What Does 20% Carry Apply To?
Two SPVs may buy and sell the same shares at the same prices and charge the same carry rate, yet pay investors different amounts. One waterfall may apply the rate to gross proceeds; another may first deduct capital, fees and costs to define profit.
The legal waterfall resolves those differences. Its sequence determines how cash moves from the sale to the investor, with the headline percentage acting as only one input.
How the Waterfall Divides the Proceeds
The company sale produces gross proceeds. The vehicle may first pay transaction costs or liabilities and retain a reserve for taxes. It then returns investor capital and applies any hurdle. Carry is calculated on the amount defined by the agreement, after which the remaining cash can be distributed.
Carta's SPV setup reference describes supported carry settings from 0% to 100%, alongside configurable expense reserves. The range says little about how common its endpoints are. The vehicle documents determine the actual calculation.
A Simple Version of the Calculation
A $10 million investment sold for $30 million creates $20 million of gross profit. If 20% carry applies directly to that profit, the sponsor receives $4 million and investors receive $26 million before any other expenses or holdbacks.
That calculation is easy because nothing sits between sale proceeds and profit. Real vehicles are rarely quite so clean. Administration costs may be charged to the SPV, and sale expenses may be deducted before carry. Reserves can delay part of the distribution even after the investment has been sold.
Expense Ordering Changes the Carry Base
With $1 million of sale and administration costs deducted before carry, profit falls to $19 million and 20% carry falls to $3.8 million. Investor proceeds are $25.2 million before taxes or other holdbacks.
If those costs come after carry on $20 million, sponsor carry remains $4 million. The gap grows with the vehicle's size, so the same rate can produce different payouts.
Partial Sales Create a Timing Problem
Suppose an SPV invests $100 million and later sells half the position for $80 million. If $50 million of cost is allocated to the shares sold, that first transaction appears to create $30 million of realized profit. A 20% carry payment would be $6 million.
If the remaining shares later sell for $20 million, total proceeds across both sales equal the original $100 million cost. The vehicle has no overall profit before expenses. Carry paid after the first sale was too high when the investment is viewed as a whole.
Escrow or clawback provisions can address this sequence, as can delaying carry until more of the position is realized. Cost-allocation rules and the final reconciliation determine how the investor's result is settled.
Distributing Unsold Shares Makes the Carry Calculation Less Certain
A vehicle may distribute cash and unsold shares together. Carry charged before the shares become liquid depends on a valuation that may later fall. Waiting for realized cash avoids that particular estimate, though reserves may remain for taxes or sale-related claims.
Expense ordering and carry base can change net investor proceeds even when company exit proceeds are unchanged. The calculated example starts with $10 million of invested capital and $30 million of sale proceeds. Expenses equal $1 million. The 20% carry applies to the $19 million profit remaining after expenses.
Single-Asset Carry Bridge
Expense ordering and carry base can change net investor proceeds even when company exit proceeds are unchanged.
View bridge data and assumptions
| Step | Amount | Calculation |
|---|---|---|
| Sale proceeds | $30,000,000 | Illustrative exit proceeds. |
| Invested capital | $10,000,000 | Capital returned as part of total investor proceeds. |
| Expenses before carry | -$1,000,000 | Sale and administration costs deducted before carry. |
| Profit after expenses | $19,000,000 | $30M less $10M invested capital and $1M expenses. |
| Carry | -$3,800,000 | 20% x $19,000,000 profit after expenses. |
| Total investor proceeds | $25,200,000 | $30M less $1M expenses and $3.8M carry. |
Investor-Level Net Proceeds
An investor that owns 10% of the SPV would receive $2.52 million from $25.2 million of total proceeds after the illustrated waterfall, before its own taxes or adviser fees.
Vehicle-level proceeds become investor-level cash according to the investor's ownership percentage and any costs outside the SPV.
Questions Before Commitment
- What amount does the agreement use as the carry base?
- Which expenses are deducted before carry?
- Is investor capital returned before profit is shared?
- How are partial sales protected by escrow or clawback?
- When are remaining reserves released?
A worked example using the vehicle's own terms makes the economics easier to assess. If the stated inputs produce different payouts for the parties, the agreement may leave part of the calculation unclear.
Frequently Asked Questions
Is carry always charged only on profit?
Many waterfalls charge carry on realized profit. The agreement sets the actual base. It also defines when carry is paid and whether costs come out first.
Why does expense ordering matter?
Because it changes the amount on which carry is calculated. Deducting expenses first will usually reduce carry compared with calculating carry before those expenses.