Hey guys, I'm currently finalising my carry agreement with the firm and I'd just like to bounce the terms off the kind folks here and see if there's anything I'm missing or isn't market. It's a pretty simplified document (I'm not sure if this works against me), and currently the areas covered are:
- Carry allocation
- Firm takes 60% of total carry upon, 40% distributed to VPs and above in specified percentages (my carry agreement specifies my allocation, whether it's large enough for my taste is a different story haha)
- Vesting period
- 5 year / 60 months straight line with two year cliff. I've heard 4 years is the norm, so maybe this is off-market. Also two year cliff sucks, but I'm not sure what's normal
- If liquidation happens before full vesting period, I get full amount (vested and unvested)
- Vested amount only applies to continued employment or a good-leaver scenario (I understand this can work against me if I'm terminated for "non-performance" but it's a good team and I'm on good relations with my boss so low risk I think)
- Information rights
- If I'm a good leaver and have vested carry, I will continue to receive investor reports as if I was an LP into the fund until the liquidation event
Is there anything missing that I should incorporate into the agreement? TIA
when you say straight line and then cliff
you mean
y1 0%
y2 40%
y3 60%
y4 80%
y5 100%
seems reasonable
when does vesting clock start?
Yup that's right, except it's on a monthly basis so 1.67% vesting per month.
For funds that were up and running when I joined, vesting clock starts the month I join the company.
For new funds, it's whenever final close is for each fund.
Most seems fine. You need to understand what happens with your vested carry if you’re a bad leaver - some firms buy it back at NAV (others just let you keep it) and if the fund is underwater when they call you then you’re suddenly massively in the hole
From my understanding, the entire carry gets forfeited in a bad leaver situation. Buying back at NAV seems like a pretty good deal for a bad leaver!
Seems standard. I don’t think anyone is taking advantage of you or any of this will work against you. You cannot make any comments to these docs in any case so I would read carefully and sign.
This is all pretty standard and the vesting is quite favorable, particularly given it would seem you’re in the UK (based on the use of the terminology “bad leaver”)?
While it is pretty common in the UK that a bad leaver forfeits vested carry, this isn’t the case in all circumstances so you’ll want to make sure you understand what happens in that scenario and what exactly constitutes a bad leaver. Typically you’d see things such as “competing” defined as bad leaver — at which point you’d want to make sure you fully understand the definition of competition (expect it to be excruciatingly broad). As mentioned above, you’ll also want to know precisely when the vesting clock begins.
You also will probably have a provision discussing any potential dilution you may incur from future hires. You’ll want to understand if you’re subject to dilution (or if there is a pool set-aside for promotions/future hires). This set aside is unlikely to be in the document but you could discuss it with a partner.
You also didn’t mention any sort of capital commitment. This is generally linked to your carry in one way or another. Is there an expectation of a capital commitment and what happens upon your leaving the firm? Do you still need to meet future obligations? At what value are you eligible to be bought out?
There are a lot of other nuances but these should get you most of the way there.
Thanks, this is really helpful. I'm in Asia, but seems the terminology is quite common around these parts from what I've sussed out.
The document is quite broad yes, but from conversations with my boss, being a bad leaver is basically limited to being fired - so that's ironically specific too.
On dilution, I'm not as worried about that at the moment since i) it's a pretty lean team and only VP+ gets allocated carry, and there aren't any plans for senior hires coming onboard in the near term, and ii) the 40% allocation is only half allocated upfront and half at exit, so any dilution comes out from the second half.
I would say, though, that the worrying thing about (ii) is that I can get potentially shoved out of any carry since the allocation is a question mark until the fund exits. I don't really have a say here, so I won't fuss about that.
There's is no expectation of capital commitment. Investing personal capital into our funds is an option (and I know some firms provide employee financing for this in many shapes and forms) but there is no obligation to do so. I'm not sure about the buyout option and have never seen any material on this, can you please elaborate this for me? Thank you.
These are helpful clarifications. I assume based on this structure that the carry allocation is on a deal-by-deal basis rather than the fund level (otherwise I’m not sure how they do the 50% allocation upon exit)? If so, your vesting isn’t nearly as attractive as it originally came across (although it is still within the bounds of “market”).
In terms of the capital contribution, there are a few different ways to structure it. The idea is that you invest your own capital almost as if you were an LP. The capital is invested in each deal so it is pretty easy to know how much you have invested in any given company. Because you’re actually investing cash, they don’t just ‘wipe out’ your capital contribution when you leave. Instead, they might (1) pay you back what you originally invested, (2) pay the fair market value of the investment, or (3) ‘let it ride’ and pay you out when the investment achieves liquidity.
Monthly vesting is very advantageous to you. Mine is annual, as are a variety of other shops. Nothing you mentioned is really off market tbh.
Thanks for the clarification!
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