Can a hedge fund charge different investors different fees?
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Usually, yes, in two common ways. Share classes, such as a founders' class with lower fees, are open to anyone who meets that class's terms. A side letter is a private agreement with one investor for a lower fee or extra reporting. Fund documents should allow side letters and disclosures should describe them, and larger investors often ask for most-favored-nation rights. Every promise made this way has to be tracked.
Everything here is for educational purposes only and is not legal, tax or investment advice, or an offer to buy or sell any security. Laws and thresholds change and depend on your facts, so talk to a qualified attorney before acting.
Key facts
- Share classes can carry different fees on stated terms.
- Side letters give one investor different terms, such as a lower fee.
- Fund documents should permit side letters; disclosures should describe preferential terms.
- Most-favored-nation clauses let an investor claim better terms given to others.
- Every side-letter promise has to be tracked over time.
Transcript
Founder: My first investor wants a lower fee. Can I give it to just him?
Operator: Usually, yes. Funds do it two ways.
Operator: Share classes. A founders' class with lower fees, open to everyone who meets its terms, like the first money in.
Operator: Or a side letter: a private agreement with one investor, for a lower fee or extra reporting.
Founder: Do the other investors have to know?
Operator: Your documents should say side letters can exist, and your disclosures should describe them. Big investors often ask for most-favored-nation rights: if anyone gets a better deal, they can too.
Founder: Any limits?
Operator: Every promise you make, you have to track, every month.
Founder: So my first investor wants a lower fee...