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.

 

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. 

I am permanently behind on PMs, it's not personal.
 

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.

 

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.

 
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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. 

 

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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