Author: Gert-Tom Draisma / www.TristanFinance.com

First published: 24th of September 2026

Latest update: 5th of October 2026

Status: First Draft

1. Carry Ownership Is Not Static

Part V established the carry cap table as a time-dependent record of economic ownership.

That immediately creates the next question:

What happens when ownership changes?

Carry plans frequently operate for longer than the careers, roles and organisational structures that existed when the original allocations were made.

During the life of a fund:

• new participants may join;
• existing participants may be promoted;
• responsibilities may change;
• additional interests may be granted;
• interests may be transferred;
• participants may leave;
• interests may be forfeited;
• reserved interests may be allocated;
• pools may be expanded;
• classes may be reorganised;
• legal vehicles may change;
• and errors may need to be corrected.

The economics therefore evolve.

The central principle is:

Opening Ownership + Ownership Events = Closing Ownership

But the arithmetic is only the beginning.

Every ownership event requires an economic interpretation.

2. Ownership Event Versus Ownership State

An ownership state describes the position at a particular moment.

For example:

Partner A = 20%

Partner B = 15%

Partner C = 10%

An ownership event explains how that state changed.

For example:

Partner A transfers 5% to Partner B.

The new state becomes:

Partner A = 15%

Partner B = 20%

Partner C = 10%

The closing state alone does not explain the event.

Therefore:

Ownership State ≠ Ownership Event

and:

Opening State + Ownership Event → Closing State

A robust carry system should preserve both.

3. The Principal Ownership Events

Changes in carry ownership can be classified into several broad categories:

1. Grant
2. Additional Grant
3. Transfer
4. Reallocation
5. Dilution
6. Pool Expansion
7. Forfeiture
8. Cancellation
9. Return to Reserve
10. Class Conversion
11. Legal Vehicle Migration
12. Economic Amendment
13. Correction

These events can produce similar closing cap tables while having very different economic meanings.

The transaction classification therefore matters.

Grants

4. Initial Grant

An initial grant creates a participant's first interest in a carry pool.

Suppose:

Fund III Employee Carry Pool = 1,000 points

Before the grant:

Partner A = 300

Partner B = 250

Partner C = 150

Reserve = 300

A new participant, Partner D, receives 100 points from reserve.

After the grant:

A = 300

B = 250

C = 150

D = 100

Reserve = 200

Total remains:

1,000 points

The economic event is:

Reserve → Participant D: 100 Points

No new points have been created.

Existing fully diluted percentages have therefore not changed.

5. Grant From Reserve

A grant from an existing reserve reallocates ownership capacity already included in the denominator.

Suppose Participant A owns 300 of 1,000 fully diluted points.

Before the grant:

A = 30%

After 100 reserved points are granted to D:

A = 300 / 1,000 = 30%

A's fully diluted percentage remains unchanged.

However, if the reserve did not previously participate in current economics, A's current economic percentage may decrease.

This illustrates:

No Fully Diluted Dilution ≠ No Change in Current Economics

The economic effect depends on how reserved interests participate before allocation.

6. Grant Through Pool Expansion

Now assume there is no reserve.

Opening:

A = 300

B = 250

C = 150

Total = 700 points.

D receives 100 newly created points.

New total:

800 points

A's percentage changes:

300 / 700 = 42.86%

to:

300 / 800 = 37.50%

The grant has diluted A.

Therefore:

Grant From Existing Reserve ≠ Grant Through Pool Expansion

The participant receives 100 points in both cases.

The effect on existing participants is different.

7. Grant Through Transfer

A third possibility is that an existing participant provides the interest.

Suppose:

A = 300

B = 250

C = 150

A transfers 100 points to D.

Closing:

A = 200

B = 250

C = 150

D = 100

Total remains 700.

Only A has surrendered economics.

B and C are unaffected.

Therefore:

Transfer-Funded Grant ≠ Reserve-Funded Grant ≠ Pool-Expansion Grant

The phrase “D received 100 points” does not describe the full economic transaction.

8. Source of Grant

Every grant should therefore identify its economic source.

Possible sources include:

• reserve;
• sponsor-retained interest;
• another participant;
• newly created interests;
• forfeited interests;
• or another defined population.

The complete transaction is not merely:

Participant D +100

but:

Source → Participant D +100

This allows the economic effect on other owners to be determined.

9. Grant Date and Economic Effective Date

A grant also requires a time dimension.

Suppose D receives 100 points.

The relevant dates might be:

Approval date: 15 March 2030

Grant date: 31 March 2030

Economic effective date: 1 January 2030

Vesting commencement date: 1 July 2029

These dates perform different functions.

For Chapter 6, the key question is:

From when does D participate in the relevant carry economics?

Therefore:

Grant Date ≠ Necessarily Economic Participation Date

10. Prospective Grants

A grant may apply only prospectively.

Suppose D joins on 1 January 2030.

The plan provides that D participates only in carry generated economically after that date.

The grant therefore creates:

Future Economic Participation

without necessarily creating:

Historical Economic Participation

This distinction becomes particularly important where the carry pool already contains substantial embedded value.

Additional Grants and Promotions

11. Additional Grants

An existing participant may receive an additional grant.

Suppose A owns:

100 points.

A receives:

50 additional points.

Closing ownership:

150 points.

But the economic meaning depends on:

• source of the 50 points;
• denominator;
• effective date;
• historical-value treatment;
• and applicable pool.

Therefore:

Additional Points ≠ Complete Description of Additional Economics

12. Promotion Grants

Promotions commonly create additional carry awards.

Suppose Principal A owns 5% of Fund III Employee Carry.

On promotion to Partner, A receives an additional 5%.

The apparent result is:

5% → 10%

But several questions arise.

Does the additional 5% apply to:

• all historical Fund III carry;
• only future carry;
• only future investments;
• only appreciation after the promotion date;
• or another defined economic population?

The percentage change alone does not answer these questions.

13. Role Change Does Not Automatically Change Historical Economics

A participant's role may change substantially.

For example:

Principal → Partner

Partner → Managing Partner

Investment Professional → Operating Partner

But a change in employment or organisational role does not itself determine what happens to existing carry.

Therefore:

Change in Role ≠ Automatically Change in Historical Carry

Any economic change should follow the carry-plan rules and the relevant ownership transaction.

14. Promotion and Existing Value

Suppose a participant's interest increases from 5% to 10%.

At the promotion date, the carry pool has a current value of €20 million.

If the new 10% applies immediately to all existing value:

Before promotion:

€20m × 5% = €1m

After promotion:

€20m × 10% = €2m

The promotion has transferred:

€1m of current indicative economic value

to the participant.

This may be intentional.

But it should be recognised as an economic consequence.

15. Prospective Promotion Economics

Alternatively, the participant may retain 5% of value created before promotion and receive 10% participation only in subsequent value creation.

Suppose:

Carry pool at promotion date = €20m

Later carry pool = €30m

Historical component:

€20m × 5% = €1m

Subsequent increase:

€10m × 10% = €1m

Total participant position:

€2m

This produces the same final amount as the previous simple example, but only coincidentally.

If the pool later falls, or different attribution rules apply, the outcomes can diverge.

The underlying rule therefore matters.

Historical Embedded Value

16. The Existing-Value Problem

Whenever a new participant enters an existing carry pool, an important question arises:

Does the participant receive economics created before they joined?

Suppose:

Current carry pool value = €40m

New participant receives 10%.

If the interest applies immediately to the entire pool:

€40m × 10% = €4m

The grant has effectively transferred €4 million of current indicative value to the new participant.

This is not necessarily wrong.

But it is economically different from granting participation only in future value creation.

