By Gregory M. Prekupec & Rahul Gupta

In the world of private equity (PE) and venture capital (VC), few concepts spark as much curiosity—and confusion—as carried interest. Commonly referred to as “carry,” this structure sits at the heart of how fund managers get paid for their performance. But carried interest is more than just a compensation mechanism; it’s a powerful tool for aligning the interests of general partners (GPs) and investors, and one that raises interesting legal, structural, and tax considerations.

At its core, carried interest represents a share of a fund’s profits allocated to the GP—typically 20%—even though the GP may have contributed very little capital. This performance fee is designed to incentivize managers to maximize the fund’s return. But unlike a flat management fee, carried interest is only paid if the fund achieves profitable outcomes. In other words, it’s a bet that fund managers are willing to make on themselves.

Legal Structure

In Canada, private equity and venture capital funds are most commonly structured as limited partnerships (LPs). The investors come in as limited partners, while the general partner manages the fund’s day-to-day operations and investment strategy.

The LP Agreement governs the operations, capital contributions, and distributions of profits—including the carried interest. Importantly, the GP may be incentivized through carry to maximize profits for all, but the legal documents must be airtight in specifying how those profits are calculated, when distributions are made, and who ultimately gets paid. These provisions are especially important in determining how the infamous “waterfall” of payments will cascade down once an investment is exited.

Lawyers advising on fund formation must pay close attention to how carry is distributed, vested, and potentially clawed back.

The Mechanics

Carry is usually paid only after limited partners have recovered their invested capital and, often, a preferred return (known as a hurdle rate). After these benchmarks are met, excess profits are split—typically 80% to investors and 20% to the GP.

These allocations can vary. Some funds adopt a “whole-fund” carry model, where returns must be measured against the fund’s total performance, while others opt for a “deal-by-deal” structure, which rewards success on individual investments. Vesting schedules also vary, commonly spanning 3–6 years to ensure long-term alignment between fund managers and investors.

From a legal standpoint, carry provisions must balance flexibility and fairness—ensuring that carry rights aren’t abused but also rewarding the GP appropriately for generating returns.

Risk Management

Claw back provisions are a critical piece of carried interest mechanics. They protect investors in scenarios where early carry distributions to the GP prove excessive due to later losses. If fund performance drops, clawback clauses may require the GP to return a portion of prior profits. However, enforcing clawbacks—especially from GPs or team members who’ve left—can be difficult.

Escrow accounts are a common solution, holding a portion of carry until final fund liquidation. This gives the fund some security in reclaiming overpaid amounts. As legal counsel, I emphasize precise language in LP Agreements to reduce ambiguity in claw back enforcement.

It’s a delicate balance: we must incentivize high performance without letting early wins skew the long-term economic reality.

Tax and Emerging Trends

In Canada, carried interest is generally taxed as business income. Unlike capital gains, this means higher tax rates for the recipients. There’s also the “phantom income” issue, where GPs may owe taxes on carry allocations they haven’t yet received in cash. Many funds address this with periodic distributions to cover tax liabilities.

There’s growing discussion around whether carried interest should be taxed as capital gains to better reflect its investment-like nature. As lawyers, we must remain agile in advising on evolving tax interpretations and structuring compensation accordingly.

With more funds forming and more capital flowing into Canadian private markets, understanding carried interest isn’t just about economics—it’s about good governance, proper incentive alignment, and legal precision. As legal advisors, we stand at the intersection of strategy and structure, helping to design frameworks that drive both compliance and performance.

By Gregory M. Prekupec & Rahul Gupta

Introduction

Despite commercial leases providing the set terms of the relationship between the landlord and tenant, either party may either, wish or to, or must, exit such arrangement prior to such set time frame. Regardless of whether such termination is voluntary or involuntary, both landlord and tenant must consider a variety of factors while proceeding.

Why Terminate Early?

There are a number of reasons which may inform a landlord or tenant’s desire to terminate the relationship early, such as mass destruction, expropriation, loss of financial viability, default of lease covenant(s), and so on.

In the same breath, the parties may wish to mutually terminate the lease agreement, which is often referred to as a surrender. In such a scenario, the tenant returns, or surrenders, its interest in the lease and any remaining options to renew to the landlord.

