VC / PE Carried Interest Language in Employment Contract

Tsukemen's picture
Rank: Chimp | 3

Hey all - long time lurker here and this time need your help with something. I recently got an offer for a new VC fund and was promised carry as part of the compensation package. My job title is Director of Investment but for all intensive purposes think of it as senior associate / VP level.

I wanted to compare language on the actual employment contract regarding carried interest language. We did not discuss a fixed % right now since they are still working on the structure even for themselves.

"The Employee may be entitled to carried interest and the relevant details will be subject to other relevant document(s) to be provided by the Company or its affiliate in its sole and absolute discretion. The Company or its affiliate reserves the right to change the bonus and other incentive arrangements at any time in its sole and absolute discretion."

Language seems extremely loose and I'm not a huge fan of the "sole and absolute" part but probably not much I can do to push back on that. Could any of you share a similar provision from your employment contract? Feel free to PM me directly or redact anything sensitive.

Thanks all!

Comments (4)

Best Response
Oct 30, 2017

There really isn't much you can do at this stage if the General Partnership agreement has not yet been drafted (possible if the fund is not yet raised). If it has been drafted, they ought to be able to provide you with your vesting schedule. You could also ask what your target carried interest compensation is (either in $ based on a 2.0x return or in % of total carry pool). Carry ought to be a meaningful part of your compensation and it isn't very sporting of them to not give you a range before signing on. However, I think it is unlikely that you'll be able to get rid of the sole and absolute discretion. You're going to end up having to put your trust in the partners either now or when you sign the GP agreement.

Also note that you refer to the document as an employment contract. I suspect what you have received is an offer letter rather than an employment contract. Employment contracts are beneficial to the employee and usually contain language regarding severance and other protections. An Offer Letter simply outlines the terms of your employment rather than binds the parties. At the end of the day it really isn't worth much because your employment is likely to be at-will. -- A labor lawyer could probably give you a better description, but that's the basics as I understand them.

    • 4
Oct 30, 2017

@CompBanker nailed it (+1). In plain English, you have a lightweight document that's intended to take you off the market while the partners finish structuring the fund. Then they have to raise it (no mean feat whatsoever). Then you'll get a full-on employment agreement, which is a dramatically more robust document than the one you're reviewing now.

Senior-level roles in any private market fund are based completely on trust. You need to be able to sleep at night knowing that the few guys above you in the firm aren't going to fuck you, because the consequence of any such fucking could vary from seven to nine figures in annual income, depending on the fund size.

(This is the root factor for why you see some people make what look like head-scratching moves from golden positions. They lost confidence, for whatever reason, in the certainty of how they'd be treated.)

Your first step ought to be to reflect on the relationship you have with these guys. Have you known them for the better part of a decade and this is simply a formalization of numerous verbal discussions you've had over time, or did they find you through a mid-tier recruiter who you haven't even known that long? Are they credible people with strong experience at solid funds that you can use as a proxy for their caliber as professionals, or is there an absence of immediately visible signals that allow you to infer the professionalism or character that will drive how they'll treat you?

Your second step has to be an earnest conversation with them about their status with the fundraise. It's an entirely different thing to join a fund that's already got a full (or at least partial) close on its target than to sign on with three guys who teamed up six months ago and haven't yet even paid for the formation work. Your post is vague and simply says "a new VC fund", but from how you describe the status of the internal operating agreements, it sounds like it's closer to the latter than the former.

At the end of the day, know that even when you do get a robust employment document, there's still all kinds of ways the founders of the firm can dick with you.

They can draw up the operating documents to say that even though the Limited Partnership Agreements include an American waterfall (deal-by-deal carry payouts), all non-partner employees of the fund will be paid on the European schedule (cumulative carry payouts).

They could have the operating documents written one way, then two years later change them to my prior paragraph. No one can stop them, they're the owners of the firm.

They can simply lie to you about overall fund performance.

They can simply withhold payments even though you know fund performance.

In all of these situations you have varying grounds for legal action, but it's invariably a long and painful process that you're automatically disadvantaged in. Your contract may (very likely) have arbitration language in it that precludes you from litigation. The GP will probably carry insurance that pre-funds their legal costs, while you're stuck paying out of pocket for what inevitably becomes a lengthy and drawn-out process.

I could go on here. The point is that you need to be comfortable with whomever you're getting in bed with, and that matters more the farther up the seniority scale your role is.

As an incoming PE associate, it's a negligible part of your calculus. As a VP or Principal, it's very material. As an MD or non-managing partner, it's huge.

    • 4
Oct 30, 2017

Really appreciate your comments CompBanker and APAE!

This was part an offer letter but it was titled "employment agreement" and it's 11 pages long which made me think this was the actual agreement. My banking offer letters were just short 1-2 pagers and then there was the employee handbook that was hundreds of pages long once you start. This agreement contained sections on employment, remuneration/benefits, confidentiality, non-solicitation, termination, etc.

And I should have elaborated more, but the fund has been around for about a year and they have pretty much deployed most of the $100m they raised, and they will have subsequent raises in the next coming year(s). I thought this was extremely curious as to why they couldn't tell me a % of carry even verbally. The partner said that they were still trying to negotiate this. I think the issue is a bit complex since it's a Asian IB that's trying to do cross-border investments. I would assume for all NA VCs that have a fund already closed and making investments that they would have an idea of carry structure, but since this was an Asian bank, I initially gave them some slack. However, I will definitely have a good sit down conversion with them before I make this final regarding where they think carry will fall out - even for themselves. I just find this extremely hard to believe that partners / senior investment professionals would be willing to work a whole year without an idea of carry, but maybe that's just how Asia works?

Few people may be wondering why I'm even putting up with this and it's more for access into the buyside more than anything. I certainly hope this experience will work out in the long run, but if not I'm hoping that having this on my resume will make me more attractive to go to other funds. My background is 3 years as an IBD associate in NYC (was consulting before bschool) and a few months of being a VP1. Also, I did want to make a jump to Asia hence why I'm dealing with an Asian IB entity. Figured it would be hard for me to make the jump to VC/PE as a VP w/o prior buyside experience so I'm nibbling at the bait...

Always open to hearing more from you guys as well as the community at large, thanks again.

Nov 2, 2017
    • 1