17. Historical Embedded Value

The carry pool may contain value generated before the new participant's economic participation began.

This can be described as historical embedded value.

Conceptually:

Current Carry Pool = Historical Embedded Value + Subsequent Value Movement

A carry plan needs to determine whether a new or increased interest participates in:

• both components;
• only subsequent value;
• selected historical economics;
• or another defined population.

Therefore:

Grant of Carry Interest ≠ Necessarily Grant of Historical Carry Value

18. Full Historical Participation

Under a full historical participation approach, the new participant receives the stated percentage of the entire relevant carry pool.

Suppose:

Opening carry pool at join date = €40m

New participant interest = 10%

Immediate indicative position:

€40m × 10% = €4m

If the pool later increases to €50m:

€50m × 10% = €5m

The participant participates in both existing and subsequent value.

This is simple administratively.

But it transfers historical economics.

19. Prospective Participation

Under a prospective approach, the participant participates only in value created after the relevant effective date.

Suppose:

Carry pool at join date = €40m

Carry pool later = €50m

Increase:

€10m

Participant prospective interest = 10%

Participant's subsequent value:

€10m × 10% = €1m

The historical €40 million is excluded from the new grant.

This produces:

Historical Carry Population → Existing Owners

Subsequent Carry Population → Updated Owners

The economics are more precise but administration becomes more complex.

20. Opening Carry Value

One method of separating historical and future value is to establish an opening carry value for the participant.

For example:

Participant A joins when:

Current relevant carry = €40m

Opening excluded value = €40m

Participant share = 10%

Subsequent carry increases to €55m.

Increment:

€55m − €40m = €15m

Participant indicative allocation:

€15m × 10% = €1.5m

The opening value functions as an economic boundary between historical and subsequent economics.

21. Opening Value Is Not Necessarily a Hurdle

Care is required with terminology.

An opening value used to exclude historical economics is not necessarily the same as a preferred-return hurdle or fund waterfall hurdle.

It serves a participant allocation purpose.

Therefore:

Participant Opening Value ≠ Fund Waterfall Hurdle

The concepts may be mathematically similar in some circumstances but have different economic functions.

22. Negative Subsequent Performance

Suppose the participant joins when carry is €40 million.

The carry subsequently falls to €30 million.

If the participant only participates in value above the €40 million opening level, the participant may currently have no positive carry allocation.

But what happens if carry later recovers to €45 million?

Possible approach:

€45m − €40m = €5m

Participant at 10%:

€0.5m

This resembles a high-water-mark concept.

Whether this is the intended result depends on the plan.

The rule should be defined rather than inferred.

23. New Investment Participation

Another approach is to separate economics by investment.

A new participant might receive:

0% of existing investments;

10% of investments made after joining.

This avoids the need to value historical embedded carry for existing investments.

The architecture becomes:

Existing Investment Pools → Existing Participants

New Investment Pools → Updated Participant Population

This can be attractive in investment-level allocation structures.

But it creates additional cap tables.

24. New Vintage Participation

A further approach is to introduce the participant only into future fund vintages.

For example:

Fund III = 0%

Fund IV = 10%

Fund V = 15%

This is administratively simple.

It also clearly separates historical and future economics.

But the participant may wait years before meaningful carry value develops.

Therefore:

Administrative Simplicity ≠ Immediate Incentive Value

25. Separate New-Joiner Pool

A firm may also create a separate pool for new joiners.

For example:

Existing Employee Pool;

New Partner Pool.

The new pool could participate only in economics generated after a defined date or above a defined value.

This can preserve historical ownership while providing current incentive.

The cost is additional economic architecture.

26. There Is No Universal New-Joiner Rule

The appropriate approach depends on:

• incentive objectives;
• existing fund maturity;
• valuation reliability;
• fund architecture;
• participant seniority;
• expected future funds;
• legal structure;
• tax;
• and administrative capability.

The key principle is not that one approach is universally correct.

It is that the treatment should be explicit.

New Joiner + Existing Carry Pool → Historical-Value Decision Required

Transfers

27. Transfer of Carry Interests

A transfer moves an existing economic interest from one holder to another.

Suppose:

A = 30%

B = 20%

A transfers 5% to B.

Closing:

A = 25%

B = 25%

Total pool ownership remains unchanged.

The transaction is:

A → B: 5%

No new economic interest is created.

28. Transfer Versus Dilution

A transfer affects specific participants.

Dilution affects percentages through a change in the denominator or another broader ownership change.

Suppose A transfers 5% to B.

C's percentage remains unchanged.

By contrast, if new interests are issued to B, A and C may both dilute.

Therefore:

Transfer ≠ Dilution

although both can reduce one participant's relative position.

29. Transfer of Points

For a point-based plan:

A = 300 points

B = 200 points

Total = 1,000 points

A transfers 50 points to B.

After:

A = 250

B = 250

Total remains:

1,000.

A's fully diluted percentage changes:

30% → 25%

B's:

20% → 25%

Other participants are unaffected.

30. Partial Transfer

A transfer need not involve the participant's entire interest.

Partial transfers can be used for:

• succession;
• internal reallocation;
• settlement;
• restructuring;
• or other purposes.

Each transfer should identify:

• source participant;
• destination;
• pool;
• class;
• amount;
• effective date;
• and supporting authority.

This preserves the economic chain.

31. Transfer Between Pools Is Not a Simple Transfer

Suppose A surrenders 5% of Fund III carry and receives 5% of Fund IV carry.

These are different economic populations.

The transaction should not be recorded as a simple 5% transfer.

Economically:

Fund III Interest −5%

and:

Fund IV Interest +5%

The values may be completely different.

Therefore:

Same Percentage Across Different Pools ≠ Same Economic Value

Reallocation

32. Reallocation

A reallocation changes how an existing carry pool is divided.

For example:

Opening:

A = 40%

B = 30%

C = 20%

Reserve = 10%

Closing:

A = 35%

B = 30%

C = 25%

Reserve = 10%

The economic movement is:

A → C: 5%

This could be implemented legally through:

• transfer;
• cancellation and reissue;
• amendment;
• or another mechanism.

The economic analysis should identify the underlying redistribution.

33. Reallocation Versus New Grant

Suppose C increases from 20% to 25%.

If the additional 5% comes from A:

Reallocation

If it comes from reserve:

Grant from Reserve

If it is newly created:

Pool Expansion / Dilutive Grant

The closing position of C is identical.

The effect on everyone else is not.

Therefore:

Same Participant Increase ≠ Same Economic Transaction

34. Reallocation and Historical Economics

A reallocation also requires a time rule.

If A transfers 5% to C effective today, does C receive:

• only future economics;
• existing unrealised carry;
• historical realised but unpaid carry;
• future distributions from historical investments;
• or all economics attached to the transferred interest?

The answer depends on the transaction terms.

Therefore:

Transfer of Ownership ≠ Automatic Definition of Historical Entitlement

Dilution

35. What Is Dilution?

Dilution occurs when a participant's percentage of the relevant economic population decreases without a proportionate reduction in the number of interests they hold.

Suppose:

A owns 200 points.

Total points = 1,000.

A owns:

20%

The pool expands to 1,250 points.

A still owns 200.

A now owns:

16%

A's points did not change.

A's percentage did.

That is dilution.

36. Economic Dilution

Dilution should be considered economically, not merely numerically.

Suppose a participant's percentage falls:

20% → 16%

but the underlying carry pool grows:

€10m → €20m.

Before:

€10m × 20% = €2m

After:

€20m × 16% = €3.2m

The participant has been diluted in percentage terms but has greater indicative value.

