A Carry does not, nor has it ever change the character of income and loss.
A Carry does not “change Ordinary Earnings into Capital Gains”, and that people believe this, or otherwise spread it as true is retarded. I mean this silly.
When you set up a VC (venture capital) fund you do so in the form of a limited partnership(LP). The LP has two types of partners, General and Limitied. The General partner has personal liability and the limited partern’s liablility is limited (hense the name) to their equity, typically including committed capital if not paid in yet.
Your typical VC fund (the partnership) will have 60-1,200 maybe more limited partners and one general. The limited partners are the outside investors, pension funds, charities, individuals, trusts, what have you. Now the limited partners will put up about 99% of the capital, and the GP will typically commit 1%. Then the Fund takes the capital these partners put in and invests in various things. The income and loss from these investments are shared among the partners based on committed capital percentages. So, if the Fund raised 1 billion, and partner 2 committed 500 million, they would get half of the income or loss from investments.
With me so far?
Now the General Partner is typically another partnership, who’s limited partners are the directors and/or big players at the VC firm. So in Bain’s case, it would be people like Mitt. Now they are getting 1% of the profit and loss here. Ignoring management fees for now, this isn’t very much nut on a lot of risk and work. So they write “Carries” into the deals.
All a Carry does is say “If certain investments perform better than some pre-determined benchmark, the General Partner will get 10% of those gains rather than 1%.” So, if the Fund is kicking ass, suddenly the GP will get a big back end kicker for picking winners.
If the winners are passing through large amounts of Ordinary Income or Interest to the Fund, those gains stay OI or Int as it passes through to the general partner, and stay OI or Int as it passes through to the directors who are limited partners in the general partner. But the thing is, a Fund is going to structure it’s investments to try and make sure income or gain is capital in nature, and due to the nature of venture capital in general, most gains are capital in nature.
Carried interest is not wages in any way shape or form, and you would need an utter lack of knowledge of the situation or business in general to believe that to be true.
