Explaining carried interest

The Equity Kicker

Carried interest’ is the name given to the profit share schemes that investors in venture capital funds, typically called ‘LPs’, use to incentivise the partners at at the funds in which they invest. We’re going through the process of explaining and awarding carry to the people in Forward Partners and I thought I’d share the explanation there. Hurdle rates stipulate that the Manager delivers a minimum return before any carry gets paid out.

Sloppy Reporting from The New York Times on Carried Interest Debate

Seeing Both Sides

I read the article in The New York Times on the carried interest debate and was shocked to see my name and a reference to me that read: " As the Senate Democrats sent signs that they were open to a tax increase, investors and their lobbyists mobilized quickly, warning that the proposal could stifle investments that create jobs. In fact, the trip had nothing to do with carried interest taxes and there were only three or four VCs as part of the business delegation from PBLN.

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The Economics of VCs Recycling Management Fees

Feld Thoughts

The post specifically discussed three items: Management Fees, Recycling, and Carried Interest. Plus, as a bonus, you get $56m of carry (vs. 50m of carry in the case where you don’t recycle proceeds.). Many fund agreements, including ours, require us to pay back all fees and expenses before taking carried interest. Several years ago, I wrote a post titled Why VCs Should Recycle Their Management Fees.

Subprime Credit Levels & How They Affect Loan Interest Rates

YoungUpstarts

These may cause them to reject the borrower’s application due to riskiness or charge higher interest rates to offset this high level of risk. Here’s more on the various credit levels and how they can ultimately affect interest rates on loans and credit cards.

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The Rise & Fall of Great Venture Firms [Part 1] ? AGILEVC

Agile VC

I’ll save these for a follow-up post because I think there are some interesting take aways and also some firms that have found hacks to either propel success or avoid pitfalls. What’s a “fair” split of fee income and carried interest when a partner joins several years/funds after others? For example carried interest takes years to accrue and is based on the efforts and decisions of both the individual and the firm that happened 5-10 years ago.

Why I Don’t Celebrate Income Inequality

Both Sides of the Table

VCs also get capital gains tax rates on “carried interest,” which is what irritates the masses. Carried interest is the upside that VCs get after returning the money they raised – it is the VC “profit” if you will. Of course “carried interest” tax breaks are more at risk than founder tax breaks. What drives economic inequality in the US?

Why Internal Ventures are Different from External Startups

Steve Blank

Worse, Robert Adams and his two partners got 20% of the carried interest in the fund, resulting in payouts of $30 million to the partnership. Henry Chesbrough is known as the father of Open Innovation and wrote the book that defined the practice. Henry is the Faculty Director of the Garwood Center for Corporate Innovation , at U.C. Berkeley in the Haas Business School. Henry and I teach a corporate innovation class together.

Group Finance Director

Transformify

In this role you will work closely with the senior management and executive board, supporting in the businesses planning and strategy.

Why Average VC Returns Don’t Really Matter

Agile VC

FoFs have a range of strategies of course, but broadly speaking LPs that invest in FoFs pay them a management fee and carried interest (on top of the fee & carry of underlying VC funds they invest in) for access, diversification, active management or a combination of all three. fund or marginally profitable fund doesn’t generate any carry for the GPs that are investing it.

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Where Does VC Money Actually Come From? [Flowchart]

View from Seed

This typically has a dual purpose: generate a return on the company’s cash while also gaining insight into new startups and technologies that may be of strategic interest to the corporation. FoFs are typically structured as limited partnerships similar to a VC fund itself, and they typically charge an annual management fee and carried interest on profits – again just like the underlying VC funds in which they invest.

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What is a Venture Partner?

ithacaVC

Managing Partner/General Partner (I have seen some with Managing Directors too like an investment bank): top dogs that run the shop and own most of the carried interest. These roles typically do not have any carried interest. It carries cache. And it often carries carried interest too (though a lower share). One of my students just asked me what a “Venture Partner” is in the context of a venture capital firm.

Am I just a greedy VC?

VC Adventure

My partner Jason has an impassioned post up about the carried interest debate currently taking place in Congress. I point this out not to get into a political debate about the benefits of taxes, the proper level of tax or even the correct taxing system but to be clear that my views on carried interest are not part of some larger agenda around reforming the tax system or eliminating it all together.

There seems to be a lack of long-term investment in startups. Why is the 3-5 year exit strategy more desirable than a 10-20+ year timeframe?

