Carry allocation for follow-on investments
Does anybody know what would happen to one's carry stake in an investment that involves multiple tranches, some of which take place after one's leaving the firm?
For instance, when I left my last firm, I had x% in the carry pool for asset A for which a certain amount of $, call it $100, had been invested by that time. Since then there have been 2 more investments, $100 each, in A.
My question is - do I have x% in the carry pool for the total $300 or just the 1st tranche of $100? Asset's about to be sold for around 3x of $300 so it piques my interest, hehe.
Been trying to read the carry agreement, which is not very clear at all and wanted to see if anybody here has real-life experience.
Ah, the classic conundrum of carry allocation across multiple investment tranches! It's like trying to figure out how many bananas are in each bunch when you've only seen the first bunch. Based on the most helpful WSO content, here's how it typically goes down in the jungle of private equity:
Initial Carry Agreement: Your carry percentage (x%) in the initial investment ($100) is usually clear-cut. This is the portion you're most likely entitled to, assuming any vesting periods have been met and you're in good standing according to the initial terms.
Follow-on Investments: This is where the vines get a bit tangled. If the carry agreement or the fund's policy doesn't explicitly address follow-on investments, it's generally assumed that your carry interest applies only to the tranche(s) invested in while you were still part of the firm. So, if you left after the first $100 investment, your carry would typically be calculated based on that amount, not the total $300.
Vesting and Terms: The devil is in the details, or in this case, the fine print of your carry agreement. Some agreements might have provisions for follow-on investments, vesting schedules that impact how carry is calculated for subsequent tranches, or clauses about leaving the firm that could affect your entitlement.
Real-life Experiences: It varies widely. Some folks have seen their carry diluted as more money is poured into an investment after their departure, while others have managed to negotiate terms that allow them to maintain a proportionate share of the carry for investments made after they've left, especially if they played a significant role in the initial deal.
Next Steps: Since the carry agreement is as clear as mud, your best bet would be to consult with someone who has navigated these waters before - perhaps a mentor or a legal advisor with experience in private equity. They can help you interpret the agreement's language and advise on any potential actions you can take.
Remember, every fund and agreement can have its own unique quirks, much like how every monkey has its own unique swing. So, while the general wisdom from the WSO jungle provides a good starting point, your specific situation might have its own nuances that require a closer look.
Sources: https://www.wallstreetoasis.com/forum/private-equity/co-invest-and-carry-what-happens-if-you-leave-the-firm?customgpt=1, First timer introduced to Co-invest + Carry: How to navigate?, Finance can ruin your career (hot take), Carried interest for Associates / Senior Associates?, Confused about carry at PE Fund
Pretty impossible to know without looking at your docs as every firm is different. Is your carry deal-by-deal (sounds like yes?) or fund-level?
I know it's impossible to know for sure - not asking for legal advice, just first-hand experience out of curiosity. Carry is fund-level.
With fund level carry, you are entitled to your % of the total carry pool based on your vesting. It doesn’t matter when the equity was invested or into which entities, all that matters is the aggregate carry paid out by the fund.
The exception is that often times carry paid out PRIOR to your departure is deemed 100% vested, so the above statement applies only to carry paid out after your date of departure.
Ah I see. If fund level carry, then you should benefit from the full exit, all subject to proration based on your vesting. Assume you vested into at least a portion of your grant?
In your example, if the equity check is $300 and it 3xs (equity value of $900), there's a $600 gain, of which, the carry pool would be 20% ($120). You should get your x% on that, prorated for your vesting (e.g., 1% grant, 50% vested = $0.6).
Thank you. Really appreciate it.
How much of the follow ons was equity funded? Did you fund?
Follow-ons were all equity funded and I did co-invest in all of them.
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