Tracking Direct Investments

adminBusiness Ownership, Stewardship

Ever increasing in popularity as an asset category and a common characteristic among families with complex wealth is direct investments in operating businesses and real estate ventures. While this investment class affords families the opportunity to achieve risk and return profiles differentiated from traditional investments, it also creates an administrative burden that one would not encounter with a traditional stock and bond portfolio. This article will examine the steps a conscientious steward should take to properly track direct investments made by the family.

Initial Investment

Once the family has made the decision to invest in a particular direct investment, the steward of family wealth will want to make sure s/he collects final executed documents and summarizes any special rights that the family has on account of participating in the direct investment (e.g., right of first refusal on secondary financing rounds, liquidation preferences, etc.). Without this documentation, there is likely no evidence of what the family owns on account of its investment. (There is no public database that keeps record of investments in most private companies.) If the family is ever in a position where it needs to enforce its interests, having access to its initial investment documents is vital.

Future financial commitments

The steward will want to take note of and track any future financial commitment required after the initial investment. For example, in many direct real estate investments, the partners may agree to fund the company initially at ten percent of the total equity required for the project. The remaining ninety percent will be called from the partners once certain project milestones are reached. If the steward fails to track outstanding commitments, the family could face a situation where it does not maintain sufficient cash to satisfy a capital call.

Follow-on rounds

Some direct investments are made into high-growth companies where it is expected that multiple rounds of additional capital will be required to fuel growth. Each round of funding that is undertaken after the family’s initial investment impacts that initial investment. It is not unusual for later rounds of financing to have special rights and priorities that are senior to those of the initial investors. Thus, even if the family is not a participant in subsequent rounds of financing, the steward needs to stay aware that such rounds have occurred and get copies of the documents associated with those subsequent rounds so that s/he can evaluate the impact on the family’s initial investment.

Options and warrants

Some companies will award options or warrants to investors who invest over a certain amount or by a particular date. These option/warrant awards give the investor the opportunity to purchase additional equity in the company on a later date at a preset price. Not only is it important for the steward to document and track the existence of these awards for the family, but the steward must be extra mindful that some of these awards may have expiration dates. No family will be pleased to learn that it is holding in-the-money options or warrants that it cannot execute because they have expired.


For those direct investments that have a mandate to distribute available cash to investors on a set schedule, it is important for the steward to set up reminders in order to ensure that those distributions are made by the company and received by the family. Companies can be lazy with distributions if they do not feel like investors are paying attention.

Annual report and K1s

Some companies will issue reports at least annually reviewing the opportunities and challenges facing the business and including a financial statement. Other companies are only required to perform this service for certain investors or have no stated rule concerning the provision of information to investors. Regardless of the type of company that the family has invested in, the steward must take the initiative to get a report from the company at least annually. Without at least an annual update from the company, the family will be in the dark as to the status of its investment, whether follow-on financing rounds have occurred, and even whether distributions have been made (it is surprisingly common for a distribution check to be sent to the wrong address). Further, for investments in pass-through tax entities like partnerships and LLCs, the steward must be mindful to collect the issued K1 for each investment. Simply assuming that all the K1s will show up in the mail is a recipe for filing an incorrect tax return and incurring unnecessary fees and fines.


Eventually, a direct investment will run its course and come to an end. Hopefully, that end is through a sale of the business or its assets to another company. In some cases, such an exit will result in a direct payout to investors of all the cash to which they are entitled in one tidy sum. But many times, the end is just a new beginning. There may be a scenario where the investors receive a large share of their payout at once but must wait for future dates to receive amounts held back on account of payment plans or liability escrows. The steward must track these dates so that the family is aware of what payments it is to receive and when. There may also be scenarios where the investors receive equity in the acquiring company. In that case, the steward must start the whole life cycle of tracking a direct investment anew.


When it comes to investing in highly regulated investment products like public stocks, tracking one’s investment is easy. Reporting, dividends, and company information are readily accessible and distributed electronically. In contrast, the mostly unregulated realm of direct investing does not benefit from this ease of administration and transparency. As described above, the steward of family wealth has much more work to do to properly keep on top of the family’s direct investments.

Complex Interests provides software to make the job of tracking direct investments easier, more standardized, and more transparent to the family. For more information, contact one of Complex Interests specialists.