Two Options for Carry Vesting
Wanted to see if the following is considered market.
Vesting: 20% each year for five years. Carry vests annually, so if you leave inter-year you don't get any benefit.
Once you leave: if you leave, management has two options at their sole discretion:
(a) the status quo option (e.g. The amount vested is frozen in time and you get paid out when everyone else gets paid. Let's say you have 60% when you leave, you'll simply get 60% of your total allotment once carry is eventually paid out.
(b) management can buy you out at the current market value. Let's say you are 60% vested when you leave but the fund is valued very conservatively and isn't marked up very much in value. Management can F you over by buying you out at the current low market value * 60%. So you get no further upside in the case that you leave early or if the fund takes a bit of time to generate an unrealized gain.
My sense is option b above isn't market, but would like to hear your thoughts.
Not sure what other people’s experiences are but unfortunately, it seems like option B is market (that’s how my carry language is worded)
I've definitely seen and heard of option B happening, I wouldn't say that it isn't market.
Pity...seems quite punitive.
The second option is not uncommon. People who set up firms generally have the view that they've taken the greatest risk so they are entitled to the most favorable treatment. I would say both of these are within 'market', the second is simply less kind or favorable to the employee.
My carry is at option B. I would've assumed this is pretty standard, but sounds like there may be more favorable language out there but this seems within the band of "market".
I'm at option B and most of my friends at other firms have told me they have a similar vesting structure. I'd actually be surprised to see if there wasn't a fund FMV buyout right.
Makes sense. There was originally 3 options and I negotiated out the third which was the ultimate F U to the employee: Option 3 was the fund buys you out at FMV * Vested % but they can then pay you that amount in installments over 5 years with an 8% interest rate. My view was if they aren't going to pay me upfront then I'd be better off to ride it out like staff who stay and would ultimately get more upside as the fund continues to grow. I was glad that they agreed to ditch that option.
Moral of the story, if you leave a fund before vesting is complete and there isn't a big unrealized gain then you're F'd.
Yep that's the right way to think about it, unfortunately.
Btw this is what happens at startups with ISOs. Surprised to hear isn’t as punitive at PEs.
I can tell you there is an option C that I have now seen:
You get bought out at the lower of market value and an 8% p.a. hurdle rate.
So if marketed conservatively you get nothing and if it is marketed at 5x you still only get an 8% rate.
Do you pay for your carry? I got told at my funds people have to “buy into the partnership” to be eligible for carry.
I thought you would be given a portion of the pool per year.
Isn’t this how it’s done for portco company shares not carry? This is a wild option. Curious to hear more
Depends if you come into a fund at a later date, or if you are unfortunate enough to live in Canada you technically have to "buy in" to carry but people get around that by paying $0 when the fund is just being set-up and no investments have been made.
Conceptually, the GP has two sets of economic claims on the fund (let's ignore management fee that go to the ManCo) - the carried interest and the GP's co-invest (typically at least 1% of the fund size) so for practical (and tax structuring) reasons you could allocate carry and co-invest on a proportionate basis.
Of course for large funds and more mature asset managers, there are all sort of ways in which carry and co-invest are detached and separately allocated but it's not unusual to allocate carry by asking members (especially more senior ones) to "buy in" to the co-invest.
So my MD told me they need to put up capital for the co-invest (makes sense) and also put up capital for the carry (doesnt make sense to me - who does that capital go to? The founder?)
This is what I've also been told, your portion of the "GP buy-in" to align interests with LPs.
There are virtually no funds who mark conservatively so that concern is not a big one
Is it common for management to be able to buy you out 1) only at the time you leave or is it 2) anytime after you leave (ie sometime in the future when FMV falls)?
It's a set date in the carry agreement. My agreement says up to 4 months after I leave they can buy me out if they want at the most recently reported FMV * vested %
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