Is it worth it to wait 7 years for a $2mm carry?

Promote has been crystalized because of the LP buyout. However earn out won’t happen until dispo, which can be anywhere between 3-7 years from now. Carry is valued at roughly $2m. With a 3-year payout schedule after earnout. Worth waiting for nah? I'll be in my mid to late 30s by the time of earn out. 

 

Been with the same shop for a long time. Definitely one of the most valuable employees there. Not sure about industry wide, but I assume above average at least. The firm is basic performing, capital-constrained, chill culture. Only way to change things is if I become the game changer. But I'm not part of the family, so...hard to control major decisions, and I'm not sure how much change I can actually bring. 

 

REmonkey.....:

Correct


Do a lot of firms pay out this way? Cuz that blows. Unfortunately, carry seems like such a dangling carrot to me. I think I rather have higher cash comp.

 

Waiting ~7 years for $2M is tough to answer but if you expect to do additional deals in next 3-4 years… could be a lot of sizable checks in a decade. But idk your firm, typical deal size, expected activity, trust you have in family to keep you around, etc.

 

So... you're a W-2 employee at a firm that's making money and is giving you meaningful carry.  What, exactly, is your question here?  You stand to make an extra ~$300,000 a year from this single capital event.  That's a lot of money!

 

The old firm is not doing well overall except for the crystalized carry. I also have an offer at hand to go to a bigger shop. Cash comp is better. Potential to get carry there too. Cash comp growth at the new place will likely be faster than my current firm. Skill set wise, I’ll learn more by doing more complicated deals. 

 

I just popped in here to say that if your vested carry can be taken away for any reason other than bad boys (fraud, murder etc), it is worth zero in my eyes. When I was offered carry, the docs prescribed that my vested carry could be voided if I left. My response to this was its worth zero to me give me a market vest or I'm out and they hit the bid. You can try a similar approach if you want to fix your vesting schedule as a means to stay. 

 

It makes sense on an annual comp basis save for risk of fruition. What is the fine print on the vesting qualifications? What is the overall stability of the responsible to pay party? What was your background before you were hired and how long did it take to get to level of participation?

 

The firm is stagnant now, the deals we do are very cookie-cutter, which in the long term is limiting. Started as an analyst and got offered carry at the associate level. Cash comp is below market. I have a stable safe low low-stress career here, but I also won’t learn anything new if I stay and will be doing the same thing for the rest of my career. 

 

Have you had conversations with your boss about your broader ambitions and if there is any capacity for you to lead those new efforts?

On new spot, you should be open with them saying you're looking for growth but leaving $2M on the table by leaving...that'll interest them and at VP level they'll try to make you whole at least in future annualized non-cash comp i'd imagine.

 
Most Helpful

a-basic-name

That’s most definitely life-changing money at most people’s age. 

I agree.  One thing you learn on WSO is different people’s perception of money and how much is a lot, and how easy (or hard) it was to get there.  @CondoDeveloper came from a real estate family (basically a generational wealth platform). Perceptions will be different for everyone.

$2 million is life changing money.  Let me break it down.

$2MM as ordinary income is taxed after state, federal, and self employment tax (if 1099), between 35% - 50%, just roughly speaking.  Getting the payout in installments can help reduce the marginal taxes, but you lose out on earning a return while you wait.  So, roughly that $2 million is $1.0 million to $1.2 million after tax.

As carried interest, the taxes are lower, more like 21% - 34%, depending on what state you live. So, after tax is $1.3 million to $1.6 million.  
 

How to save that much money and for how long?  I think it is very tough to save that much money, and if you do, it will be over the course of decades and investing.  I don’t want to depress anyone, but here’s what I’ve seen after working 20 years.
 

Granted, most of us started our careers making less money (< $100K) and some experienced unemployment, we are not going to have a meaningful savings rate until we are mid-career.  
 

Example: 

$200K salary, taxes is 30%, so take home is $140K.  Living expenses $90K (per month $3K housing exp, $2K food/utilities, $2K accumulating for big trips/grad school/child care/senior care, etc = $7K/month).

That’s $50K per year in savings, that was from after tax at the highest ordinary income.  OP would have to save that much for 30 years (12 - 20 years depending on investment returns, 401K, IRA and other tax planning).  
 

With $1.2MM - $1.5MM in the bank at age 35 or 40 (vs age 55-60), OP can have a lot more financial freedom and creative pursuit, and rely on the money compounding.

If you ask me, that is hugely life changing.

My opinion, making that kind of money is hard for most people.  And don’t think just starting a business will easily get you there; it can be huge, but remember 1) you have to create a good business, 2) you have to navigate partnership risk (easiest way for your partner to juice their net worth is to take from yours).  The best thing you can do is work hard and save, marry a likeminded values person, and invest, compound your money.  Let the chips fall from there, but don’t sweat, you are doing better than most.  
 

Have compassion as well as ambition and you’ll go far in life. Check out my blog at MemoryVideo.com
 

How the hell is $2mm by mid-late 30s not life changing for someone making what sounds like a relatively average white collar cash comp (annually) in a LCOL market? At first I thought this post was pretty tone deaf - this job market is tough and so many well qualified people would love to have $2mm in carry by their late 20s. With more detail on the firm and alternative options, yes, moving to a bigger shop for a big bump in cash comp and better experience seems like the better choice, but I'm sure plenty people on this board would love to have $2mm in carry that could feasibly be realized in 7 years at that age. In any market.

 

Can you negotiate a backwards looking vesting schedule?  It might make a ton of sense for them to let you go for 2 years to have you return and bring that additional skill set and network inhouse.  