Termination by Landlord

1. REASONS A LANDLORD MAY WISH TO TERMINATE EARLY

As mentioned above, there may be a variety of reasons why a landlord may wish to terminate the lease early. Additional examples are if, upon the assignment of the lease during the sale of the tenant’s business which occupies the leased premises, the landlord wishes to commence fresh relations with the incoming tenant, which may be done if, for instance, the established rent is significant below market rates and needs to be increased. In such instance, the landlord would terminate the lease with the outgoing tenant and prepare a fresh lease with the commencement dated the same as the closing date for the underlying transaction.

2. SECURITY DEPOSIT

Regardless of the reason for which the lease is terminated, the landlord must determine its rights and obligations with any security deposit it is holding. This is opposed to an assignment of a lease where the incoming and outgoing tenants adjust for the security deposit the landlord is holding. As such, counsel must refer to the relevant provincial legislation to determine whether the landlord must return all or some of the same, and if the landlord can use the deposit to offset any rent arrears.

3. RIGHTS UPON TERMINATION

Upon a tenant’s default under the lease, a landlord may wish to pursue its rights under the same, which may include early termination. However, a landlord may wish to consider its additional rights.

I. Acceleration

Rent acceleration is the landlord demanding the immediate repayment of all rent arrears from the tenant. This provides the landlord the legal ability to take such amount and enforce the same against the tenant through legal proceedings. Due to the high likelihood that rent acceleration may compel a tenant into bankruptcy or insolvency proceedings, or would otherwise significantly impair the tenant’s business operations, a landlord may only look to this remedy upon the breakdown of the relationship with the tenant or a loss of faith in the tenant’s ability to return the business to financial viability; assuming the only reason for the emergence of the rent arrears was an inability to pay.

II. Injunctions

Injunctive relief is the process of obtaining the court’s order to compel an action or omission of the counterparty. In a leasing scenario, a landlord may wish to seek such relief to compel the tenant to cure any default(s) it may have caused under the lease agreement.

III. Additional Rent

Depending on the wording of the underlying lease agreement, any costs which the landlord incurs to enforce its rights under the lease can be charged back to the tenant as additional rent, exclusive of an additional administrative fee on such amount.

IV. Re-Entry

A landlord may be able to access the leased premises and seize the tenant’s assets to settle any arrears. However, a landlord would be prohibited from doing the same should it decide to terminate the lease.

Considerations

A landlord would need to conduct appropriate due diligence to satisfy itself of any concerns which may arise before terminating the lease.

I. Third Party Consent

If title to the underlying property is encumbered, the landlord would need to review all mortgage documentation to determine if the mortgagee needs to consent to early terminations.

II. Environmental Damage

Depending on the tenant’s conduct, the landlord may need to evaluate the environmental state of the premises to determine if the tenant caused any harm. Should any issues arise, the landlord may require the tenant remedy the same by enforcing its indemnity within the lease.

III. Co-Tenancy

If the premises is within a larger complex, the tenant may require such complex be adequately leased, or certain tenants remain within the complex. As such, the landlord’s default for the same may provide other tenants additional leverage for lower rent or may motivate them to also terminate their leases early.

By Gregory M. Prekupec & Rahul Gupta

Introduction

Employees are often offered shares in their employer as part of the employee’s overall compensation. There are a variety of benefits of doing so, including aligning the motivations of the employees with the shareholders, rewarding an employee’s historical performance, or to encourage future performance and behaviour.

Equity compensation can take a variety of forms, including stock options, restricted share units, deferred share units, share appreciate rights, and phantom share plans. Such form of compensation is applicable to public and private corporations alike, with public corporations having greater prescribed requirements under the rules of the various stock exchanges.

Security Law and M&A Considerations

Generally speaking, equity issuances to grantees (defined below) are generally exempt from prospectus requirements, assuming the satisfaction of certain criteria by the grantor.

Upon the sale of a grantor (defined below), the purchaser may wish to cash out the majority of the outstanding awards or to assume the award structure and substitute the grantor’s shares with its own.

