🎉 Happy Friday, funds family!

This is the third in a multi-part series on 💼 Negotiating Co-GP Deals. This week, we’re going to discuss how co-GPs split the magical elixir of funds and syndications - carried interest. 🤤 

🤔 What is carried interest?

In case you’ve been living under a rock, “carried interest” (also called “promote”) is a GP’s share of the profits from an investment fund or syndication. For example, the GP might get 20% of the profits generated by a fund (this is the “20” in the standard “2 and 20” structure).

If you want to get up to speed, we have a three-part series getting into the nitty gritty of carried interest. Here’s the first article in the trifecta: 🛠️ How Investment Fund Carried Interest Works (Part 1) 

🧵 How do co-GPs split carried interest?

Unlike 🛠️ fund documents (the agreements between the GP and the LPs), which have ~standard economic terms, co-GP deals are all over the place.

However, in broad strokes, in a simple two-party co-GP agreement between the operator (the party doing most of the work) and the capital provider (the party ponying up large amounts of capital), the operator often gets between 50-90% of the carried interest. We realize this is a broad range, but every deal is special, unique, and important.

💵 Who gets the carried interest in the co-GP docs?

In many co-GP documents, the carried interest is given directly to the individuals involved.

In other words, if the co-GP arrangement is between two business entities, the co-GP agreement has the two entities managing the co-GP entity, but allocates the carry to the humans running the show. This isn’t always the case, but it’s common.

Always work with a good tax lawyer to figure out the most efficient way to grant carry!

🕑️ Vesting of carried interest

In many co-GP agreements, carried interest is subject to vesting. If someone leaves the GP, they stop vesting. Most GP agreements have different rules based on how someone exits the entity.

For example:

• Resignation: If someone merely resigns, they might stop vesting the standard way (they keep vested carry and forfeit unvested carry).

• Death: If someone dies, some co-GP agreements will accelerate vesting, meaning that some or all of the deceased person’s unvested carry automatically vests.

• Cause Event: If someone commits a nasty “cause event” (by committing fraud, breaking restrictive covenants, etc.), they might forfeit all of their carry, ignobly getting zeroed out for their bad behavior.

Note that capital providers usually aren’t subject to vesting. They get their carried interest because they invested cash, not because they’re providing services.

👐 Can you give people more carry later?

Yes!

In co-GP agreements, you can typically (i) admit new carry owners or (ii) increase the carry percentages of existing carry owners.

In either case, the carry will need to come from somewhere. The GP agreement should contain a specific mechanism for whose carry percentages get diluted when additional carry is doled out to new people.

If you’re planning on doing this, work with a good tax lawyer to ensure that the carry grant is structured in a way that does not create a taxable event for the recipient. Hint: Say the magic words “profits interest” to your tax lawyer. 🧞 

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.