Therefore:

Percentage Dilution ≠ Necessarily Reduction in Economic Value

Both measures can be relevant.

37. Value Dilution

Conversely, a participant may experience actual value dilution if additional interests are granted participation in existing value.

Suppose:

Carry pool = €20m

A owns 20%:

€4m

New interests dilute A to 16%, with no change in pool value.

New indicative position:

€20m × 16% = €3.2m

Value transferred away from A:

€0.8m

This is economically significant even if A's number of points remains unchanged.

38. Prospective Dilution

A plan can attempt to make dilution prospective.

Suppose A retains 20% of the first €20 million of existing carry value but owns 16% of subsequent value.

Historical position:

€20m × 20% = €4m

If carry later increases to €30m:

Subsequent increase:

€10m × 16% = €1.6m

Total:

€5.6m

This protects historical value while allowing future ownership to change.

Again, administration becomes more complex.

39. Dilution Basis

Whenever dilution is discussed, the basis should be identified.

Possible measures include:

• issued percentage;
• fully diluted percentage;
• current economic percentage;
• effective look-through percentage;
• percentage of total GP carry;
• or percentage of a particular participant pool.

Therefore:

“Diluted from 20% to 15%” is incomplete unless the denominator is identified.

40. Dilution From Reserve Grants

As established in Part IV, a grant from reserve may not change fully diluted ownership.

But it can change issued-basis ownership.

Suppose:

A = 40 points

B = 30

Reserve = 30

Fully diluted:

A = 40%

B = 30%

Reserve = 30%

Issued-basis before grant:

A:

40 / 70 = 57.14%

B:

30 / 70 = 42.86%

Ten reserve points are granted to C.

Issued points become 80.

A:

40 / 80 = 50%

B:

30 / 80 = 37.5%

C:

10 / 80 = 12.5%

A and B have been diluted on an issued basis but not on a fully diluted basis.

Therefore:

Dilution Depends on the Measurement Basis

Pool Expansion and Contraction

41. Pool Expansion

A carry pool expands when its authorised economic denominator increases.

For example:

1,000 points → 1,200 points.

If existing participants retain the same number of points, they dilute.

Suppose A owns 200 points.

Before:

200 / 1,000 = 20%

After:

200 / 1,200 = 16.67%

Pool expansion is therefore an economic event affecting all holders unless specific protections apply.

42. Why Expand a Pool?

A pool may be expanded to:

• recruit senior talent;
• reward promotions;
• create additional reserve capacity;
• support succession;
• add new participant groups;
• or implement revised compensation policy.

The commercial rationale does not alter the mathematical effect.

The denominator changes.

Therefore:

Pool Expansion → Potential Dilution of Existing Interests

43. Pool Contraction

A pool can also contract.

Suppose:

Total points = 1,000.

One hundred unallocated points are permanently cancelled.

New denominator:

A participant with 180 points moves from:

180 / 1,000 = 18%

to:

180 / 900 = 20%

The participant has experienced accretion.

Therefore:

Pool Contraction → Potential Accretion of Remaining Interests

44. Accretion

Accretion is the opposite of dilution.

A participant's percentage increases because the denominator decreases or other interests are removed.

But, like dilution:

Percentage Accretion ≠ Necessarily Increase in Economic Value

If the carry pool itself falls significantly, the participant can own a larger percentage of a smaller amount.

Percentage and value should therefore remain separate concepts.

Forfeiture

45. Forfeiture

Forfeiture occurs when a participant loses some or all of an interest under the applicable rules.

Possible causes may include:

• departure;
• breach;
• failure to satisfy vesting;
• termination;
• or another plan event.

The detailed circumstances belong to Chapter 7.

For Chapter 6, the relevant question is:

What happens to the forfeited economic interest?

46. Destination of Forfeited Interests

A forfeited interest might:

• return to reserve;
• be cancelled;
• transfer to the sponsor;
• be redistributed pro rata;
• be reallocated selectively;
• remain economically dormant;
• or be treated in another defined manner.

These alternatives produce different ownership outcomes.

Therefore:

Forfeiture Requires a Destination Rule

47. Forfeiture to Reserve

Suppose:

A = 30

B = 25

C = 20

Reserve = 25

C forfeits 10 points.

If the points return to reserve:

A = 30

B = 25

C = 10

Reserve = 35

Total remains 100.

A and B's fully diluted percentages do not change.

48. Forfeiture and Cancellation

If C's 10 points are cancelled instead:

A = 30

B = 25

C = 10

Reserve = 25

Total becomes:

A's percentage increases:

30 / 100 = 30%

to:

30 / 90 = 33.33%

B's percentage increases:

25% → 27.78%

The same forfeiture by C has created accretion for the remaining interests.

Therefore:

Forfeiture to Reserve ≠ Forfeiture Through Cancellation

49. Selective Reallocation of Forfeited Carry

Suppose C forfeits 10 points.

The compensation committee reallocates:

5 to A;

3 to B;

2 to reserve.

The transaction should be recorded as a sequence of economic movements.

For example:

C −10

then:

A +5

B +3

Reserve +2

The final cap table reconciles.

More importantly, the ledger explains the redistribution.

50. Forfeiture Does Not Necessarily Reverse Historical Carry

Suppose C previously received €1 million of carry distributions.

C then forfeits future unvested interests.

The forfeiture does not automatically mean the €1 million historical distribution is reversed.

That depends on the leaver, clawback and other plan provisions.

Therefore:

Forfeiture of Future Interest ≠ Automatic Reversal of Historical Carry

This distinction becomes central in Chapter 7.

Cancellation

51. Cancellation of Carry Interests

Cancellation extinguishes an economic interest.

If cancelled interests are removed from the denominator, remaining participants may experience accretion.

But cancellation can also be implemented without affecting other participants if the cancelled economics are transferred elsewhere or the plan preserves the denominator.

The exact economic effect should therefore be identified.

52. Cancellation Versus Transfer

Suppose A loses 10 points.

If the points are transferred to B:

A −10 / B +10

If they are cancelled:

A −10 / Total Pool −10

These are different events.

Therefore:

Cancellation ≠ Transfer

and:

Reduction in Participant Interest ≠ Necessarily Reallocation to Another Participant

Reserve Management

53. The Reserve as an Economic Account

The reserve should be treated as a controlled economic population.

Its movement can be represented:

Opening Reserve + Returned Interests + New Reserve Capacity − Grants − Other Uses = Closing Reserve

For example:

Opening reserve = 200 points

Forfeitures returned = +30

New grants = −80

Promotion awards = −20

Closing reserve:

200 + 30 − 80 − 20 = 130 points

This should reconcile.

54. Reserve Exhaustion

Suppose the reserve contains only 20 points but management wishes to grant 50.

The additional 30 points must come from somewhere.

Possible sources:

• pool expansion;
• sponsor transfer;
• participant reallocation;
• newly forfeited interests;
• or another defined source.

The system should not simply allow the reserve to become negative unless the plan explicitly permits such a concept.

Therefore:

Grant Requirement > Available Reserve → New Economic Decision Required

55. Replenishing the Reserve

A reserve may be replenished through:

• forfeitures;
• participant transfers;
• sponsor contributions;
• pool expansion;
• or another mechanism.

Each has different consequences.

For example:

Forfeiture → Reserve

may not dilute existing fully diluted ownership.

But:

Pool Expansion → Reserve

does.

Therefore:

Same Closing Reserve ≠ Same Economic History

Class Changes

56. Class Conversion

A participant's interest may be converted from one class to another.

Suppose:

100 Class B units

are converted into:

100 Class A units.

If Class A and Class B have identical economics, the conversion may have no immediate economic effect.

