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Whether you are a potential venture capitalists or a business owner looking for investments, understanding how a typical VC fund charges fees and expenses can help you be more able to navigate the venture capital waters.

Management Fees
Most VC funds charge an annual management fee, typically 2 percent of the fund’s total dollar amount. This money is paid to the fund’s management team in order to pay for all the overhead associated with running the fund: salaries, benefits, office rent and expenses. The 2 percent also covers any travel expenses managers incur while scouting out new business investment possibilities. The management fee in some funds is contracted to be scaled back after the initial commitment period of roughly 5 years. After this time, the management fees are often based on the net invested capital.

Profit Carries
Some of venture capital fund profit money is reserved every year for payments to their investors. This is known as a profit carry or carried interest. VC funds usually allocate between 20 to 30 percent of annual profit for this purpose. It is similar to how an investor would get a share of equity in a startup company.

The management fees and profit carries are connected. The venture capital fund’s net returns are counted after taking out the management fees. In order for VC investors to earn their profit carries, the fund must make enough profit to cover the management fees first and have leftovers. This means venture capital funds that make large investment return generally have more room to charge higher management fees. Indeed, funds that have excellent records of profits sometimes charge a premium fees for its management team. All fees and charges should be disclosed in a VC funds Private Placement Memorandum (PPM) and Fund Summary.

Having a firm grasp of how venture capital funds use and make their money can help you know how to invest or the funds with which you’d like to curry favor as an entrepreneur.


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