Recently an entrepreneur asked me if VCs get individual compensation beyond the fees and profits from their partnership for serving on the board of a startup. Normally, there’s no individual compensation (this changes if the company goes public and the VC stays on the board), but with some basic math you can come up with a rough approximation of their individual ownership position.
Let’s work through a simple example:
- Assume the typical venture firm targets a 20% ownership position as the lead investor in the Series A
- Assume the typical partnership has four general partners (varies based on size and stage of firm)
- Assume the venture firm has the standard compensation of 2% management fees and 20% carry (profits)
- Take the 20% ownership position and multiple by the 20% of profits resulting in an effective partnership ownership position of 4% of the company (assumes a big exit where the initial investment is returned many times over)
- With four partners and the firm owning 4% of the exit, each general partner effectively owns roughly 1% of the startup individually (this doesn’t take into account junior partners, venture partners, advisors, etc. that have different stakes in the partnership)
So, while VCs don’t get compensated directly on an individual basis in a successful investment, they often have economic interests equivalent to roughly 1% of the startup’s value.
What else? What are some other thoughts that a Series A VC roughly owns 1% individually?
David Cummings on Startups 