Congrats on the carry.
Sorry about the liquidity.
If you're reading this, you probably have a carried interest statement somewhere that shows a number — maybe $500K, maybe $5M, maybe more — that represents your share of your fund's profits.
You also probably can't access that money for years. It's subject to fund performance. It might get clawed back. And if you've tried explaining this to anyone outside of finance, you've watched their eyes glaze over around the phrase "distribution waterfall."
Welcome to the psychological torture of illiquid wealth.
The three phases of carry
Phase 1: Anticipation
You know carry exists. It's part of your comp. On good days, you run the math on what it could be worth. On bad days, you remember the fund that returned 0.8x and everyone's carry was worthless.
This phase is mostly fantasy. The carry is theoretical. You have a rough sense of your points, a rougher sense of fund performance, and a very rough sense of timing.
Most people make their biggest mistakes in this phase — spending against unrealized carry, making financial commitments based on "when the fund exits," or assuming their estimates are more reliable than they are.
Phase 2: Vesting
Carry typically vests over 3-5 years, often with a cliff. You've now "earned" a portion of it. But earning and having are different things.
Your carry is worth something on paper, but there's no liquidity event yet. The fund hasn't exited its best deals. Or it has, but the proceeds are stuck in escrow. Or they've been distributed, but the next distribution is the big one. It's always the next one.
In this phase, the number on your statement feels real but also feels fake. You're "worth" more than you've ever been worth, but your checking account looks the same as it did two years ago.
This is when the spousal conversations get difficult.
Phase 3: Realization
A distribution actually happens. Money appears in your account. Taxes are owed. Decisions need to be made.
Most people think Phase 3 is the end. It's not. It's the beginning of a whole new set of questions: What do I do with this? How do I invest it? How do I protect it? And when is the next one coming?
The things you can actually control
Here's the uncomfortable truth about carry: you don't control most of what determines its value.
You don't control fund performance. You don't control exit timing. You don't control whether the GP decides to do a continuation vehicle instead of distributing cash. You don't control whether your best portfolio company's IPO happens in a good market or a terrible one.
What you do control is much smaller, but still matters:
Your expectations. Stop running best-case scenarios as your base case. Your carry could be worth 2x what you think. It could also be worth nothing. Plan for the middle, hope for the better, accept the possibility of the worse.
Your liquidity. Don't spend unrealized carry. I know, everyone says this. Everyone also ignores it. The new house that's "fine because carry will cover it" is how people get into trouble. Build your life around your cash comp. Treat carry as a bonus that may or may not materialize.
Your tax positioning. This is where you actually have leverage. How you hold your carry, when you trigger recognition, whether you've made elections that matter — these decisions can meaningfully change your after-tax outcome. More on this next week when we talk about Section 1061.
Your relationship conversations. Your spouse or partner needs to understand this stuff at least at a high level. Not the mechanics of waterfall calculations — no one needs that at dinner — but the basic reality: "We have wealth on paper that we can't access for X years, and the actual amount is uncertain."
The conversation is awkward. Have it anyway. The alternative — "surprise, that $3M I've been talking about might be $1M and we can't touch it until 2029" — is worse.
The spouse conversation template
Since we're on the subject, here's roughly how I'd frame the carry conversation with a non-finance partner:
Maybe that changes eventually. For now, the focus is on being useful.
"My compensation has a few pieces. The base salary is what hits our account every two weeks — that's reliable. The bonus is annual and varies but it's cash when I get it.
The carry is different. It's a share of the profits from the funds I work on. On paper, it might be worth $10-15 million. But we won't see that money for 8-10 years, and the actual amount depends on how the investments perform.
I don't want us to make plans assuming that money exists until it's actually in our account. Let's build our life around what we know is coming, and treat the carry as a bonus if and when it shows up."
Adjust for your situation. The key points:
Separate cash comp from carry
Give a range, not a number
Emphasize the uncertainty and timing
Set the expectation that it shouldn't change your current spending
The bottom line
Carry is a wonderful component of fund compensation. It aligns your interests with LPs. It can create meaningful wealth over a career. It's also illiquid, uncertain, and psychologically complicated in ways that your W-2 friends will never understand.
Your job is to maintain perspective. Don't ignore the carry — it matters, and you should plan for it. But don't let unrealized gains drive realized spending.
The money isn't real until it's in your account. Until then, it's Schrödinger's compensation: both life-changing and worthless until you observe the distribution.
Next week: Section 1061 — the tax code section that owns your financial life.
Talk soon.