The competition for key talent among hedge fund managers is fierce, and many have resorted to offering their key employees a stake in the manager’s business to attract the best and the brightest. “Equity” compensation has become so prevalent that more than one-quarter of hedge fund manager employees have reported owning an equity interest in their firms. See “Hedge Fund Manager Compensation Survey Addresses Employee Compensation Levels and Composition Across Job Titles and Firm Characteristics, Employee Ownership of Manager Equity and Hiring Trends
,” Hedge Fund Law Report, Vol. 6, No. 8 (Feb. 21, 2013). The forms of equity compensation that hedge fund managers can offer include profits interests, capital interests, options and phantom income in the firm. Each of these options has economic and other ramifications, both for the offering firm and the offeree. A recent program provided an overview of the various forms of equity participation that a hedge fund manager can offer its personnel. Among other things, the panelists discussed the intricacies of profits interests; the current status of carried interest legislation; four different types of equity compensation that managers can offer personnel (including profits interests, capital interests, options and phantom income); tax consequences of becoming a “partner” as a result of the receipt of equity participation in the firm; and the applicability of Section 409A of the Internal Revenue Code to various forms of equity compensation offered by managers. This article summarizes the key takeaways from the program.