Back to Learning Center


Specialty tag(s): High Net Worth Divorce

Unusual Employment Benefits: Carried Interests

Eric Robertson | September 5, 2018

Carried interests, which are also known as performance fees or profits interests, are often the primary incentive payment mechanism for general partners and managing members of hedge funds, private equity funds, and venture capital firms. A carried interest is a share of profits the managers of private equity funds receive as compensation. This method of compensation seeks to motivate the general partner or fund manager to work toward improving the fund’s performance. Carried interests generally become available to fund employees after all the initial capital that the limited partners contribute is returned along with a previously agreed upon rate of return.

Distributions of carried interests in most private equity funds are subject to the terms and conditions of the limited partnership agreements of the respective entities that hold the carried interest, which usually contain terms for vesting, cross-collateralization, and restrictions on transfer, among other terms and conditions. Normally, an individual will only participate in deals acquired during the individual’s tenure with the firm. Carried interests may have unusual vesting schedules, for instance, a portion may vest annually for the first three or four years after the initial acquisition, with the final portion vesting as long as eight to ten years after the initial acquisition. Many firms have carried interests that vest on a per-investment basis, where the vesting period starts when a fund makes an investment and pertains to each investment on an individual basis.

These assets are difficult to characterize when a carried interest is acquired during marriage, but vests over a period of time that extends past the date of divorce. Although carried interests vest in a manner similar to that of stock options, restricted stock plans, and other property interests in employment benefits covered by Texas Family Code §3.007, carried interests are not specifically mentioned with the other property interests listed in the statute. Therefore, when carried interests vest after divorce, we need to know how the unvested carried interests should be characterized. Given their similarity to stock options and restricted stock units, it is reasonable to argue that §3.007 should be expanded to include these types of employee benefits.

Because carried interests are a component of an employee’s compensation, requiring the employee’s post-divorce time, toil, and effort to enhance the value of the community estate’s carried interest assets, such enhancement may give rise to a claim of reimbursement against the community estate and in favor of the employee’s separate estate for the value of the enhancement. Remuneration for the employee’s work post-divorce clearly would be the employee’s separate property. If part of that remuneration relates to continued work on behalf of property characterized as community, then a potential reimbursement claim would arise because the employee’s separate property efforts would enhance the value of a community asset.

Existing reimbursement principles might support such a claim. At least, this could be asserted as an equitable claim a Court could consider in rendering a just and right division of the community estate, creating the possibility of a decline curve on the net value of the community property’s portion of the carried interests related to post-divorce work done by the employee. The attorney should be clear and careful when characterizing these assets and their effect on the division of property.

To learn more about how our firm can help you, contact Eric Robertson at (512) 454-8791.

Popular Family Law Articles

Primary CustodyTexas Divorce Paperwork OnlineChild Support Percentage Texas
Is It Illegal to Spy on SomeoneTexas Custody CalendarEffects of Divorce on Teenagers
What Age Does Child Support End in TexasPrenuptial Agreements in TexasSecond-Parent Adoption Texas
Common Law Marriage Divorce TexasDivorcing a Female NarcissistBible and Divorce
Thanksgiving Custody ScheduleLawyer vs Mediator for DivorceWho Pays Capital Gains in Divorce

Services to Help Solve Your Challenges

Our attorneys are experienced in all aspects of family law and will guide you through each step of the process, ensuring you have the information you need to make wise decisions and prepare for the future.

Get in Touch

At Goranson Bain Ausley, we strive to deliver clarity about what comes next and confidence that you and your family’s future are more secure. Contact our team and discover how we can help you.

“My purpose is to help people adapt to the uncertainty and discomfort of going through family law issues and teach divorce survival skills.”

Request A Consultation