Profits Interests 101: Part I: A Crash Course In Profits Interests

Profits Interests 101:

A Two-Part Series Part I: A Crash Course in Profits Interests

Question: I'm considering a new job offer, and my proposed compensation package includes profits interests. What are those, and how do I evaluate them?

As executive compensation attorneys, we hear this question from our clients frequently. In Part I of this two-part series, we will provide a conceptual introduction to profits interests, which come with special tax advantages – but also pitfalls. In Part II, we will introduce a framework for assessing an offer of profits interests.

1. What is a profits interest?

A profits interest, also known as "carried interest" or "promote," is an equity interest in the future appreciation of a partnership (or an LLC that is taxed as a partnership). Profits interests are sometimes described as options, but there are some key differences between the two types of incentives. For one thing, with a profits interest, you become a partner