Common Forms of Equity Compensation

As mentioned above, equity compensation can take various forms. However, common forms include:

A. Stock options;

B. Restricted share units;

C. Performance share units;

D. Phantom share plans;

E. Deferred share units;

F. Share appreciation rights; and

G. Employee share purchase plans

Stock Options

A stock option is when an employer (the “grantor”) provides an employee, independent contractor, or other service provider (the “grantee”) with the right, but not the requirement, to purchase shares, or other securities from the grantor at a specified strike price within a certain time frame.

A. Strike Price

A strike price is a fixed price at which the grantee can buy or sell the underlying security. In the case of equity compensation, the grantor will likely provide the strike price of the fair market value of the shares at the time the stock options are provided. In a private corporation, the strike price may be lower than the fair market value of the shares if the grantor’s constating documents allow for the same.  

 B. Term and Vesting Schedule

Grantors tend to provide a date by which the grantees may exercise their options, which may be 5-10 years after the option is provided.

On the other hand, grantors also want to ensure grantees do not exercise such options and then immediately change jobs. Accordingly, stock options must “vest” which means the grantee must work for a specified time frame or achieve certain performance criteria before the grantee can exercise the option.

Options are typically structured such that they all vest at the end of a certain period or in segments over such period. These options may accelerate due to the occurrence of a particular event such as an initial public offering, the sale of the grantor, or the grantee’s termination of employment.

C. Stock Option Plans

Due to the frequency of stock options being issued, grantors typically issue a stock option plan which allow for a series of grants to the grantees. Such plans can vary on a variety of factors, including but not limited to, the size of the grantor, the liquidity of the grantor’s shares, tax considerations, size of the executive body of the grantor, etc.

Stock option plans are usually discretionary to limit the grantor’s liability under such plan. They also can be granted to independent contractors and other service providers, each carrying their distinct tax considerations

Restricted Share Units; Performance Share Units; Deferred Share Units

A restricted share unit (“RSU”) is a conditional right to receive shares or cash without a purchase or strike price. Accordingly, the RSU holder does not actually hold any equity in the grantor, and is therefore not entitled to any voting, dividend, or other rights unless the RSUs are settled in shares. On the other hand, performance share units (“PSU”) are subject to performance based vesting schedules (e.g., the revenue growth of the grantor over a three-year period).

A deferred share unit (“DSU”) is the right to receive cash or shares of the grantor within 1 year of the grantee’s retirement, termination, or death.

PSPs, RSUs, PSUs, and DSUs are all offered on a discretionary basis and grantors are not required to have uniform offerings amongst grantees. In addition, these plans can also be extended to non-employee grantees, each carrying their own tax treatment.

Phantom Share Plans

A phantom share plan (“PSP”) is connected to grantor shares; however, the grantee is not actually issued shares. Rather, the grantee receives access to an account which is credited with hypothetical shares, and the corresponding hypothetical dividends and appreciation (if any). Upon the culmination of the vesting schedule, the grantees are awarded with the phantom account value in cash or shares.

The key differentiator between PSPs and stock option plans is they do not need to be exercised by the grantee as they are settled automatically.

Share Appreciation Rights

Share appreciation rights (“SAR”) are rights afforded to grantees to receive the appreciation of the value of underlying shares in cash over the vesting period. When SARs are offered together with other forms of equity compensation, a grantee can exercise their options and acquire additional shares instead of only receiving cash settlement.

Employee Share Purchase Plans

An Employee Share Purchase Plan (“ESPP”) allows grantees to acquire shares of the grantor per certain time frames at a prescribed price. A grantor can restrict the ESPP as they wish however, grantors usually offer grantees financial assistance such as low-interest loans or matching payments. Private corporations often require grantees under ESPPs enter into a unanimous shareholder agreement as to not affect the management of the grantor.

Concluding Thoughts

Equity compensation continues to be a valuable tool for private corporations seeking to attract, retain, and motivate talent while aligning employee interests with the long-term success of the business. Whether through stock options, RSUs, SARs, or phantom share plans, each structure offers unique benefits and legal considerations for both employers and grantees. As equity-based incentives grow increasingly sophisticated, it is important for corporations to carefully tailor these plans to their operational needs, tax objectives, and corporate governance frameworks. Thoughtful implementation, clear documentation, and ongoing legal guidance are key to maximizing the value of equity compensation while minimizing associated risks.