Gust

If an early stage fund therefore targets, say, a 20% annualized gross return (to compensate for the risk and for the GP’s carried interest), that means every individual company in the portfolio needs to be at least theoretically able to return that entire amount for the whole portfolio. If the VC fund took the typical 20% interest, that sets the IPO value of the company around $160 billion, or roughly eight times the value at which Google went public.

What’s the Difference? Venture Capitalist vs. Angel Investor

The Startup Magazine

An article in Forbes explains that a venture capital firm makes its money through management fees (a percentage of the amount of capital that they have under management) and carried interest (a percentage of the profits of the business). When a company is targeted for Series A investment, it usually has a track record of sales or steady customer interest already.

How VCs Make Money….Hopefully

ithacaVC

Now, there are interesting ways for the GP to fulfill its portion of a capital call using “fee waiver”, but I am not going to address that here. Fourth, GP1 is entitled to a carried interest in fund profits. Therefore, the returns from the sale/IPO of the fund’s portfolio companies must clear capital commitments before GP1 gets any carried interest. I thought it would be useful to demystify how VCs make money. Here is a short explanation.

Where Do Venture Capital Dollars Actually Come From? This Visual Explains

Agile VC

This typically has a dual purpose: generate a return on the company’s cash while also gaining insight into new startups and technologies that may be of strategic interest to the corporation. FoFs are typically structured as limited partnerships similar to a VC fund itself, and they typically charge an annual management fee and carried interest on profits – again just like the underlying VC funds in which they invest.

Why Investor Titles are Important

This is going to be BIG.

Partners, in my mind, should have carried interest (upside) in the fund and be able to lead deals and take board seats.

Battery Ventures Announces New $750 Million Fund

VC Cafe

The New York Times says the new fund is a signal that Silicon Valley is being revived, but according to the Wall Street Journal , it was lower fees and carry that facilitated securing the capital: It helped that Battery proactively offered some investor-friendly terms. The firm lowered its carried interest fee–the fee that it takes on profits made in the fund–to 20% from 25% previously, though the fee would rise to 30% after the fund returns three times its capital, said Mr. Crotty.

Joining The B Team

VC Adventure

More recently I’ve become very interested in the B Corp movement. Things such as our “no a s” rule, what we (along with our friends at Techstars) now call #givefirst , putting entrepreneurs first and including all of our employees (and Pledge 1%) in our carried interest all came out of these discussions. For a long time I’ve been fascinated by the intersection between entrepreneurship and social change.

Top 29 Startup Posts May 2010

SoCal CTO

He’d wasted a year of his life and had a pile of stock options that weren’t very interesting. He started targeting the ad by location and interest, and the number of potential people he was reaching began decreasing on screen (Facebook tells you dynamically). He shares a lot of interesting info about his strategy, and it's about as diametrically opposite to my strategy as you can get.

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Barney Frank says: Don't Mess with VCs or Angels

Seeing Both Sides

On Financial Reform, Barney Frank was very direct when I pressed him on the myriad restrictions that are being discussed in the Senate bill around angel investing and the discussions about taxing carried interest. Here's what he said: "We will exempt venture capital from the carried interest tax.". "We

What Makes an Entrepreneur? Cojones (7/11)

Both Sides of the Table

I didn’t negotiate hard on carried interest. This is part of my series on what makes an entrepreneur successful. I originally posted it on VentureHacks , one of my favorite websites for entrepreneurs. I started the series talking about what I consider the most important attribute of an entrepreneur : Tenacity. I then covered Street Smarts , Ability to Pivot , Resiliency , Inspiration and Perspiration. You need the whole package.

How to Negotiate a Partner Role at a Venture Capital or Private Equity Firm

David Teten

Compensation : base salary, share of profits of management company, carry. In theory, carry correlates with decision-making power. Will your vote carry more weight than your new partners or will two out of three votes get a deal done?” As a negotiating point, you’re probably going to want to highlight that numerous top-tier VCs have equal carry in funds, although often unequal ownership at the management company level. – Share and vesting of Carry.

The VC Shakeout: Are We There Yet?

Agile VC

But it is also typically in the interests of those same stakeholders for the VC firm’s challenges not to be broadcast widely. a VC fund’s entire portfolio in aggregate, net of management fees and carried interest) a good return from an LP’s perspective would be 2.5-3.0x [ This also appears as a guest post at PandoDaily ]. Over the weekend, I read Sarah Lacy’s PandoDaily article that the VC shakeout is taking too long.

