Carried interest data points/negotiation when moving to smaller firm
Looking for some insight into how carry works when moving to a smaller firm. Let's say someone is at the senior associate/VP level looking to make a move to a smaller firm. Let's say base salary is currently $150k with a 50% bonus and 0% carry at an institutional firm and looking to jump to a smaller firm.
Can anyone provide some insight into how they would negotiate carry/determine if an offer from a smaller firm is attractive? How much of a base or bonus hair cut would you take for carry (I guess this depends on the % offered and how confident you are in payout but generally speaking).
Also, another carried interest question...as firms grow, and add more investment professionals, where does the new % of carry come from? Do founders/principals take less of a share with the idea that as head count grows so do deals/$ and the lesser % of a larger pie is fine?
Formatting above is really annoying, not sure why it came out that way and won't let me edit. Reposting.
Looking for some insight into how carry works when moving to a smaller firm. Let's say someone is at the senior associate/VP level looking to make a move to a smaller firm. Let's say base salary is currently $150k with a 50% bonus and 0% carry at an institutional firm and looking to jump to a smaller firm.
Can anyone provide some insight into how they would negotiate carry/determine if an offer from a smaller firm is attractive? How much of a base or bonus hair cut would you take for carry (I guess this depends on the % offered and how confident you are in payout but generally speaking).
Also, another carried interest question...as firms grow, and add more investment professionals, where does the new % of carry come from? Do founders/principals take less of a share with the idea that as head count grows so do deals/$ and the lesser % of a larger pie is fine?
It varies wildly, but what I would say is most standard for a real VP role (like 8-10 years experience, not a 5-7 year entry/junior VP) is something like $150 - $200k salary + 100% bonus potential and your carried interest if things go to base case should average to be 100% of your salary per year.
If it's a new firm, your owner's should be allocating the carried interest with the expectation that firm will grow (so they're holding some aside now that technically goes to them but will be allocated to new hires). By getting in early, you can also expect that your % might not change much as you get more experienced (maybe a small uptick), but the pie theoretically grows bigger so the $ amount it translates to grows.
The trade off for going to a smaller firm should be up to you. Those numbers above are probably typical at more established firms. So figure in how much more upside you want in exchange for taking a haircut on that salary/bonus potential. You might want double the carried interest potential for taking a 20 - 25% haircut on cash comp potential, but you have to be the one to determine that.
I second what I'll call the 1-1-1 rule, which is the general guidance I received from many sources in terms of the general framework to target.
What this means is that your base / bonus / carry should all be on par, annually, in the base case scenario. So if your base is 100, you should expect 100 bonus and 100 in carry, annually. This can then be massaged any number of ways. So if your shop gives little or no bonuses for example, your carry should be closer to 200k annually to make up for the lack of bonus.
I would argue that if you're short on salary or bonus, the expected promote should more than make up for it. So for example - if you're losing $100k in bonus, I'd want my expected promote to increase by probably at least $150k - $200k if not more. Not only is the promote more risky, but you're losing out on major time value by waiting for it. That bonus can be invested in something immediately and make a return from it.
As a data point, as a senior assoc in a past role I was given 2% of the carry pool at a small fund (est. ~$400k). We had a handful of mid-level people like me around 2% and then the 3 principals pretty much had 30% each.
Interestingly, NONE of the mid-level people including myself stuck around long enough to actually receive any carry. There wasn't anything wrong with the fund, it was a solid place to work, but we all eventually got better offers to jump ship. Keep this in mid when negotiating carry as a mid-level employee - there is a significant chance you won't stick around to receive it, since there will likely be opportunities to move firms every few years for a 20%-50%+ raise in your immediate cash comp. Once you're very senior and less likely to find better opportunities the carry becomes much more "real".
This is a great point. Not only does your fund/deals have to hit for that promote to solidify, but you also have to stick around long enough to see it through. This is nuanced point too - are you talking about joining a sponsor that hits their promote on a deal by deal basis? Or are you joining a fund where that promote check isn't coming until all your deals have solidified which can end up taking 7-10 years?
it was a fund with a 10 year life. I wish it was deal by deal.
I meant more for a question for OP to consider in his decision - but great example of how it can come into play. If you got an offer for your dream job in year 8 with 1-2 properties left to sell in the fund - oh well! You just lost all that promote you worked for for 8 years.
I mean, this isn't really accurate unless you have no vesting or fully revocable interests, which is the main thing I negotiated on. What's typical, and where I ended up, is 20% tail after fully vested. When we started, the offer was to forfeit all carry upon leaving to which I said this is worth $0 to me and that's how I'm valuing it.
The key terms you should care about:
My negotiation was pretty straightforward in that I knew what my market value was, I had calculated and assigned a dollar value to the fund/carry as negotiated (base case and sensitized 100 ways) and then used that base case to negotiate the annual comp towards my market value. I was fully transparent in the number I was targeting and why and then we worked together to structure the carry in a way that reasonably got me there, though I will emphasize one last time - most of the focus was on the soft factors above rather than the dollars tbh.
8 YOE Director here. I got 4bps carry in a fund that should net me $400k on base case performance in 7 years from now.
Mind sharing the rest of your comp? Guessing you're working for a large fund if 4 bps equates to $400k (unless you meant 4%)?
Yes I did mean 4%. This was fund I. Plan is to raise fund II next year at 4x the size. I will get at least 4% in that vehicle, hopefully more. I also get carry in SPVs which could add up to another $50k per year. Base 130k, bonus of $85k. MCOL location.
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In all likelihood, his allocation will at least double by time that amount actually comes to fruition, and you theoretically should be cashing out on a fund every 3-4 years once your company gets into the swing of things
Some good answers below. I’ll add that once you get more senior, your carry (annualized for est) can be guided to be at least equal to your base plus bonus aka you make a 1 mil in cash comp with base and bonus you also pull in 1 mil in carry for the year. Obv that means you are getting 10 mil carry on a 10 year basis. This can be comprised of several funds that lead to such a number or one large fund (MF size) where you have some decent economics. If things are going well and you get into multiple funds you can imagine how the numbers become meaningful. Also agree on some of the points such as vesting. Many funds will never allow 100% vest if you leave, even if you leave in year 7 of a 10 year fund. You’ll lose 20% of your carry on any deal that remains to be realized when you leave…by that point you should at least be walking away with greater than 80% of your carry, not the end of the world.
Also - remember that there will be taxes, so the number you see obv is not what you take home.
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