11/17/2023 0 Comments Venture capital fund managementThese had nine different ways to calculate management fees, including the “classic flat fee”, a rising-then-falling fee based on deployed capital, the step-down approach, and variations on all three. Katherine Litvak’s article Venture Capital Limited Partnership Agreements: Understanding Compensation Arrangements ( University of Chicago Law Review, 2009), based on 68 fund agreements from 28 VCs, from over time (mean vintage 1997). Views of generally well-informed capital allocators ( like Samir), and of VCs that are trying to make the case (that they presumably believe) that their step-down approach ( like Tyler) means they are offering VC funds at a 40% lower price than “traditional fees”. For example, this post on recycling from VC godfather Brad Feld, which uses a standard 15% fee load – which is surely more likely a step-down approach than a flat 1.5% for 10 years, especially given this earlier article explicitly describing the step-down approach.īut as I dug into the evidence, it seems there is actually good support for the alternative view. Occasionally perusing offering documents from funds in the Southeast, angel sidecar funds from across the US, and other precedent documents we’ve collected over time.Īnd other analyses, where the assumptions seem (to me) more likely to be a step-down approach than a flat fee. Starting after the end of the “investment period” the fee will decline annually based on a negotiated formula.” Or at Quora where the first answer is the step down approach: “This is usually 2% of the committed investment to the fund but declines after the fund is done investing in new companies – usually year 5 or 6. That represents 15% of the fund’s original committed capital.” the amount of capital the fund has invested in active companies in the portfolio.) Over the life of this $50M fund, the fund will pay out in the neighborhood of $7.5M in management fees. After the first 5 years, the 2% fee is usually based on the remaining invested capital (i.e. This is the time period in which new investments are made and most of the follow-on investments occur. For example it might just apply for the first 5 years of the fund. Like at Seraf: “ In most cases, this level of management fee will be in place for a limited time period. Like SBIC funds, where the SBA model agreement defines “management fee base” using the step-down approach. Like the private equity fund industry, where the ILPA model documents, for example page 5 of the term sheet, definitely describe the step-down approach So which view is right? In this article, we’ll unpack the evidence and share some other thoughts about who cares.īefore I dived back into research, I thought the evidence would overwhelmingly support the “VentureSouth view.” My evidence included:Īdvice from our counsel when we were forming the first VentureSouth sidecar fund in 2014 that the “step down approach” was typical. (Yikes.) They say this is modeled on traditional VC fund practice. Samir Kaji explaining ( here and here) that 22-25% of capital goes towards management fees and expenses (so at least 2% per year for at least 10 years)ĪngelList’s rolling funds generally charge “2% per annum over each fund’s 10-year life, payable quarterly over the first four years” (so 20% “total load” with the cash going out faster). Gyan Kapur telling us on Twitter that the traditional approach is to move down after the 10-12-year mark Here are some recent examples of the alternative view: We were surprised – and a little disturbed – to find out we were…possibly…wrong…Īn alternative view: Venture capital funds traditionally and/or generally charge 2% of committed capital for the whole of the fund’s (typically 10 year) life. Prompted by some recent discussions on “VC Twitter” we went back to see if the VentureSouth view was correct. We’ll call this the “step-down approach” in this article. The VentureSouth view: Venture capital funds and other similar funds that invest in early-stage companies ( like our VentureSouth sidecar funds) charge a management fee that is calculated as follows:Ģ% of committed capital for the “commitment period” (the period when new investments are being made, say five years), plusĢ% of (net) invested capital for the “harvesting period” (the period when old investments are being sold, say the second five years). What do VC funds actually charge in management fees, and who cares?
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