If the classes have different rights, the conversion can materially change the participant's entitlement.

Therefore:

Same Number of Units ≠ Same Economics Across Classes

57. Conversion Ratio

A class conversion may use a ratio.

For example:

2 Class B units → 1 Class A unit.

A participant with 200 Class B units receives:

100 Class A units.

The reduction in unit count does not necessarily mean the participant lost value.

The relevant question is the economic rights represented by each class.

Therefore:

Unit Count Before and After Conversion ≠ Sufficient Measure of Economic Change

58. Promotion Through Class Conversion

A promotion may be implemented through class conversion rather than an additional grant.

For example:

Principal Class → Partner Class.

If the Partner Class has stronger economics, the participant receives additional economic value even if the nominal number of units does not change.

The transaction should therefore be analysed by economic rights, not merely unit quantity.

Legal Vehicle Changes

59. Migration Between Carry Vehicles

Participants may move between legal carry vehicles.

Reasons may include:

• relocation;
• tax restructuring;
• regulatory requirements;
• organisational restructuring;
• or replacement of a carry vehicle.

Suppose Participant A owns 10% of Fund III carry through Vehicle X.

The interest is moved to Vehicle Y while preserving exactly the same underlying economics.

Economically:

Before = 10% Fund III Carry

After = 10% Fund III Carry

There may be substantial legal activity but no economic ownership change.

Therefore:

Legal Restructuring ≠ Necessarily Economic Reallocation

60. Preserve Economic Continuity

Where the intention is continuity, the carry administration should preserve the economic history.

It should not treat the migration as:

Old Interest Terminated → New Economic Grant

unless that is actually the intended economics.

Instead:

Existing Economic Interest → New Legal Wrapper

This preserves historical ownership continuity.

61. Legal Change With Economic Change

Sometimes the restructuring also changes economics.

For example:

Old vehicle interest = 10%

New vehicle interest = 12%

The transaction contains two components:

1. legal migration;
2. economic increase of 2%.

These should be separated analytically.

Otherwise, the economic grant can disappear inside the legal restructuring.

Amendments

62. Economic Amendments

The carry plan itself may be amended.

For example:

• pool percentage changes;
• reserve increases;
• participant classes change;
• allocation methodology changes;
• historical-value rules change;
• or participant rights change.

An amendment can therefore affect many participants simultaneously.

The system should distinguish:

Plan Amendment

from:

Individual Participant Transaction

although a plan amendment may generate participant-level consequences.

63. Prospective Amendment

An amendment may apply only prospectively.

For example:

Before 1 January 2031:

Employee Pool = 60% of GP carry.

From 1 January 2031:

Employee Pool = 70%.

Historical carry remains subject to the old 60% rule.

The system therefore needs two economic periods.

Old Rule → Historical Period

New Rule → Subsequent Period

The old rule should not simply be overwritten.

64. Retroactive Amendment

A retroactive amendment changes economics for an earlier period.

This can have substantial consequences.

It may require recalculation of:

• participant allocations;
• distributions;
• reserves;
• accounting;
• tax;
• and reporting.

Therefore:

Retroactive Economic Amendment → Historical Recalculation Requirement

Such changes should be explicitly documented and controlled.

65. Amendment Versus Correction

Suppose the plan always provided a 20% interest but the system recorded 15%.

Changing 15% to 20% is a correction.

Suppose the plan originally provided 15% and is later amended to provide 20% retroactively.

That is an economic amendment.

The resulting corrected cap table may look identical.

The underlying event is different.

Therefore:

Same Corrected Result ≠ Same Reason for Change

Corrections

66. Data Corrections

Carry records can contain errors.

Examples include:

• wrong participant;
• wrong pool;
• wrong number of points;
• wrong effective date;
• wrong class;
• duplicate transaction;
• missing transaction;
• incorrect denominator;
• or incorrect legal vehicle.

Corrections should preserve an audit trail.

The objective is:

Correct the Economic Record Without Erasing the History of the Correction

67. Reversal and Rebooking

A robust approach may reverse an incorrect transaction and record the correct one.

For example:

Incorrect grant:

A +100 points

Correction:

Reverse A −100

Correct grant:

A +50 points

This preserves the transaction history.

Simply changing 100 to 50 may obscure what happened.

68. Current Correction With Historical Effect

Suppose an error from 2028 is discovered in 2031.

The correction may need to change historical ownership from 2028.

The system should distinguish:

Correction entered:

2031

Economic effective date:

2028

This allows the current audit trail to preserve when the correction was made while reconstructing the correct historical economics.

69. Corrections Can Affect Downstream Calculations

A historical cap-table correction can affect:

• realised carry allocations;
• unrealised carry;
• participant statements;
• distributions;
• clawback balances;
• vesting calculations;
• tax reporting;
• accounting;
• and reconciliations.

Therefore:

Cap Table Correction → Potential Downstream Recalculation

The impact should be assessed systematically.

Economic Continuity

70. The Continuity Question

Every ownership change should ask:

Which economics continue, and which economics change?

This is more important than the administrative form of the transaction.

For example:

A participant moves carry vehicles.

Legal ownership changes.

Economic ownership may remain identical.

Alternatively:

A participant receives additional points in the same vehicle.

Legal structure remains unchanged.

Economic ownership changes.

Therefore:

Legal Change ≠ Necessarily Economic Change

and:

No Legal Structural Change ≠ No Economic Change

71. Economic State Before and After the Event

A useful analytical framework is:

Pre-Event Economic State

↓

Ownership Event

↓

Economic Transformation Rule

↓

Post-Event Economic State

For example:

Pre-event:

A = 20%

B = 20%

Reserve = 60%

Event:

Grant 10% to C from reserve.

Transformation:

Reserve −10%

C +10%

Post-event:

A = 20%

B = 20%

C = 10%

Reserve = 50%

This framework makes the economic effect explicit.

72. Ownership Conservation

Where no pool expansion or contraction occurs, ownership is conserved.

For example:

Transfers In = Transfers Out

or:

Participant Grant From Reserve = Reduction in Reserve

Therefore:

Total Economic Population Before Event = Total Economic Population After Event

This provides an important control.

73. Events That Change the Denominator

Some events change the economic population itself.

Examples include:

• pool expansion;
• pool contraction;
• creation of a new economic class with additional rights;
• cancellation reducing total interests;
• or plan amendments changing the underlying pool.

In these cases:

Opening Denominator ≠ Closing Denominator

The change should be separately identified.

74. Numerator Change Versus Denominator Change

This provides a useful classification.

Numerator Change

Participant's units change while total pool remains constant.

Example:

Transfer from A to B.

Denominator Change

Total pool changes.

Example:

Issue of new points.

Both

Participant units and total pool change simultaneously.

Example:

New points issued directly to a new participant.

Understanding which component changed helps explain dilution.

75. Ownership Bridge

For each participant, a useful ownership bridge can show:

Opening points

• grants
• transfers in− transfers out− forfeitures− cancellations± conversions± corrections= closing points

For example:

This provides a transparent explanation of the participant's ownership movement.

76. Pool Bridge

The same concept applies to the pool.

Participant points and reserve then reconcile to the 1,150 closing denominator.

This allows dilution to be explained rather than merely observed.

Ownership Changes and Carry Value

77. Ownership Change Does Not Equal Carry Value Change

Suppose A's interest increases:

10% → 15%.

The current carry pool simultaneously falls:

€20m → €10m.

Before:

€20m × 10% = €2m

After:

€10m × 15% = €1.5m

A owns a greater percentage but has a lower indicative value.

