How to Attract a Seasoned General Counsel into a Private Equity Portfolio Company Executive Team

As private equity deal teams build out their portfolio company executive teams, the general counsel should be one of the key hires from the beginning of the investment. Fifteen+ years ago, very few portfolio companies had a general counsel until the exit through an IPO was near. Today, it is more common than not to have a general counsel in the leadership team early on so that the team can benefit from the general counsel’s expertise as a business advisor and risk mitigator.

The challenge—and thrill—of growing a company to an ultimate sale to a strategic buyer or taking a company public is often appealing for general counsel when looking at a new opportunity. But to attract the right talent to your team, you will have to show that the role is a strategic role and considered a key part of the executive team by doing the following six things:

1. Offer Competitive Compensation Packages

Offering a competitive salary and equity-on-exit incentives is critical. Private equity-owned portfolio companies vary widely on base-bonus-equity ratios, and the most sophisticated general counsel candidates will understand the value of the equity. When recruiting a candidate from a larger, more established organization or a publicly traded company, the candidate must shift their mindset to compensation based on long-term performance targets and a one-time grant that does not monetize until those targets are accomplished.

However, that does not mean that a competitive base and bonus are not also required. Being treated as a key executive close to the CFO is most important to the sought-after talent; thus, the CEO, CFO, and CLO (or GC) will have similar compensation packages. Compensation below industry standards or other key executive team members signals that legal is not valued and will deter strong candidates. Keep in mind that the GC will have access to equity and other compensation metrics for key employees through the course of their role, so clarity (and accuracy) on how the compensation package compares to the other executives is important.

2. Signal that the Business Values the Role

The modern-day general counsel is often viewed as a strategic partner to, and key member of, the executive team. Thus, it is important to involve legal in the business strategy and key leadership discussions.

A reporting structure where the GC reports to a CFO is a deal-killer for most qualified general counsel candidates, as it communicates a non-strategic role and inadequate access to the CEO. It also increases the private equity fund’s risk as compliance issues often arise in finance. Reporting to the CFO would present a conflict for the GC and may make the prevention and/or early detection of those improprieties less likely.

Beyond reporting structure, general counsel should be included in key leadership meetings (including board meetings, where they act as corporate secretary) and have a seat at the table in M&A and other significant business-related matters. General counsel should also serve as a liaison between the executive team and the private equity sponsors, including managing the company’s equity program and preparing the company for exit due diligence as well as other core business functions.

3. Emphasize the General Counsel’s Role in Shaping the Company Culture and Values

A general counsel is considered a valued business partner to the CHRO and part of shaping the culture of ethics and compliance. Because of this relationship, it is important that the CHRO be involved in the interview process and emphasize the attributes of the company culture and how the legal team fits into the overall vision of the company. To the extent that a general counsel will be responsible for ESG and other diversity initiatives, the CHRO can emphasize the support that the general counsel will receive from others in leadership, including the CHRO, in these challenging areas.

Attracting investors at the fund level requires certain diversity and ESG policies; the general counsel candidate will need to understand the role they will play in developing and/or enforcing these initiatives.

4. Articulate the Types of Challenging and Impactful Work Anticipated

Private equity-owned portfolio company GCs are motivated by growth and innovation; they are not driven only by commercial contracts. Discussions during interviews should focus on the objectives and milestones set by private equity sponsors and how the general counsel can contribute to each of the objectives.

Assisting in revenue-generating activities is, of course, critical, but general counsel also help identify and mitigate meaningful risks outside of contracts. More portfolio companies are investing in general counsel now because of the increasing risk factors that can save the company from catastrophic liabilities. The general counsel serves as the company’s chief compliance officer and contributes to the development of its Enterprise Risk Management (ERM) policies, which preserves the value created.

5. Articulate a Clearly Defined Exit Strategy

A seasoned portfolio company general counsel will want to understand the company’s trajectory toward an exit (including known challenges), not unlike any CEO or CFO candidate would. Phrases such as “we’re focused on building a lasting company” or “if we hit our numbers, good things will happen” communicate a lack of transparency and respect for a prospective executive hire and will solicit detailed follow-up questions in any event. To attract top GC talent, have the candidate sign an NDA, allowing transparency with financial information, strategic objectives and expected timelines. This will help the GC better align with the shared exit goals of the sponsors and determine their ability to contribute to the company’s success.

6. Include Private Equity Sponsors in the Interview Process

Private equity sponsor involvement in the interview process is critical for the candidate, the portfolio company executive team and the private equity firm. The private equity sponsor’s view of legal and the importance of the role can make or break a hire. Involving sponsors in the interview process communicates the importance of the role to prospective candidates; the absence of sponsor involvement communicates the inverse. The timing of the involvement of the private equity sponsor is also important—too early in the interview process could signal a private equity firm that micro-manages its executive team. Typically, private equity deal team members (often board members of the portfolio company) meet the finalists after the CEO determines the candidate could be a good fit.

When meeting the candidate, the private equity firm representative should 1) articulate the private equity firm’s perspective on the role of legal, 2) signal alignment in objectives and understanding of the role and the communication lines between the private equity sponsor, general counsel, and executive team, 3) articulate the perceived value of prior portfolio company general counsel guiding successful exits, and 4) discuss the resources the private equity firm can provide to the general counsel (for example, playbooks for M&A, integration, ESG or ERM and networking/mentoring opportunities for portfolio company general counsels). Taking these actions will set the relationship with your general counsel up for future success. It will also be priceless when critical matters arise during the portfolio company’s lifecycle and ultimate exit.