Carried Interest (Advice / Help!)

Hello fellow monkeys! I have been a long-time lurker (with another account) and have recently come across a situation that I need some perspective on (created this new account to maintain anonymity). The quick two cents on myself, I am a senior associate at a MM/LMM firm that is raising a new fund. I have carry in the prior fund and have verbally received carry (more on this later) in the new fund that is in the midst of fundraising. The new fund has already held a few closes but is still short to its final target, so it has not held its final close. Due to COVID-19, the fundraising market has been put on pause and it is not clear when the final close will take place. The new fund has also made investments in new deals that I have worked on.

My question is the following, "when are carried interest docs typically sent to investment professionals for signing? Can you receive your carry docs before the final close of a fund?" Although I have verbally received the carry, nothing is set in documentation (I was verbally awarded carry months ago). At the same time, the starting date for the vesting period is up in the air as this would normally be fleshed out in the official documentation. I am wondering if I should push back and ask for the documentation now, while the fund is in the midst of fundraising. My overall worry (and the situation I want to avoid) is one where I will spend a year to 18 months working on this new fund with 0 vested carry because the documentation hasn't been signed. I'm also worried there is a chance I get pushed out a few years down the road, and have spent all this time at the fund with minimal vested carry.

I would appreciate the advice / wisdom of the community as to how I should handle the situation. Thanks!

 
Most Helpful

Shockingly I have been in your precise situation twice...

I don't see any reason why the General Partnership Agreement cannot be drafted and even finalized well in advance of the final close. The GPA includes things such as your (a) carried interest allocation, (b) capital commitment, and (c) vesting provisions. So technically speaking, they could provide a draft of this document to you if they wanted to.

However, unless they are using the GPA from the prior fund, the document requires a fair amount of legal work to draft as well as a lot of input from the Partnership. If they haven't produced it yet, asking for them to produce a draft just to give you peace of mind is not likely to go over well. Your ask seems to go one step further and actually request that they finalize and sign this document which I think is unlikely. It is quite possible the carry allocation among the Partnership has not yet been finalized and they will want more clarity on fundraising before doing so. Basically, don't expect a fully executed GPA.

That said, and this has happened to me on multiple occasions, they can provide you with a letter outlining the carry grant and the key terms. It won't be legally binding but it can prevent you from getting screwed. This will give you the opportunity to speak up if they don't plan to start the vesting clock until the final close (which doesn't seem very sporting considering you already have money invested from that fund). Even if you don't want to push back, you'll know what to expect, and they may even give you better terms as they won't have as much leverage as they will once fundraising is done.

As I mentioned above, I was in this situation about 10 years ago. I led a small coalition of colleagues and ended up negotiating out some really unfavorable terms in the GP Agreement that were simply unfair to the non-Partner employees. For example: one such provision called for employees to forfeit all of their VESTED carry if they quit or were terminated not for cause. The Partners were actually very cool about it.

CompBanker’s Career Guidance Services: https://www.rossettiadvisors.com/
 

Thanks for the quick and detailed response. I'm not as familiar with the fund level documents so please excuse any naivety in the following. Let's assume that the General Partnership Agreement has not been finalized, maybe because a major LP would like to negotiate some key terms in the agreement (purely theoretical as I don't have insight into this). Does that mean that carry docs cannot be issued to non-partner employees? I'm sort of surprised by this because I thought that non-partner employees could have different terms from partner employees (e.g., associates may have a shorter vesting schedule) and would think that those provisions would not be detailed in the General Partner Agreement. Also I would be surprised if an LP would be concerned with associate / senior associate / VP level terms. If carry docs are dependent on a finalized General Partner Agreement, then my best course of action would be to ask them for a "offer letter" as you said.

Assuming that the General Partnership Agreement is already finalized and signed, is there any reason why they can't send me the carry documentation?

Thanks again for the response and insight. I just want to be aware of all the variables before starting a discussion with the partners.

 

I just went back and reviewed some of my documents from my last few funds (it had been a few years), so hopefully I can give you a more definitive answer.

First, what precise "carry docs" are you referring to? The reason I ask is that across all of my past funds (which includes two separate employers), the only document I have that legally grants me carry is the General Partnership Agreement. I certainly have non-binding offer letters and the like which state how much carry I am going to be granted in advance of the grant itself, but nowhere do I have an actual, enforceable legal document that grants me carry in any of my funds.

Second, it is certainly possible that certain employees are treated differently than others in terms of vesting provisions and the like. Those can be stipulated directly in the General Partnership Agreement simply by creating multiple "classes" of employees. This isn't dissimilar to having multiple tranches of debt all supporting the same company.

Third, the actual structure of the fund formation documents is really a function of the law firm that crafts them. Just like each law firm has their own "go-to" style of purchase agreement, the style (or "form") of the fund formation documentation can be different. This means that your particular documents are likely to look different from mine even if they accomplish nearly an identical goal. Because of this, it is really hard for me to advise you on precisely what you should expect to receive. However, you shouldn't assume you're going to get a unique contract stating that you are entitled to X% of the carried interest in the GP. More likely, there will be an exhibit at the end of the GP agreement that states the carried interest percentage of each member. Put differently, in all of my cases, the GP Agreement itself IS the carry documentation -- there is nothing else.

Finally, the Partners can realistically do whatever they want in terms of timing. If they want to finalize the General Partnership Agreement tomorrow, there is absolutely nothing stopping them. if they want to wait until the bitter end, they can do that as well. If they want to put in place a side agreement with you that outlines precisely how much carry, capital contribution, and vesting parameters you'd be granted -- that is also within their capability. This is why the best advice I can offer you is to go have a chat with them and ask for them to send you an email outlining expectations. It won't be legally enforceable, but it will give you grounds for a discussion if they try to change things up from you a year from now when the fund is raised.

My apologies if this is unclear -- kind of hard to communicate how all the fund documents work in a forum post.

CompBanker’s Career Guidance Services: https://www.rossettiadvisors.com/
 

Bumping this. We are approaching final close on our fund and while I have been "told" I have XX points of carry, I have not seen any documentation to support this.

This begs a bigger question (probably to fund attorneys?):  in the carry schedule, should I expect to see a carry-related vehicle (where all our carry goes)? And then are we granted ownership stakes (or something else) in that carry vehicle that are correlated to our carry %? Which document is the vesting outlined?

Thanks!

 

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