Therefore:

Higher Ownership Percentage ≠ Higher Carry Value

Ownership and valuation movements should be analysed separately.

78. Carry Value Bridge

A participant's carry-value movement can conceptually be separated into:

1. change in underlying carry pool value;
2. change in participant ownership percentage;
3. interaction between the two;
4. distributions or other realised movements.

This helps distinguish:

Investment Performance Effect

from:

Ownership Change Effect

A participant statement can become considerably more informative when these drivers are separated.

79. Example — Ownership Versus Performance

Opening:

Carry pool = €20m

Participant interest = 10%

Participant value = €2m

Closing:

Carry pool = €30m

Participant interest = 15%

Participant value = €4.5m

The €2.5 million increase is not solely investment performance.

If ownership had remained 10%:

€30m × 10% = €3m

Performance-related increase:

€3m − €2m = €1m

Additional ownership contributes:

€30m × 5% = €1.5m

Total increase:

€1m + €1.5m = €2.5m

This separates the economic drivers.

Multiple Changes

80. Several Events Can Occur in One Period

During one year, a participant might:

• receive a promotion grant;
• transfer interests;
• change class;
• move legal vehicle;
• and have a historical correction processed.

The closing cap table alone compresses all of these events into one number.

The ledger preserves them separately.

Therefore:

Multiple Ownership Events → One Closing State

but:

One Closing State Does Not Explain Multiple Ownership Events

81. Sequence Can Matter

Suppose economic rules differ before and after an ownership event.

The sequence of events may matter.

For example:

1. carry is realised;
2. participant interest changes.

may produce a different allocation from:

1. participant interest changes;
2. carry is realised.

Therefore:

Same Events + Different Economic Sequence = Potentially Different Participant Carry

Effective dates and event ordering are therefore important.

82. Same-Day Events

Even events on the same date may require sequencing.

Suppose on 1 January:

A transfers 10 points to reserve;

reserve grants 20 points to B;

pool expands by 50 points.

If all events are effective simultaneously, the plan may define how the resulting percentages are determined.

If sequencing matters, the transaction ordering must be preserved.

This becomes particularly relevant when values or percentages are calculated between events.

New Joiners

83. New Joiners Require More Than a Grant

A new joiner requires decisions concerning:

• carry pool;
• number of points or percentage;
• grant source;
• effective date;
• historical embedded value;
• relevant funds;
• relevant investments;
• relevant vintages;
• vesting;
• and future dilution.

The grant amount is therefore only one component of the economic design.

84. Existing Funds Versus Future Funds

Suppose Partner D joins while Funds II, III and IV are active.

Possible allocation:

Fund II = 0%

Fund III = 5%

Fund IV = 10%

Future Fund V = expected 15%

The participant's carry economics therefore span several fund generations.

The new-joiner package should be understood as a portfolio of carry interests rather than one headline percentage.

85. Mature Funds

A mature fund may already contain substantial carry value.

Granting a new participant a percentage of the mature fund can transfer significant existing economics.

For example:

Fund III employee carry value = €30m

New grant = 5%

Potential current indicative value:

€1.5m

By contrast, 5% of a newly raised fund may currently have little or no carry value.

Therefore:

Same Percentage + Different Fund Maturity = Different Economic Grant

86. Headline Carry Offer

This reinforces a broader principle.

An offer of:

5% carry

has little meaning without understanding:

• 5% of which pool;
• which fund;
• what fund maturity;
• what current carry value;
• what historical-value treatment;
• what vesting;
• what dilution;
• and what future fund participation.

Therefore:

Headline Carry Percentage ≠ Economic Value of Carry Offer

Succession

87. Succession Through Ownership Change

Carry ownership can be an important succession mechanism.

Suppose Founder A gradually reduces future participation:

Fund III = 40%

Fund IV = 30%

Fund V = 20%

while Partner B increases:

Fund III = 10%

Fund IV = 20%

Fund V = 30%

Historical fund ownership can remain intact while future economics shift.

This creates:

Succession Through Future Carry Ownership

rather than rewriting historical economics.

88. Succession Within an Existing Fund

Succession can also occur within an existing fund.

For example:

Founder A transfers part of an interest to Partner B.

The plan then needs to determine whether B receives:

• historical value;
• future value only;
• unrealised value;
• future distributions;
• or another defined economic population.

Again:

Transfer Percentage Alone Does Not Define Economic Succession

89. Intergenerational Carry

As private equity firms mature, several generations of participants can coexist.

A senior founder may retain economics in older funds.

Current partners may dominate current funds.

Younger partners may receive larger interests in future funds.

The resulting economic structure can be represented:

Historical Funds → Earlier Participant Generations

Current Funds → Current Leadership

Future Funds → Emerging Leadership

This allows succession to occur without necessarily reallocating every historical carry interest.

Promotions and Demotions Across Vintages

90. Promotion Across Successive Funds

A participant may progress:

Fund I: 2%

Fund II: 5%

Fund III: 10%

Fund IV: 15%

This creates a natural economic progression without changing historical fund interests.

The participant's current professional seniority therefore does not determine the percentage owned in every fund.

Therefore:

Current Seniority ≠ Historical Carry Percentage

91. Reduced Future Role

The reverse can occur.

A senior partner may reduce activity.

Their historical interests may remain:

Fund II: 20%

Fund III: 20%

while future interests decline:

Fund IV: 10%

Fund V: 5%

Therefore:

Reduced Future Role ≠ Automatic Reduction of Historical Carry

The distinction between historical and future economics is central to fair and controlled succession.

Ownership Change Controls

92. Every Change Should Have a Reason

A carry ownership movement should be explainable.

For every transaction, the organisation should be able to answer:

• What changed?
• Why did it change?
• Who approved it?
• Which pool changed?
• Which participant changed?
• What was the source?
• What was the destination?
• When was it economically effective?
• Which document supports it?
• Did the denominator change?
• Did historical economics change?

This provides the minimum framework for controlled ownership changes.

93. Source and Destination Control

Where ownership is conserved, every movement should have a source and destination.

Examples:

Reserve → Participant

Participant A → Participant B

Participant → Reserve

Sponsor → Employee Pool

If ownership appears from nowhere or disappears without explanation, the transaction requires investigation.

Therefore:

Economic Movement → Source + Destination

except where the transaction deliberately changes the denominator.

94. Denominator Change Control

If the denominator changes, the system should identify:

• previous denominator;
• change;
• new denominator;
• authority;
• effective date;
• and resulting dilution or accretion.

For example:

Opening points: 1,000

Expansion: +200

Closing points: 1,200

The change should not be hidden inside participant percentages.

95. Before-and-After Analysis

For material ownership events, a before-and-after cap table can make the consequences clear.

For example:

This shows the economic impact of a dilutive grant.

96. Value Before and After

Where current carry values are available, the ownership analysis can be supplemented with indicative values.

Suppose carry pool = €20m.

Before:

A at 30% = €6m

After:

A at 27% = €5.4m

Indicative value transferred:

€0.6m.

This does not determine fair value or tax treatment.

But it makes the economic effect visible.

97. Approval Should Reflect Economic Consequence

A decision described administratively as:

Grant 100 points to Partner D

may have a significant economic consequence.

The approval process should therefore understand:

• percentage created;
• dilution;
• current indicative value;
• historical-value participation;
• and future economic effect.

Therefore:

Administrative Grant Description ≠ Complete Economic Decision

Worked Example — Ownership Evolution

98. Opening Structure

Assume Fund VI Employee Carry Pool has:

1,000 authorised points.

Opening cap table:

99. Event 1 — New Joiner

Partner E receives 100 points from reserve.

