Does Carry Step Up If You’re Promoted?
If you get promoted from say VP to Principal in the middle of a fund, would your carry points in that fund typically increase, or would you need to wait until the next fund is raised to see an increase in basis points? There was a post on this a couple years ago with few responses, so I wanted to re-ask the question.
I understand many funds have an unallocated portion of carry reserved for promotions, while others don't and will make you wait for the next fund to see an increase in basis points. I'm wondering which of these two is more common in the industry. Does anyone have any insights?
For those who receive an increase in basis points in the existing fund upon promotion, how would that typically work? For example, say you're a VP with 100 bps of carry in the current fund and Principals receive 200 bps of carry. If the vesting period is 6 years and you started as a VP1 in the fund's first year and were promoted to Principal at the end of year 3, would it be logical to assume that you could have 100 bps of carry for the first three years and 200 bps of carry for years 4-6 (such that your weighted average carry in the fund would be 150 bps)? Or perhaps the weighted average math would be more based on number of years to deploy the fund (i.e., 5 years as a typical duration) rather than the vesting period.
For those funds that make you wait for the next fund to see an increase, are there any convincing arguments one could make to encourage the Partners to increase your basis points in the existing fund upon promotion? For instance, using my example above, what if you were a lateral and joined the firm as a VP3 (last year VP) during the fund's first year. If you were then promoted to Principal at the end of your first year (and the fund's first year) and the Partners said you would need to wait another 4 years for the next fund is raised to see an increase in basis points, while I'm not sure you would have much negotiating leverage, that would clearly not be a great outcome because then you would have been a Principal for the majority of the current fund's life (i.e., VP for 1 year and Principal for the remainder), yet you would largely be receiving VP level carry. While you would likely see an immediate increase in cash comp upon getting promoted to Principal, recognizing carry is where the majority of compensation can be, this could be fairly demotivating.
Thank you for any insights!
Usually you would need to wait till the next fund. When carry is granted you need to file a form with the IRS which dictates your percentage. Remember if you are granted more it means you are taking away from someone else, usually partners/the house.
I think it depends and I've seen in some funds you get a top up in the form of shadow carry to avoid some tax complications but that the top up is smaller than a typical new fund allocation. Also seen a top up in the form or normal carry. Also seen nothing.
It depends on the fundraising lifecycle. These days groups are raising every 2-3 years so it lines up with promotions. But in your example of the fund that does offer an incremental grant, then it is treated as just that. An incremental grant. So you have 100bps on a 6 year vesting schedule at time 0. Then whenever you get promoted to principal, you get an additional 100bps grant that starts a new vesting schedule. Using your example of promotion after year 3, after 6 years, you would have 150bps vested. And no, it won't be based on the investment period, which is often defined in the docs.
Hard to say which one is more common as I’ve seen both pretty regularly. Note this only applies for firms that do fund-level carry because carry that is allocated on a deal by deal basis is going to depend on your title at the time the deal gets done.
To answer your specific question on whether it is done on a “pro-rata” basis based on a VP allocation versus Principal allocation — while this makes incredible logical sense, I’ve never seen it actually done this way in practice. Usually the bump is pretty minimal. Using your example, your 100bps might be incremented to 115 - 120 unless you are VERY early in the fund deployment lifecycle. You’ll need to wait until the next fundraise for a full allocation.
As to the poster above who mentioned that carry allocated to you takes away from someone else — this is conceptually true, but not the way it often works in practice. Many firms set aside un allocated carry that is earmarked for mid-fund promotions or new hires that occur in the middle of the fund. Alternatively, when employees quit or are terminated, their unvested carry is essentially returned to the carry pool and possibly up for grabs. This can be an opportunity for existing employees to gain a bump without diluting anyone’s initial allocation.
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