I would seriously consider making a deal like that if one of my top guys came to me and said "hey boss I have an offer from a MF to go on the RE group and get experience.  I know we are going to be slow for the next 1 - 2 years so I might as well go and learn some new skills and bring them back."  You basically set up a contract that you will get backwards looking vesting, give up your carry points from when you are away and then it resumes when you return.  This way you don't get shafted on what you already should have, they don't have to compensate you when you are away, and the firm gets someone who has more skills and network when you come back.  It is kind of a win-win situation.   Plus if you decide not to return there isn't any real loss for anyone.  

 

Overall this seems like a good problem to have. From reading through this thread I personally would jump ship as it seems there are substantial risks with staying and from reading your responses it seems that is what you truly want to do, and you are just looking for outside validation. Go with your gut on this one.

Few quick questions for you and others from someone who is new to the industry:

  1. How easy/ common is it to negotiate vesting schedules? It seems like it would be massively advantageous to negotiate for immediate promote payouts on capital events, but I guess firms want to keep their people so it makes sense why it's structured this way, but is there usually leeway on this aspect? On top of this, can you structure it so that you are paid out even in the event you are fired/ leave? \
  2. How does promote crystallization work? From my basic knowledge and reading, it sounds like the promote has been realized with the exit of the LP, so why must you wait until the building is sold in order to receive the payout? What am I missing here? 

Good luck on this decision process, and appreciate any insight to my questions. 

 
Dev_WanaBe

Overall this seems like a good problem to have. From reading through this thread I personally would jump ship as it seems there are substantial risks with staying and from reading your responses it seems that is what you truly want to do, and you are just looking for outside validation. Go with your gut on this one.

Few quick questions for you and others from someone who is new to the industry:

  1. How easy/ common is it to negotiate vesting schedules? It seems like it would be massively advantageous to negotiate for immediate promote payouts on capital events, but I guess firms want to keep their people so it makes sense why it's structured this way, but is there usually leeway on this aspect? On top of this, can you structure it so that you are paid out even in the event you are fired/ leave? \
  2. How does promote crystallization work? From my basic knowledge and reading, it sounds like the promote has been realized with the exit of the LP, so why must you wait until the building is sold in order to receive the payout? What am I missing here? 

Good luck on this decision process, and appreciate any insight to my questions. 

In my experience, and this could be different than OP, is when you do a Develop-to-Core type of project with a direct investment from say a Pension Fund, there is a mechanism in the JV docs to allow the Sponsor / Developer the opportunity to earn a promote while the LP / JV still owns the property long term.  So this is a hybrid Merchant Build with a long term hold.  After lease up stabilization, the JV does an appraisal and “crystallizes” the value for the Sponsor.  The Sponsor could get a combination of cash and equity, say 25/75 or something.  Since the Sponsor usually gets its promote based on IRR, this mechanism allows them to get a Merchant Build return, while aligning long term interests with LP.  When the JV sells is ultimately up to the LP, but the Sponsor I’m sure is pushing for it sooner.  
 

I’m not sure why OP would have to wait an additional 3 years for the carry payout, that is probably created by OP’s employer in the carry documents, probably to ensure that the company doesn’t have a liquidity crisis and to ensure long term employment (avoiding one of their employers having a “I’m rich biatch!”  Dave Chappelle moment if all $2MM was paid at once). 

Have compassion as well as ambition and you’ll go far in life. Check out my blog at MemoryVideo.com
 

That's exactly right, it was a build-to-hold deal with a soft exit. The deal is still not sold so we can’t unlock the dead equity yet, but as soon as we sell it, everything from the soft exit to real exit will flow through the last split with no more IRR hurdle to meet. As for the deferred payout, it’s the firm's way to handcuff employees long term so no one gets a big check and bounce. Most non family employees here had 10+ year tenure. 

 

OP here, I didn’t expect the post here to generate this much discussion. Thank you all for your perspectives and advice. I got some more time to think about my offer from the hiring team, but at this point, I’ve decided to take the new job. I’ve had long discussions with mentors, friends, my wife, and ppl in the industry. The consensus is it’s time for me to take a leap of faith. While money is important, I don’t doubt my ability to learn and grow. My end goal is to eventually do my own deals, and I need both access to capital and skill sets to do that. Doing cookie-cutter simple deals worked for the family, but I doubt that is gonna work for me since the barrier of entry in real estate is low and there are way too many groups in the easy to operate space. What ultimately made it hard for me to leave was not the dollar amount, it was the feeling of importance. In my current role, I know I have a team that depends on me, respects me, values me, and like one of you mentioned “treats me like a partner”. It scared me to become just another disposable employee at the new firm. But then I realized that I was sheltered, I’ve been spoiled in an easy environment where if I don’t make a change now then I might lose my muscle and forget how to thrive. $2m is a lot of money to walk away, but as I look at what’ve been able to achieve in the last 7 years, I hope can replicate it and outperform it in the next 7 years. Coming from a small town in the middle of nowhere, fell into real estate simply out of luck, I had no idea what I was stepping into. I feel grateful to have this decision to make in a lot of ways, grateful to be able to get a better job offer in a tough market, and grateful that my current firm was kind enough to offer me carry at my age. But it’s time to look forward, hopefully, I’ll look back in 7 years and feel good about the decision I made today. 

 

Best of luck on your adventure!  The journey and the making of your life story are important too.  I left home (Hawaii) for the big city (San Francisco). I would have always wondered what-if had I never left. Home will always be special.

Have compassion as well as ambition and you’ll go far in life. Check out my blog at MemoryVideo.com
 

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