Transaction:

Reserve −100

E +100

New position:

A = 300

B = 200

C = 150

D = 100

E = 100

Reserve = 150

Total remains 1,000.

No fully diluted dilution occurs for A–D.

100. Event 2 — Promotion

D receives 50 additional points from reserve.

Transaction:

Reserve −50

D +50

New position:

D = 150

Reserve = 100

D's fully diluted interest increases:

10% → 15%.

101. Event 3 — Partner Departure

C forfeits 100 of 150 points.

The plan provides that forfeited points return to reserve.

Transaction:

C −100

Reserve +100

New position:

C = 50

Reserve = 200

Total remains 1,000.

102. Event 4 — Succession Transfer

Founder A transfers 50 points to B.

Transaction:

A −50

B +50

New position:

A = 250

B = 250

No other participant changes.

103. Event 5 — Strategic Recruitment

Management wishes to grant 150 points to a new senior partner, F.

Only 200 reserve points exist, so the grant could be made entirely from reserve.

Assume instead the firm wishes to preserve 150 reserve points.

Only 50 reserve points are therefore used.

The remaining 100 points are newly created.

Transactions:

Reserve −50

F +150

Pool Expansion +100

New total:

1,100 points

Closing:

A = 250

B = 250

C = 50

D = 150

E = 100

F = 150

Reserve = 150

Total:

1,100

104. Dilution Result

Before F's grant, total points were 1,000.

A owned:

250 / 1,000 = 25%

After:

250 / 1,100 = 22.73%

B similarly moves:

25% → 22.73%.

D:

15% → 13.64%.

The 50 points sourced from reserve did not create fully diluted dilution.

The 100 newly created points did.

This illustrates why the source of a grant matters.

105. Closing Cap Table

The table shows the closing ownership.

It does not explain how that ownership arose.

The transaction ledger does.

106. Ownership Ledger

This history allows each movement to be reconstructed.

107. Adding Historical Value

Now assume the carry pool had an indicative value of €20 million immediately before F joined.

F receives 150 points.

Of those:

50 come from reserve;

100 are newly created.

If F participates immediately in all existing value, F's fully diluted interest is:

150 / 1,100 = 13.64%

Indicative value:

€20m × 13.64% = approximately €2.73m

The grant therefore transfers a substantial share of existing economic value.

If the intention was to reward only future contribution, a different historical-value rule would be required.

108. Same Cap Table, Different Economics

Suppose instead F's 13.64% applies only to value created after joining.

The closing cap table still shows:

F = 13.64%.

But F does not own 13.64% of the historical €20 million.

Therefore two plans can show the same current cap-table percentage while producing different participant economics.

This is fundamental:

Same Current Cap Table ≠ Same Historical Economic Entitlement

The cap table must be interpreted together with the effective-period and historical-value rules.

Ownership Changes Across Multiple Pools

109. One Promotion Can Create Several Transactions

Suppose Partner D is promoted.

The promotion package includes:

Fund III: +2%

Fund IV: +5%

Growth Pool: +10%

Investment X: +15%

Economically, this is not one carry transaction.

It is four transactions across four populations.

Therefore:

One Compensation Decision → Multiple Carry Ownership Transactions

Each requires its own effective date and source.

110. Different Treatment Across Funds

The promotion might apply:

Fund III: no change because fund is mature;

Fund IV: prospective increase;

Fund V: full increased participation;

Future funds: target partner allocation.

This can be economically sensible.

But it means that the participant's ownership cannot be represented by one global “partner carry percentage.”

111. Carry Portfolio

A participant's interests can therefore be thought of as a carry portfolio.

For example:

Each position may have its own:

• history;
• value;
• vesting;
• leaver treatment;
• clawback exposure;
• and legal implementation.

The participant's total carry economics are the aggregation of these positions.

112. Changes to the Carry Portfolio

A promotion, departure or organisational change may alter only part of the portfolio.

For example:

Historical Fund II = unchanged

Fund III = unchanged

Fund IV = increased

Future Fund V = increased

Leadership Pool = added

Deal X = unchanged

Therefore:

Participant Event ≠ Necessarily Change to Every Carry Interest

Each economic population should be considered separately.

Governance of Ownership Changes

113. Carry Ownership Changes Are Economic Decisions

Carry ownership can represent substantial value.

A grant, transfer or dilution event should therefore be treated as an economic decision, not merely an administrative update.

The decision should consider:

• intended incentive;
• source of economics;
• effect on existing participants;
• historical value;
• dilution;
• current indicative value;
• future value;
• legal implementation;
• tax;
• vesting;
• and administration.

114. Decision Before Data Entry

The correct sequence is:

Economic Decision

↓

Approval

↓

Legal / Plan Documentation

↓

Cap Table Transaction

↓

Review

↓

Participant Reporting

not:

Spreadsheet Change → Attempt to Explain Later

The cap table records the decision.

It should not create the decision.

115. Four-Eyes Control

Material ownership changes should generally be independently reviewed.

The reviewer can verify:

• participant;
• pool;
• class;
• transaction type;
• source;
• destination;
• units;
• denominator;
• effective date;
• approval;
• and documentation.

The objective is to prevent economically significant changes from being implemented incorrectly.

116. Periodic Ownership Reconciliation

At regular intervals:

Opening Ownership

plus:

Approved Ownership Changes

should equal:

Closing Ownership

The closing position should then reconcile to:

• legal records;
• participant statements;
• carry allocation models;
• and relevant governance documentation.

This creates a controlled ownership cycle.

Relationship With Chapter 7

117. Ownership Change Versus Vesting

Part VI has focused on changes in the ownership architecture.

Chapter 7 considers a different question:

How much of a participant's carry interest has been earned or retained under the vesting and leaver rules?

These concepts must remain separate.

Suppose a participant owns 10% of a carry pool.

Only 60% is vested.

The ownership record may still show the 10% interest.

The vesting record describes the conditions attached to it.

Therefore:

Carry Ownership ≠ Vested Carry

118. Departure Does Not Automatically Define Ownership Outcome

A participant leaving the organisation is an employment or partnership event.

The economic consequences depend on the carry plan.

The participant may:

• retain vested carry;
• lose unvested carry;
• retain some unrealised economics;
• lose future economics;
• remain responsible for clawback;
• or experience another defined outcome.

Therefore:

Departure Event → Apply Vesting and Leaver Rules → Determine Ownership Consequences

The departure itself does not tell us the answer.

119. Ownership Transaction Follows the Leaver Determination

The conceptual sequence is:

Participant Leaves

↓

Determine Leaver Classification

↓

Apply Vesting / Forfeiture Rules

↓

Determine Economic Interests Retained and Forfeited

↓

Record Carry Ownership Transactions

Chapter 7 therefore determines many of the ownership events that Chapter 6 must ultimately record.

