VC shadow carry terms
I am considering joining a VC firm in a non-investing role at a Principal level. The firm is fairly young and in early stages of raising Fund III. Part of the package is shadow carry in both Fund II, and future Fund III, but I have outstanding questions regarding the terms of the shadow carry, and what are the common practices around it in other VC funds.
- The amount of shadow carry is specified, with a 5-year vest, but it is positioned as a discretionary performance bonus, with no guarantees, which gives me pause. How standard is this for other VC funds? Is carry usually guaranteed?
- Shadow carry will be paid as earned taxable income out of the holding company, not investment income out of the fund, again is this standard?
It will probably be a couple of years before the firm sees any carry. I am new to the PE/VC world, if these bonuses were guaranteed, joining would be a no-brainer, since I like everything about the firm, but I hesitate taking an offer with a significant deferred bonus without any formal guarantees of getting it other than the verbal agreement. The firm indicated that every non-partner at the firm is getting these terms, I am not sure yet if there is room for negotiation around the terms.
What is your take, would you be ok signing what is effectively a verbal agreement for shadow carry?
Don't think this is standard. If there's a vesting schedule, there shouldn't be a need to make it sort of doubly subject to someone's discretion also.
Not sure. Might be the only way, depending on how it's structured.
Why can't they just give you "regular" carry, esp in Fund III? Also why is it just a verbal agreement?
Depending on how much $ you could be talking about, it might be worth talking to a securities/funds or employment lawyer.
To clarify, the terms are spelled out in the written offer, with a caveat that it is discretionary and can be taken away for no reason. Which effectively feels like a verbal agreement. Maybe there is no reason to worry, since all team members have the same terms, and it would be impossible in practice to exercise the discretionary clause outside of really egregious circumstances?
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