How much does a VC partner earn?

It’s so all over the place.

And most importantly — you have to think about earnings on a net basis.

Let’s take a $150m fund, with 3 partners … with a 2% fee structure … and 3% of the fund contributed by the partners themselves — the “capital commit” (some amount is required by LPs, the funds that invest in the VC funds).

OK, so 2% of $150m is $3m in fees per year. That sounds like a lot, and it is. But let’s assume there’s rent, 3 associates, 2 analysts, an admin or two, and a lot of Travel & Entertainment (say, $100k per partner per year in expenses here and $25k per other professional in expenses).

Rent, non-partners, expenses, and T&E then will likely consume say $1.5m-$2m of that $3m.

That might leave $500k-$1m left for the 3 partners to split as annual salary.

Let’s call it $300k each in salary.

now …

about that capital commit.

In this example, the partners are putting in 3% of the $150m themselves, or $4.5m over the life of the fund. Let’s simplify and call that $450k per year (that’s too oversimplified, but makes math simple). In after tax income. In California, that’s probably equivalent to $700k or more in pre-tax dollars

So the 3 partners here are “investing” $700k a year in pre-tax equivalent dollars out of their own pockets, and taking $750k out in taxable income collectively in salary.

In this case, the partners aren’t making anything net.

The earnings are only in the future profits, the carry.

Now, this is a particular example. In more established funds, the % contributed by partners is not only lower … but often the retired partners make up most of it (many times, as part of getting an ongoing % of the carry / investment profits).

In that case, especially as the fund sizes get large, the salaries can be quite large and the capital contributions quite low for the newer GPs. At older, established, large funds, the GPs can make $1m-$1.5m and not put all that much of their own cash into the funds.

And if you can raise multiple funds quickly, you can “stack” fees on top of each other. This can create a lot of cash flow in some scenarios.

But most smaller and newer funds on a net basis don’t pay much at all if anything net of partner capital contributions. Here, you’re betting on the investments to make you money 8, 10, 12 years down the road.

And if you do that right, it is a good deal. Because you get substantial leverage on your capital commitment. If you think of it that way, it makes a ton of sense. If you think of it in short-term economic terms, net of capital commitments … it may depress you.

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Published on May 22, 2016

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