Core Principles

120. Core Principles

The principal concepts developed in Part VI can be summarised as follows:

Opening Ownership + Ownership Events = Closing Ownership

Ownership State ≠ Ownership Event

Opening State + Ownership Event → Closing State

Grant From Existing Reserve ≠ Grant Through Pool Expansion

Transfer-Funded Grant ≠ Reserve-Funded Grant ≠ Pool-Expansion Grant

Source → Participant = Complete Grant Movement

Grant Date ≠ Necessarily Economic Participation Date

Additional Points ≠ Complete Description of Additional Economics

Change in Role ≠ Automatically Change in Historical Carry

Grant of Carry Interest ≠ Necessarily Grant of Historical Carry Value

Current Carry Pool = Historical Embedded Value + Subsequent Value Movement

Participant Opening Value ≠ Fund Waterfall Hurdle

New Joiner + Existing Carry Pool → Historical-Value Decision Required

Administrative Simplicity ≠ Immediate Incentive Value

Transfer ≠ Dilution

Same Percentage Across Different Pools ≠ Same Economic Value

Same Participant Increase ≠ Same Economic Transaction

Transfer of Ownership ≠ Automatic Definition of Historical Entitlement

Percentage Dilution ≠ Necessarily Reduction in Economic Value

Dilution Depends on the Measurement Basis

Pool Expansion → Potential Dilution of Existing Interests

Pool Contraction → Potential Accretion of Remaining Interests

Forfeiture Requires a Destination Rule

Forfeiture to Reserve ≠ Forfeiture Through Cancellation

Forfeiture of Future Interest ≠ Automatic Reversal of Historical Carry

Cancellation ≠ Transfer

Reserve Is an Economic Account, Not a Plug

Grant Requirement > Available Reserve → New Economic Decision Required

Same Closing Reserve ≠ Same Economic History

Same Number of Units ≠ Same Economics Across Classes

Unit Count Before and After Conversion ≠ Sufficient Measure of Economic Change

Legal Restructuring ≠ Necessarily Economic Reallocation

Existing Economic Interest → New Legal Wrapper

Retroactive Economic Amendment → Historical Recalculation Requirement

Same Corrected Result ≠ Same Reason for Change

Correct the Economic Record Without Erasing the History of the Correction

Cap Table Correction → Potential Downstream Recalculation

Legal Change ≠ Necessarily Economic Change

No Legal Structural Change ≠ No Economic Change

Pre-Event Economic State → Ownership Event → Economic Transformation Rule → Post-Event Economic State

Total Economic Population Before Event = Total Economic Population After Event, unless the denominator itself changes.

Opening Denominator ≠ Closing Denominator where the pool expands or contracts.

Numerator Change ≠ Denominator Change

Higher Ownership Percentage ≠ Higher Carry Value

Investment Performance Effect ≠ Ownership Change Effect

Multiple Ownership Events → One Closing State

One Closing State Does Not Explain Multiple Ownership Events

Same Events + Different Economic Sequence = Potentially Different Participant Carry

Same Percentage + Different Fund Maturity = Different Economic Grant

Headline Carry Percentage ≠ Economic Value of Carry Offer

Current Seniority ≠ Historical Carry Percentage

Reduced Future Role ≠ Automatic Reduction of Historical Carry

Economic Movement → Source + Destination

Administrative Grant Description ≠ Complete Economic Decision

Same Current Cap Table ≠ Same Historical Economic Entitlement

One Compensation Decision → Multiple Carry Ownership Transactions

Participant Event ≠ Necessarily Change to Every Carry Interest

Economic Decision → Approval → Documentation → Cap Table Transaction → Review → Participant Reporting

Carry Ownership ≠ Vested Carry

Departure Event → Apply Vesting and Leaver Rules → Determine Ownership Consequences

Part VI has established how carry ownership changes.

Part VII adds the dimension that makes these changes economically meaningful across the life of a private equity organisation:

Time.

The next Part considers vintages, historical ownership, effective periods, overlapping funds and the reconstruction of participant economics through successive generations of carry.

Need assistance with your Carried Interest Challenges? Reach out to us:

[email protected]

Or ask your questions here:

References and Further Reading

Internal Ownership and Changes in Private Equity Economics

Ivashina, Victoria and Josh Lerner. “Pay Now or Pay Later? The Economics within the Private Equity Partnership.” Journal of Financial Economics, Vol. 131, No. 1, 2019, pp. 61–87.

Relevant subjects include:

• allocation of carried interest among individual partners;
• changes in internal economic ownership;
• founder and non-founder economics;
• management-company ownership versus carry ownership;
• partner departures;
• succession;
• economic inequality between partners;
• retention;
• and evolution of partnership economics over time.

Particularly relevant to:

Current Seniority ≠ Historical Carry Percentage

Change in Role ≠ Automatically Change in Historical Carry

Historical Economics ↔ Future Economic Opportunity

Private Equity Partnership Compensation

Gompers, Paul A. and Josh Lerner. “An Analysis of Compensation in the U.S. Venture Capital Partnership.” Journal of Financial Economics, Vol. 51, No. 1, 1999, pp. 3–44.

Relevant subjects include:

• partnership compensation;
• carried interest;
• management fees;
• incentive compensation;
• contractual compensation structures;
• fund economics;
• and differences in compensation arrangements across investment organisations.

Particularly relevant to:

Carry Ownership as Long-Term Incentive Compensation

Economic Participation → Incentive Alignment

Private Equity Fund Compensation

Metrick, Andrew and Ayako Yasuda. “The Economics of Private Equity Funds.” Review of Financial Studies, Vol. 23, No. 6, 2010, pp. 2303–2341.

Relevant subjects include:

• carried-interest economics;
• GP compensation;
• economic value of carry;
• fund-level compensation structures;
• management fees;
• and the relationship between contractual carry percentages and economic value.

Particularly relevant to:

Percentage Ownership ≠ Economic Value

Higher Ownership Percentage ≠ Necessarily Higher Carry Value

Carry Ownership × Carry Pool Economics → Participant Carry Value

Valuation of Carried Interest

Choi, Wonho Wilson, Andrew Metrick and Ayako Yasuda. “A Model of Private Equity Fund Compensation.” NBER Working Paper No. 17568, 2011.

Relevant subjects include:

• economic valuation of carried interest;
• expected GP compensation;
• timing of carry;
• contractual profit-sharing;
• fund performance;
• and sensitivity of carry value to underlying fund economics.

Particularly relevant to:

Current Carry Percentage ≠ Guaranteed Economic Value

Ownership Change Effect ≠ Investment Performance Effect

Carry Value Depends on Both Ownership and Underlying Fund Economics

Future Funds and Intergenerational Economics

Chung, Ji-Woong, Berk A. Sensoy, Léa H. Stern and Michael S. Weisbach. “Pay for Performance from Future Fund Flows: The Case of Private Equity.” Review of Financial Studies, Vol. 25, No. 11, 2012, pp. 3259–3304.

Relevant subjects include:

• future fundraising;
• successive private equity funds;
• GP lifetime economics;
• performance incentives;
• current versus future fund economics;
• and the importance of future fund participation as an incentive mechanism.

Particularly relevant to:

Historical Funds → Historical Economics

Future Funds → Future Economic Opportunity

Current Carry Ownership ≠ Expected Future Carry Opportunity

Private Equity Performance and Successive Funds

Kaplan, Steven N. and Antoinette Schoar. “Private Equity Performance: Returns, Persistence, and Capital Flows.” Journal of Finance, Vol. 60, No. 4, 2005, pp. 1791–1823.

Relevant subjects include:

• successive private equity funds;
• performance persistence;
• fundraising;
• capital flows;
• GP track records;
• and the relationship between current performance and future fund activity.

Relevant to the broader organisational context in which participant carry interests develop across multiple fund generations.

Private Equity Firm Organisation and Investment Practice

Gompers, Paul A., Steven N. Kaplan and Vladimir Mukharlyamov. “What Do Private Equity Firms Say They Do?” Journal of Financial Economics, Vol. 121, No. 3, 2016, pp. 449–476.

Relevant subjects include:

• private equity firm organisation;
• investment decision-making;
• value creation;
• internal processes;
• investment professional involvement;
• and organisational differences between private equity firms.

Relevant to the broader context in which carry allocations may evolve as participant responsibilities, seniority and contributions change.

