Some extremely successful venture capital funds may receive as much as 25–30% carry. It is worthy noting that most venture capitalists get 20% carry. This percentage of profits distributed to the management company is known as “carried interest” or carry. Approximately 20% of the profits go to the management company LLC. Individual investors receive a share of these profits based upon their ownership interests. Approximately 80% of the profits go to the investors. Once the LPs receive a return of their invested capital (and the 8% if applicable), the remainder of the funds (the profits) are split between the management company and the investors. Also, it is a common provision that the investors must earn an 8% internal rate of return on their investment before any further distribution of profits is made. All limited partners must recover their investment before any distribution of profits is made. Generally, the first distribution of proceeds from sale go to the limited partners. That is, the management company manages the funds of the investors in hopes of making a return when the portfolio companies are later sold. In addition to owning an interest in the venture fund and receiving management fees from the fund, the management company participates in distributions from the sale of the company. All of these variations seek to achieve the same purpose - adequately compensate those responsible for providing professional services as advisors and managers to the venture fund. In some cases the management company might have no fixed management fee and will charge actual fund expenses. Alternatively, some managers take a fixed management fee up front to last for life of the fund. Similarly, the fees may be higher in the beginning and tier down over the life of the fund. The fees may be higher during the active investing periods and lower during the maintenance period. Sometimes, the management fee is structured over the life of the fund. There are, however, numerous variations on the management fees. The fees are used to finance the operations of VC fund, including salaries for investing partners and their staff. The traditional management company LLC receives a management fee that is typically between 1.5% - 2.5% of the total amount of money committed to the fund. This means that they advise on the process of operating the fund and manage the assets of the fund, source deals, conduct due diligence, and invest funds. The management company LLC serves as manager and advisor to the venture capital fund. As investor in the fund, these owners will generally receive a commensurate distribution of fund profits or losses. This shows third-party investors in the fund that the fund managers have a vested interest in the success of the firm’s portfolio companies. These managers will generally invest between 5-20% of the total capital in the VC fund. As previously stated, these managers are advisors to the investment fund. The individuals organizing the management company and the investment fund, typically referred to as “venture capitalists” hold all of the ownership interest in the management company LLC. Back to: Business Transactions Equity Structure of the Management Company The limited partner is a business entity made up of all of the fund investors. The management company serves as advisor to the investors of the venture fund. The general partner is the management company organized as a limited liability company. It is made up of two primary business entities - a general partner and a limited partner. A basic venture capital fund is generally organized as a limited partnership. To understand the typical equity structure of an advisor to a venture capital firm, it is important to understand the structure and role of the advisor. Update Table of Contents The typical equity structure of an Advisor to a VC Fund Equity Structure of the Management Company Management Fees Carried Interest The typical equity structure of an Advisor to a VC Fund
0 Comments
Leave a Reply. |
Details
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |