Carry escrow / holdback
Last updated
Quick Answer
Carry escrow, or holdback, retains a portion of each carry distribution to secure the clawback obligation.1,2
What it is
Operational context
What good looks like
Why It Matters
An escrowed clawback is a security interest. An unescrowed one is a claim against whoever still exists at the end of the fund.1
Term Family
Related Questions
What is an example of a clawback?
A fund exits its first investment at a large gain, pays the general partner carry on that deal, and then writes off several later investments — at wind-up the limited partners are short of their capital and preferred return, so the general partner must return the carry it was paid.
What is the American waterfall approach?
The American, or deal-by-deal, waterfall calculates carried interest on each realized investment separately rather than across the fund as a whole.
Frequently Asked Questions
What is Carry escrow / holdback in venture capital?
Rather than paying carry in full as it is earned, the fund withholds an agreed percentage into escrow, where it remains until release conditions are met. It is the most direct answer to the enforceability problem: the money securing the obligation never leaves.
Why is Carry escrow / holdback important for startups?
Understanding Carry escrow / holdback is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Sources & References
- 1.ilpa-model-lpa-wof-ts — ILPA Model LPA Term Sheet — Whole-of-Fund Waterfall Version (July 2020)ILPA Model LPA Term Sheet — Whole-of-Fund Waterfall Version (July 2020)ILPA(Carry escrow, or holdback, retains a portion of each carry distribution to secure the clawback obligation.)primary · T1 · vesting-clawback · structure
- 2.ilpa-principles-3 — ILPA Private Equity Principles 3.0 (2019)ILPA Private Equity Principles 3.0 (2019)ILPA(Carry escrow, or holdback, retains a portion of each carry distribution to secure the clawback obligation.)primary · T1 · vesting-clawback · structure
- 3.duanemorris-clawbacks — Private Equity Funds: Clawbacks and Investor GivebacksPrivate Equity Funds: Clawbacks and Investor GivebacksDuane Morris LLP(Carry escrow, or holdback, retains a portion of each carry distribution to secure the clawback obligation.)secondary · T2 · vesting-clawback · structure
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