A few weeks ago I got an invitation to join a syndicate.

In her email, the founder of the syndicate added this line: "I promise that at least 30% of the deals will have 0% carry".

Now, we've all heard the term "carry". But I was a little confused about this statement.

So naturally I went down a rabbit hole to learn as much as I could about this concept.

Here's what I learned.

Disclaimer: I'm sure others know way more than I do about this topic. Feel free to reply to this email to tell me how wrong I am.

‍Quick reminder of what carry is

Carry is the percentage of the profits that go to the leader of the syndicate or fund.

So let's say I have a fund and I charge 20% carry.

As a fund manager, I answer to my Limited Partners ("LPs"), which are the investors in my fund.

So. My LP Kelsey gives me $100k to invest into a startup. That startup has an exit and returns $200k to us.

First, I return Kelsey's $100k, leaving me with $100k in profit.

Because of the carry structure, 20% comes to me and the remaining 80% goes to Kelsey. So I get $20k and Kelsey walks away with $80k in profit.

Why is carry a good thing?

At its core, carry is an incentivizing function for the investors who do all the work of finding deals.

Basically... if I'm running a fund, my LPs want me to pick great companies to invest in so that they have the highest ROI potential.

In order to pick great companies, I have to research the market, do due diligence on the company, run reference checks to make sure the founders aren't scam artists, etc.

Carry incentivizes me to do this legwork. Presumably, if I pick great companies, my LPs and I will all make lots of money. But if I don't do this legwork then (presumably) I will not pick great companies and we (presumably) will not make lots of money.

It's a similar situation if I'm running a syndicate.

My co-investors want access to great dealflow, but they don't want to do the work on the backend. Things like: setting up the SPV, bringing in lots of investors so that we get a bigger allocation, writing the deal memo, digging into the financials.

This is where carry comes in.

Most LPs and co-investors are happy to pay the carry fee so they don't have to do that legwork.

But it also incentivizes me to be really good at my job so that we all get the best possible returns.

If the fund or syndicate makes money, then I make money. So it's in my best interest as the leader to put in the work.

Some funds will go even further on the incentive train. They'll create a variable carry structure where the carry percentage is higher if the multiple is higher.

So if I have a fund that gets a 2x-4x return, I get 10% or 20% carry. But if I get a 5x multiple or higher, then I could get 30%.

Why might an investor offer to waive carry?

If an investor waives carry, then her LPs get more money returned to them.

Using the example from above... if an LP invests $100k and that startup returns $200k, the LP gets all $200k of profit.

Now, most funds can't afford to waive carry for 100% of their deals.

Same with syndicate leads.

This is because the profit they get from carry gives them the resources they need to do all the work of sourcing the deals.... like researching the companies, doing due diligence, doing reference checks, handling the paperwork, legal fees, etc.

But they might offer to waive carry in special circumstances.

For example: A syndicate lead might offer to waive carry for a new investor's first deal. This might help them fill allocation, or attract new investors to their SPV.

The thing to remember is that if the lead investor is waiving carry, you should be prepared to do your own homework on that company.

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