Negotiating Carry
I talked to my boss the a couple months ago who is looking to promote me to sr. associate as we continue to expand, and he said I will be getting carry as my base is below market. We are a small firm ($800M AUM with 4 FTE) and I am fully remote, so I'm not complaining. I know sr. associates occasionally get carry, but it's hit or miss depending on your firm size, so I was curious what I should be looking to get. We're completing our 6th deal for the year next month for $500M in assets acquired and my carry would be retroactive to encompass those deals.
We talked today and I will be negotiating my carry in a month, here's my comp right now:
Base: $72k
Bonus: ~$42K
Total: $114K
I've heard 1-3% from recruiters, but does that depend on firm size?
I ran an analysis once to calculate how much our firm's 20% carry was worth over an 8% pref including a clawback. What it basically spit out was that a gross IRR on the fund level of 14% to 18% ended up being worth between 10% to 12% of the original equity raise. Again very rudimentary analysis here and YMMV, but assuming you were able to do $500MM in deals and assuming 65% LTV, your equity raise was approximately $175MM, which means your GP's carry may shake out around $17.5MM to $21MM assuming 20% carry over an 8% pref. Therefore in this example, 1% to 3% of the carry equates to $175k on the low end to $630k on the high end.
I'd run the calculations yourself to determine what your carry may be worth, but I'd say 2% up to maybe even 5% considering it's only 4 FTE. That seems reasonable/appropriate to me.
10-15% of the fund size is a pretty good rule of thumb for total carry. Of course a fund can generate a higher or lower amount of carry than that (or none for that matter). I don't know your market OP but you feel underpaid. At your same level I was probably closer to $170K all-in before carry. Smaller company + inability to pay you market on current comp, I'd be pushing for as much carry as you can get. 3% is high in my world, but I also work for a much larger company with more mouths to feed and more AUM. 3% gets you closer to being whole, assuming that the fund hits its targets.
I agree, but I am also remote working in the Midwest. My firm is a bay area firm, and we have been mostly investing on the west coast. I know I am underpaid compared with them, but my house is also $400k versus the $1.5M I'd have to pay over there. Harder to judge my salary for myself just because of the conveniences I am awarded, but I did take this role over another role that I had an offer on at $150K because I knew the hours would be better and I didn't have to live in a major city so I saved on costs.
Like I said in the comment above, we are projected higher equity pools, but I do think I should probably be looking at it at a smaller return with the 10-15% figure you are looking at. Though being on a deal-to-deal basis for carry is nice, I am a little hesitant to shoot for 3% just because I feel the partners would be very reliant on the model we have projected which would put my carry for the deals we've done this year at ~$1.3M.
I ran my own calculations and our average GP profit over 8% pref was ~$7-10M over 10 years per deal. My carry is on a per deal basis, and we are completing about 6-7 deals this year. That would mean with 6 deals at $7M pool per deal, we'd have $40M in profit in 10 years in an ideal world where our projections play out perfectly. at 2-5% that's $800k-$2M which seems high. Our GP IRRs are much higher than 14-18% though, more like 20-25% because of our promote structure. I think I am better off shooting for 1.5-2%, but I honestly don't know the market for carry and there won't be a ton of members sharing equity, I just don't want to start at an unreasonable number.
Vesting should be 3-4 years is what I am being told as well, which wouldn't be too bad.
The next question-do you want the carry? Carry sounds amazing but you can’t eat it and you need to stick around for it to maybe be worth something and pay you out. You mentioned you’re getting carry as you’re under market. Can you get cash comp.? If you can increase your cash comp., you can at least save more or increase your standard of living. At least the firm recognizes you’re under market, but you also need to make sure you’re cash grows too.
I get a bump in cash comp at the end of the year. I was told I'd get carry before then. My hope is to get $90k-$100k base and $10k per deal which would get me to $160-$180K for next year + carry. I am remote in the Midwest so my pay would be pretty good at that level.
There are many more questions you should be asking yourself. Here are a few:
All of these questions might not even matter - I've been in a position where it's a "take it or leave it" situation. It's unfortunate, but I don't think about the carry (or try not to) until the buyer is hard and a sale is imminent. For others that can play a part in writing the script, think beyond just "what is the right percentage."
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