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5 Signs You Need to Create Your Startup Sponsorship Program

Women Entrepreneurs Can

VCs tend to gain most of their returns through carried interest- a percentage received as compensation from the profits of a hedge fund or private equity. Investors will not want to invest in a company that has landed itself in hot legal trouble and brands interested in sponsorships are wary of being associated with controversial PR nightmares. Early on in any startup is more often than not filled with the unknown. How can you market on a shoestring budget?

10 Ways close the Coronavirus budget gap in New York

This is going to be BIG.

4) We need to push the Federal Government to close the carried-interest tax loophole —but we should do it in such a way where the localities where it gets collected get a share of the income from it. Closing the carried interest tax loophole is something Trump said he was going to do when he campaigned. 1) Legalize all the vices.

High Returns On A Small Fund Challenge Low Returns On A Big Fund

David Teten

An article on the New Enterprise Associates blog by Partner Tom Grossi , however, makes an interesting point: most of the megafunds were raised since 1999, a period in which the entire industry did poorly. We thought that you’d be interested in our conversation. A cynical observer might argue this is why some firms raise many concurrent small funds… then they have both large management fee streams and high volatility on each given carried interest pool.

LP 96

11 Things I've learned from running a micro VC in the last year

Hippoland

There have been several cases over the course of the last year, where either Eric or myself have had to loan Hustle Fund money interest-free to do a deal that needed to be done now (before we had the fund fully together). And if you’re writing small checks out of your fund, much of that $3m will then just sit around in your bank account not earning interest and will negatively affect your rate of return.

11 Things I've learned from running a micro VC in the last year

Hippoland

There have been several cases over the course of the last year, where either Eric or myself have had to loan Hustle Fund money interest-free to do a deal that needed to be done now (before we had the fund fully together). And if you’re writing small checks out of your fund, much of that $3m will then just sit around in your bank account not earning interest and will negatively affect you rate of return.

Pari Passu or F.U.little guy

Professor VC

It''s also interesting how a lot of this resembles toddler behavior on the playground from "show me a little more love" to "mine mine mine" and of course, the classic playground bully. Funders Club ( which I''ve written about previously ) recently launched a referral program where angels can receive 10% of the carried interest in a deal they refer that ultimately gets investment from an FC fund.

A Call to Arms on the IPO Malaise and Inaction

Seeing Both Sides

It is just stunning to me how little interest there seems to be on the part of a supposedly pro-business Congress and (more recently) Executive Branch on this one simple thing that would unleash innovation and jobs - watering down Sarbanes Oxley. But recent conversations that I have had with bankers has carried a different, even more depressing message. I almost never agree with a single thing written on the Wall Street Journal editorial pages.

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Obama proposes no capital gains tax on qualified small business stock

Startup Company Lawyer

The budget proposal is wide ranging, and includes, for example, proposed changes with respect to the taxation of “carried interests&# in partnerships, as well as sweeping reform of the international tax area. This week, the Obama Administration released the first comprehensive summary of its budget proposal.

The Venture Spiral

K9 Ventures

I would welcome a discussion on this topic and invite any interested folks to either leave their comments below or email me directly if they prefer. In addition, there is a performance incentive — the Carried Interest or Carry. The carry is typically around 20% of any gains on the fund. So the carry for the GPs would be (20% of $23.3M) $4.66M and the balance would be the return to the GPs ($10M + $18.64M).

IRR 48

LP Conference

BeyondVC

Every year the Dow Jones Private Equity Analyst puts together a show where fund managers can listen to what the LP community is interested in and where they plan on allocating their dollars. Anyway, as I had time to think about it, it might be helpful for entrepreneurs to understand how VC funds operate to better understand our motivations and to better align interests.

LP 60

ProfessorVC: How much is enough?

Professor VC

While my ownership stake in the company has been diluted through these financings (and the merger with uControl), my carried interest (paper value of my equity) has been going up with each increase in valuation. ProfessorVC. The last blogger in Silicon Valley. Monday, June 20, 2011. How much is enough? Financing, that is.I had mixed emotions when I read the the press release on the recent funding of iControl Networks.

The Secret History of Silicon Valley 12: The Rise of “Risk Capital.

Steve Blank

Interestingly enough, Fred Terman, Dean of Stanford Engineering was tied to all three companies. The better news – government money encouraged private companies to form to invest in new startups The bad news – the government was more interested in rules, regulations and accounting then startups (because some SBIC’s saw the government funds as a license to steal) By 1968 over 600 SBIC funds provided 75% of all venture funding in the U.S.