That new VC partner on your board?
They might have say 5% carry in the fund
Let's say you sell for an incredible $500,000,000 after 10 years. WOW!
And the fund owns 15%
The new partner then makes … $750,000
$500m x 15% x .2 x 0.05#vceconomics
— Jason ✨Be Kind✨ Lemkin (@jasonlk) April 25, 2023
So personally, with SaaStr Fund, I am what is called a “Solo GP”. I’m the only general partner, and that means most of the eventual gains from any investment do go to me. The partners themselves get to keep roughly 20% of the gains (their own investors, the Limited Partners, keep 80% in most cases). So if SaaStr Fund is lucky enough to invest enough to own say 10% of your startup, that’s sort of like me owning 2% personally. (20% of that 10%). There are some important nuances here, but it’s close enough to accurate for founders to understand.
But the more partners there are, and the less equal partners there are, and the bigger the fund, the more this math radically changes:
- Let’s take that same 10% ownership, but imagine there are 4 equal partners. Now, the partner on your board really only owns 0.5% effectively, not 2%. Since that 0.2 x 10% is being split four ways.
- Let’s take that same 10% ownership, but imagine a bigger firm with a new partner, and that new partner that led your deal has 2% carry. That’s 2% of the 20% of the $10m. Now, that partner on your board really only effectively personally owns just 0.04% of your startup. Not nothing, but not nearly as much as you’d think when the fund itself purchased 10%.
- And that carry, the profits from the investment, often vest over 10 years. Not 4-5 like an employee.
Now, of course, each partner has an equivalent stake in other investments, too. So there is real portfolio theory here. And it’s important as a VC to build up your wins and top logos, even if you don’t personally make all that much from some of them. VC partners have motivations beyond their indirect ownership in your startup to make it a winner. And VCs in general are very well paid. Not suggesting otherwise.
But I’m making a different point for founders to understand. To understand the motivations of one part of the team — their board members and VCs. Just how much does that VC on my board themselves, herself, really effectively own after that check goes in? Usually, often, a lot less than you’d intuitively think. In many cases in fact, less than a director-level employee might have. Even if the fund itself owns a ton.
A related post here:
(VC org chart image from here)