Carry Participation and Compensation Market Practice

Heidrick & Struggles. 2025 North America Private Equity Investment Professional Compensation Survey. 2025.

Relevant subjects include:

• carried-interest participation;
• fund-level carry;
• deal-by-deal carry;
• professional seniority;
• participant capital commitments;
• compensation progression;
• and contemporary private equity compensation practice.

Particularly relevant to:

Professional Progression → Potential Change in Carry Participation

Same Professional Title ≠ Necessarily Same Carry Economics

Fund-Level Carry ≠ Deal-Level Carry

Employee Carry Pools — Primary-Source Example

Hamilton Lane Advisors, L.L.C. 2016 Carried Interest Plan. Effective 1 January 2016; subsequently amended and restated.

Relevant subjects include:

• employee carry pools;
• participant eligibility;
• allocation of employee carry;
• fund-specific carry interests;
• forfeiture;
• administration;
• amendments;
• and treatment of participant interests.

Particularly relevant to:

Fund Carry → Employee Carry Pool → Participant Interest

Participant Changes → Carry Plan Rules → Economic Consequences

Forfeiture Requires Defined Treatment

Publicly Disclosed Private Equity Carry Arrangements

Hamilton Lane Incorporated. Registration Statement and subsequent public filings concerning carried-interest arrangements, employee incentive structures and ownership arrangements.

Relevant subjects include:

• employee participation in carried interest;
• carry vehicles;
• ownership arrangements;
• compensation;
• changes in participant economics;
• and interaction between firm ownership and carried-interest participation.

Particularly relevant to:

Firm Ownership ≠ Carry Ownership

Legal Vehicle ≠ Ultimate Economic Interest

Carry Allocation Architecture and Ownership Changes

Pittman, Tom and Robert Hagmeier. “Carried Interest Employee Incentive Structures.” In Mariya Stefanova (ed.), The Definitive Guide to Carried Interest. Private Equity International, 2017.

Relevant subjects include:

• carry points;
• allocation methods;
• fund-level allocation;
• vintage-level allocation;
• deal-by-deal allocation;
• new hires;
• participant turnover;
• vesting;
• termination;
• forfeiture;
• reallocation;
• historical value;
• participant statements;
• and carry administration.

Particularly relevant to:

Grant From Reserve

New Joiner Economics

Historical Embedded Value

Forfeiture and Reallocation

Multiple Carry Pools

Participant Ownership Through Time

Carry as an Incentive Mechanism

Havers, Simon. “Carried Interest as an Incentive Mechanism: Advantages and Disadvantages.” In Mariya Stefanova (ed.), The Definitive Guide to Carried Interest. Private Equity International, 2017.

Relevant subjects include:

• allocation of carry among participants;
• retention;
• promotion;
• recognition;
• performance attribution;
• individual versus collective incentives;
• deal-specific incentives;
• risk-taking;
• and organisational behaviour.

Particularly relevant to:

Allocation Architecture → Economic Incentives → Participant Behaviour

Changes in Carry Ownership → Changes in Participant Incentives

Ownership, Incentives and Agency

Jensen, Michael C. and William H. Meckling. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, Vol. 3, No. 4, 1976, pp. 305–360.

Relevant subjects include:

• ownership;
• economic incentives;
• agency relationships;
• managerial behaviour;
• governance;
• and alignment of economic interests.

Relevant to the broader conceptual relationship:

Economic Ownership → Economic Exposure → Incentives

Team Production and Allocation of Economic Rewards

Alchian, Armen A. and Harold Demsetz. “Production, Information Costs, and Economic Organization.” American Economic Review, Vol. 62, No. 5, 1972, pp. 777–795.

Relevant subjects include:

• team production;
• economic reward allocation;
• monitoring;
• organisational incentives;
• individual contribution;
• and collective production.

Relevant to:

Individual Contribution ↔ Collective Economics

Economic Allocation → Organisational Behaviour

Practitioner Framework Used in This Part

The following formulations are used in The Carried Interest Bible as an analytical framework for changes in carry ownership:

Opening Ownership + Ownership Events = Closing Ownership

Ownership State ≠ Ownership Event

Opening State + Ownership Event → Closing State

Grant From Existing Reserve ≠ Grant Through Pool Expansion

Transfer-Funded Grant ≠ Reserve-Funded Grant ≠ Pool-Expansion Grant

Source → Participant = Complete Grant Movement

Grant Date ≠ Necessarily Economic Participation Date

Additional Points ≠ Complete Description of Additional Economics

Change in Role ≠ Automatically Change in Historical Carry

Grant of Carry Interest ≠ Necessarily Grant of Historical Carry Value

Current Carry Pool = Historical Embedded Value + Subsequent Value Movement

Participant Opening Value ≠ Fund Waterfall Hurdle

New Joiner + Existing Carry Pool → Historical-Value Decision Required

Administrative Simplicity ≠ Immediate Incentive Value

Transfer ≠ Dilution

Same Percentage Across Different Pools ≠ Same Economic Value

Same Participant Increase ≠ Same Economic Transaction

Transfer of Ownership ≠ Automatic Definition of Historical Entitlement

Percentage Dilution ≠ Necessarily Reduction in Economic Value

Dilution Depends on the Measurement Basis

Pool Expansion → Potential Dilution of Existing Interests

Pool Contraction → Potential Accretion of Remaining Interests

Forfeiture Requires a Destination Rule

Forfeiture to Reserve ≠ Forfeiture Through Cancellation

Forfeiture of Future Interest ≠ Automatic Reversal of Historical Carry

Cancellation ≠ Transfer

Reserve Is an Economic Account, Not a Plug

Grant Requirement > Available Reserve → New Economic Decision Required

Same Closing Reserve ≠ Same Economic History

Same Number of Units ≠ Same Economics Across Classes

Unit Count Before and After Conversion ≠ Sufficient Measure of Economic Change

Legal Restructuring ≠ Necessarily Economic Reallocation

Existing Economic Interest → New Legal Wrapper

Retroactive Economic Amendment → Historical Recalculation Requirement

Same Corrected Result ≠ Same Reason for Change

Correct the Economic Record Without Erasing the History of the Correction

Cap Table Correction → Potential Downstream Recalculation

Legal Change ≠ Necessarily Economic Change

No Legal Structural Change ≠ No Economic Change

Pre-Event Economic State → Ownership Event → Economic Transformation Rule → Post-Event Economic State

Total Economic Population Before Event = Total Economic Population After Event, unless the denominator itself changes.

Opening Denominator ≠ Closing Denominator where the pool expands or contracts.

Numerator Change ≠ Denominator Change

Higher Ownership Percentage ≠ Higher Carry Value

Investment Performance Effect ≠ Ownership Change Effect

Multiple Ownership Events → One Closing State

One Closing State Does Not Explain Multiple Ownership Events

Same Events + Different Economic Sequence = Potentially Different Participant Carry

Same Percentage + Different Fund Maturity = Different Economic Grant

Headline Carry Percentage ≠ Economic Value of Carry Offer

Current Seniority ≠ Historical Carry Percentage

Reduced Future Role ≠ Automatic Reduction of Historical Carry

Economic Movement → Source + Destination

Administrative Grant Description ≠ Complete Economic Decision

Same Current Cap Table ≠ Same Historical Economic Entitlement

One Compensation Decision → Multiple Carry Ownership Transactions

Participant Event ≠ Necessarily Change to Every Carry Interest

Economic Decision → Approval → Documentation → Cap Table Transaction → Review → Participant Reporting

Carry Ownership ≠ Vested Carry

Departure Event → Apply Vesting and Leaver Rules → Determine Ownership Consequences

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