Carry Vesting for VP @ Startup PE Fund
Hi all,
Question about time vesting of carry for an investment team member -- see notes below. Our MD asked me to solicit feedback from PE folks on what would be considered "market". Honest feedback would be appreciated, as we'll use this to determine my comp. Thanks in advance!
Paul
Question 1: The GP gives an analyst/VP a cut of the deal-by-deal carry at a small PE fund, tied to deals he works on. Approximately how much time vesting (if any) might be considered "market"/"conventional"?
Question 2: Specific situation. Over past two years, the two of us did 3 small deals together (deployed $25-30mm of equity across the three deals). It's largely just been the two of us -- me + the MD -- doing these deals as an indep sponsor (we are now starting a PE fund). For deal three, the carry is split is agreed as 17.5% / 82.5%. We need to mutually agree on a reasonable vesting schedule for the VP carry. We both have our ideas on what's appropriate, but have agreed to poll the market on "conventional" carry time vesting for a deal team member.
Independent of vesting, most important is you negotiate American waterfall with your LPs (if you can). Far better for GP carry comp.
Vesting wise, I've seen 7 year linear vests (from date of first capital call / fund closing) with an acceleration to 60% once the fund is fully deployed. This is common in VC as well. On the PE side, have seen some firms do a 5 year linear vest from the time each dollar is deployed. I.e. if you have $bn fund and deploy a $100m check into a company, 10% of your carry vests 5 years linearly from that date. Not sure if this is market-representative, but a couple example structures.
Thanks! Very helpful. Point well taken re: European vs. American style carry.
In this case, we are talking just about the carry for one deal; LPs have already agreed to the deal-by-deal carry with the GP; the question is just about time-vesting for the share of the carry that is provided to the VP. (Slightly edited the question to clarify this).
Hoping to get at least a few opinions here, so other thoughts appreciated. Thanks again for the help.
Ah gotcha -- in that case, the 5-year linear vest is probably a good model. Maybe you can negotiate for shorter, but 5-year is pretty standard / market.
I've been at two different funds and have seen four- and five-year vesting schedules, with one-fourth or one-fifth of total carry vesting each year. One of the funds had monthly pro-rata vesting in the event that you left in the middle of the year, while the other did not.
Thanks! I like the pro-rated feature.
@Jelly - clarifying as I summarize the responses. Was this fund-level vesting (e.g. a % of a 10 year fund, 5 year investment period)? Or was this vesting triggered at deal close, stretching forward 4-5 years?
Vesting triggered as of the final close of the fund.
Just went through this exercise.
Typically the vest is linear and tied to the length of the investment period. The best I have seen is a 3 year linear vest and the worst i have seen is a 7 year back weighted vest where 50% of the amount was in the final two years. Often the vest gets accelerated if the fund hits certain milestones, like full deployment. Average I see is 4-5 years with a linear vest. Also, if you're doing deal by deal as an independent sponsor then I think it's fair for the vest to be shorter.
Thanks! Helpful color. Two questions:
(1) What number comes to mind (understanding that it varies) for an "accelerated" vest once capital is deployed?
(2) For seven year / back-half weighted vest -- were the final two years still capital deployment phase, or was deployment completed in year 5?
It was a 4 year investment period with the following vest: 10/10/10/15/15/20/20. It was pretty shitty tbh and the partner kept saying "value creation doesn't stop when the investment period ends, we need to actively manage and liquidate these companies properly". I mean, I agree, but he didn't have a vest at all so it's easy for him to say that. This was also an annual vest, so of you left 6 months into the year you got no credit.
Don’t have much to add here but you shouldn’t use your real name on WSO.
Thanks! Appreciate the feedback.
fyi, 17.5% + 83.5% = 101%
Ahh, maths. Thanks. 82.5%. Fixed above.
Agree with what has been said. Deal by Deal is 3 on the fast end and 5 years is probably market. It's also worth mentioning that it's important to know how your carry works once you leave (i.e. you retain vested portion, GP can buy it back at mark, which is always going to be lower than what you could actually get in a realization, etc.).
Good point re: repurchase right. Thanks for the color.
Any additional opinions welcome, as we're still hoping to collect multiple data points.
Any view on whether GP repurchase right is market? I know of two data points: one friend left his firm and retained his vested portion to be paid out upon exit and the other had his vested carry repurchased.
I don't have a great sense TBH. My carry can be bought back at the current mark.
Carry agreements typically have three options:
Based on offers I have seen, some variation of a 5 year linear vesting schedule is fairly standard and what I would consider market. The partners at my current independent sponsor shop were generous to have everything vest day one at close of each deal, since "we want you to work here because you want to work here not because you have to."
Thanks! Very helpful. Sound like great people to work for.
Intellectually interesting to me: If vesting is not put in place as "golden handcuffs" (which may be part of the "conventional setup"), seems like there's still a fair question about the appropriate time schedule. The fair-minded counter to the "100% at close" structure is that there's ongoing value creation work that takes place post-close. (On the other hand, even once fully vested, the upside does provide motivation / alignment to maximize the outcome -- so debatable whether vesting is needed to align interests.)
Arguably much of the deal-team value add is up-front (tied to sourcing, structuring, executing the deal). Obviously it varies, but any thoughts on the potential % of back-weighted vesting that is structurally justified to account for ongoing activities by the sponsor / deal team?
Sent you a pm
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