First timer introduced to Co-invest + Carry: How to navigate?
Firm is offering me a co-invest opportunity as well as a share in promote on a deal-by-deal basis. For any individual deal, EM is anticipated to be 2x over a 5 year period. The requirement is a minimum investment of $25,000, with a 0.8% promote for each contribution of $25,000.
So for example, if I were to invest $75,000, I'd be looking at an expected $150,000 return on my investment after 5 years, with an additional 2.4% of the promote (estimated at $1.7m for a particular deal). If all were to go as planned, I'd put in $75,000 today and receive $190,800 in 5 years. This would mean a ~17% IRR for me. We have a deal on the table that I believe in, and so my thought is that this return is guaranteed from an execution point of view.
I have other worries, however. This would be first co-invest/promote share, and I'm unfamiliar with how the terms are typically structured. I'll certainly ask the partners how this is all supposed to work, but I'd like to know a bit more before having that conversation. Here are some questions I have:
1) Since I'm investing on a deal-by-deal basis (and not at the fund level), my returns will be paid out once the deal closes?
2a) What are some ways I could lose my co-invest profit and/or promote? I assume voluntarily leaving the company is one way. How about being laid off? Getting fired? What's stopping the partners from laying me off due to "hardship" in the final year of the investment and me then losing the unrealized profit the deal will have made?
2b) What happens to your initial capital if, say, you leave the company? Do you lose this money (I imagine not...)? Does it remain locked into the deal, no longer accruing interest/profit for you, but at least returned to you upon close? Do you maintain your co-invest role but lose your claim to the promote (I imagine this is the typical scenario)?
2c) Is co-invest/carry largely operated by a "trust system"? As in, the idea of this profit-sharing mechanism is to reward people who have been consistently in good favor at the company, and if that ever changes, the company is not obligated to share any of its profits with you?
3) What terms of the co-invest/carry arrangement should I be wary of (e.g. clawbacks) or should I fight to have included in the contract (assuming there is one...)?
4) Other considerations?
New to this completely so thanks in advance for the wisdom everyone.
To start off - there is no "standard" structure for carry. Everyone does it a little differently. This doesn't seem like an unreasonable structure for a low/mid-level employee. The 2x multiple is just your underwriting target and you'd actually receive whatever actual returns are, correct?
To your questions:
1. This is a question you need to clarify with your partners. Presumably yes, but if the deal is 100% owned by your fund and the fund is using a European waterfall that is a little strange since the rest of the company would be earning no promote on the deal.
2a. Again, question for your partners. Generally you would never lose the co-invest, that is real money you are putting in and real ownership in the deal. You should be getting/signing the same LPA joinder all your other investors are (probably slightly modified to reflect employee-specific terms like waiving payment of the promote, waiving fees, etc.). Carry depends, some shops will vest over a set schedule (i.e. 20%/year, or 50% at completion or stabilization and 50% at exit), while others will make it fully contingent on still being there when the deal is sold. The latter is obviously a shitty way to set it up, but it happens. If you are a good employee I wouldn't worry about the possibility of being laid off in final year just to screw you out of $40k.
2b. This is basically the same question as 2a, see above.
2c. Nothing to do with "in good favor", but it is intended to reward loyalty and tenure. If you leave, you're gonna lose whatever hasn't vested. This is standard and is why it's offered to retain employees.
3. Generally you aren't going to have any room to negotiate the carry structure until you are VERY senior, and at early stages of your career all you can likely negotiate is the amount of carry, not the terms. I wouldn't worry about this, just read the docs carefully so you understand them.
Awesome, super helpful. I'll see what the partners say. Thank you!
What level can you expect this? I always thought VPs+ at shops got an offer to be a part of deals, but have been hearing on here some associates have gotten it.
I'm assuming associates can get carry if it's a smaller org like Associate in acquisitions, then just partners above but in a normal structure with x senior execs there for 10+ years, a vp or two and then a few associates and analysts why would an associate get carry / the chance to invest?
Somewhat different, but how does this happen with a partner at Fairstead with presumably protections in place - https://therealdeal.com/new-york/2022/08/01/i-fcking-rope-a-doped-you-f…
Not all VPs get to be in on deals. You should leave any company that doesn’t give you carry as an associate unless it is a mega fund. It’s not necessarily personal finances at issue, it means they don’t care about their more junior employees and their tenure. I worked as a development associate in REPE. The VPs did not do well at all. Also a shitty member of IC can destroy whatever your value your carry could have been.
At my shop, carry is typically restricted to the executive management team (VP and above). I was allowed participation because the partners see a bright future in me at the company long term. I guess it's a good way to retain talent, regardless of seniority. We're smaller (but not small) so the partners can be more "off the cuff" if they want to be.
Definitely blessed to be in this position!
Confirm your investment is in same tranche as all other equity investors in the deal. You don’t want to be in some inferior tranche that GP has structured whereby you’re behind others in repayment priority.
Confirm how overruns are funded and who signs guaranty. Will all equity investors get a phone call if overrun capital is required? You can be diluted if this occurs and you aren’t given the chance to invest in overruns.
Very helpful, thank you. To your point about the equity tranche, being in the same tranche would mean I get paid at the same time as all other investors, pro rata - correct? Is there typically language in the agreement that calls out your repayment priority?
Great point about overruns if I understand you correctly. Your point is that I should want the chance to participate in an additional capital call/overrun if one were to occur? Should I at the same time be wary of language that requires participation in an overrun (if that kind of language is even a thing)?
For this specific thread you're investing as a Class A member in a certain LLC (tranche) that has more rights than non developer entity? What if you aren't in the same tranche as others at your company since they are more senior and they are investing in that first tranche and this tranche that you get an offer for and it's a take it or leave it deal?
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