What are normal venture fund fees and carried interest?

Terms and alignment
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Look past the headline rates. Two funds with the same management fee and carried interest percentages can have very different economics depending on what the fee is charged on, when it steps down, what is offset against it, which expenses the fund bears and how the distribution waterfall works. For an allocator comparing proposals, those details decide what you actually pay.

The management fee, and what is attached to it

The management fee pays for running the firm: people, rent, systems. Cooley's practitioner commentary, which is among the most complete public sources on venture terms, describes five features worth checking.

  • The base. Committed capital is the venture convention Cooley records. Invested capital, net invested capital and cost basis are different bases and produce different totals from the same rate.
  • The start. Fees are often charged from the initial closing, including retroactively for investors admitted later. Sometimes they start from the first capital draw or first investment.
  • The step-down. Cooley observes that most venture funds have some step-down after the investment period: a lower rate on the same base, the same rate on a smaller base, or both.
  • The end. Fees may end at the natural term, at the end of extensions or at final liquidation, sometimes at much lower rates in the later years.
  • The offsets. Directors' fees, monitoring fees, transaction fees and break fees are commonly credited against the management fee, in whole or in part.

Carried interest, and when the manager receives it

  • The rate. Cooley records 20 percent as the widely accepted starting point. Premium carry appears either as a flat higher rate or as a higher rate earned only above a performance threshold.
  • The waterfall. Under a whole-fund arrangement, the fund returns contributed capital before the manager begins receiving carry. Cooley records this structure at roughly 90 percent of the funds it surveyed.
  • The preferred return. More common in private equity than in venture. Cooley notes early-stage venture funds have generally not had one.
  • The catch-up. Where a hurdle exists, the catch-up moves economics back to the agreed sharing ratio once it is cleared.
  • The clawback. An obligation to return carry that turned out to be more than warranted, which matters in funds with early winners and later losses.

Expenses produce the most surprises

Ask which costs the fund bears and which the management company bears. Organizational expenses, fund administration, audit, legal, travel and broken-deal costs can each fall on either side. Caps on organizational expenses and clear allocation rules protect you. ILPA has published guidance on rising organizational expenses in fund formation.

Questions to ask the manager

  • What is the fee charged on, when does it start, and when does it step down?
  • Which fees from portfolio companies are offset against the management fee?
  • Which expenses does the fund bear, and are organizational expenses capped?
  • Is the waterfall whole-fund or deal-by-deal?
  • Is there a clawback, and how is it secured?

Reading terms for an emerging manager

Fee income matters more to a small fund's survival than to a large one's. A manager running a $30 million fund on a standard fee may have a thin operating budget, and terms that look generous can reflect real costs. That is not an argument for accepting any terms; it is a reason to ask how the budget works and whether the firm can operate through the full fund life.

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Sources

This page describes market practice for context. It is not legal advice; review specific terms with qualified counsel.