Or if they have enough management fees to draw from, they’ll use those to fund their commit and take a lower salary than they might have otherwise. If they don’t have a lot of cash lying around, then they’ll take out a loan to fund that GP commit. General partners have a “GP commit” (often around 2% of the total fund) that they have to pay in.
Sure, you have shops like Industry Ventures and exchanges like EquityZen that can help investors take money off the table - but it’s far from the level of liquidity and transparency that you would see in the public markets. Venture is a highly illiquid asset class.the average VC fund’s life cycle) to see any meaningful returns on your investment. For example, at the early stage, you’re looking at 10 years (i.e. Less than half of respondents at analyst levels had the potential to earn carry.īut even if a fund ends up generating carry - it takes a loooong time. The data from the survey bears all this out, too. Still, as a general rule of thumb, most mid and low-level employees at a fund do not earn much carry. That said, there are many nuances to carry distribution, with some firms employing different mechanisms such as “cliffs” and “accelerations” (or a lack thereof) to incentivize partners and/or lower-level employees to remain at the fund longer – as this can often positively signal LP’s. Most funds follow traditional structures and really need the math to work out in their favor before they even dream of paying their juniors something that could be considered substantial carry. Just like a startup isn’t going to pile on the equity for someone who isn’t a founder - a VC firm isn’t going to offer up a share of the profits until you’ve proven yourself. (The Lowercase Capitals of the world? They’re the exception, not the rule.) They found that the majority of funds in their study, 62 out of 100, failed to beat public market returns after fees and carry were paid You know that your average VC isn’t exactly generating great cash returns - so it’s pretty hard to get into that carry zone.Īfter all, VC funds as of late have consistently underperformed the S&P 500, NASDAQ, and Russell 2000.Ī recent Kauffman Foundation study detailed VC performance as an asset class. Typically, VCs don’t get carry until they climb the ranks…but more on that to come. What’s left is the “profit,” and this is the money (the carry) that is divided up using the 20% / 80% distribution. “Carry” is typically only realized after the limited partners in the fund have received over 1X of their invested capital back. Paper gains don’t count, and cash returns need not apply) …with a few table scraps for the junior staffers.įor example, firms like Benchmark Capital divide the carry equally between all partners.Īnd according to some academic research, funds with an equitable split of the carry tend to outperform funds that don’t. In most firms, carry is divided up (often, unevenly) between the General Partners… You might have heard this talked about as the “2 and 20” model – the (typically) 2% management fee and the (typically) 20% carry. It’s the percentage of investment profits (often 20%, sometimes 25% or even 30%) that the partners in the VC firm get paid in addition to fund management fees.
That’s why you see some VCs who run small funds doing side hustles to pay the bills while they wait for their bets – (I mean, investments) – to pay off.īonus isn’t a given like it is in investment banking or other traditional finance shops.īut many respondents (across all titles) say that they’re getting them.
This is because a firm that has $500k or $2 million (or even $5 million) under management isn’t going to have much - or any - cash lying around to pay you a full-time salary. (And teeny tiny funds won’t pull any management fees.) Smaller funds will have lower management fee percentages. Most VC funds above a certain size will charge a 2% or 2.5% management fee for the active investment years. Salary is usually paid out of a fund’s management fees. It makes up the majority of a (non-intern) VCs comp in any given year. There are 3 pieces that make up the compensation structure of a VC: How Do VCs Make Money? (VC Comp Structure)
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