PS#003: A Detailed Guide to VC Compensation
The most common questions I receive are about venture capital compensation.
What is market?
Will I get carried interest?
Does it vary by type of fund or stage?
How should I approach or negotiate a VC offer?
Never fear, I’ll answer all of these questions and then some.
But, before we dive into the details, let’s be clear about one thing…
Venture capital is NOT a get rich quick scheme.
For pre-partner venture capital roles (which likely includes most, if not all, of you), venture capital is not a very effective way to get rich quickly.
Why is that?
For the most part, the best way to get “rich” in the VC & startup world is to own equity.
Early on in your career as a venture capitalist, the amount of equity (also known as “carried interest”) you’ll own in your fund will be very small. Most of the carried interest will be owned by the partners who founded the firm and raised the capital. Depending on your level, you may have access to a small portion of this carried interest.
So, if your plan is to jump into venture capital to “get rich quick,” buckle up, because it is going to take a long, long time. I’m talking decades.
If you’re not deterred by this, keep reading. I’ll answer the following:
What does VC compensation include?
What are the compensation differences between the type of fund, role, etc.?
How should you approach an offer or think about the different aspects of compensation?
Let’s dive in…
1. What does VC compensation include?
Venture capitalist are typically paid in three ways:
Salary
Bonus
Carried Interest
Salary & Bonus
The salary and bonus will typically be paid out of a fund’s management fees.
Historically, most VC funds charge a management fee of 2.0-2.5% of the fund size for the active investment years (also known as the “investment period”). The active investment years will usually last for 4-5 years depending on the fund structure. After this period, the management fees are reduced to a much lower level (the level depends on the structure). This is why you’ll often see VC firms trying to raise another fund a few years after the last fund.
That’s all great, but what does it mean?
Generally speaking, this means that smaller funds have lower management fees and therefore pay lower salaries (and smaller bonuses, if at all).
Let’s look at an example.
$50M Fund x 2% management fee = $1M per year
Let’s assume there are 2 partners who raised this fund. Typically, VC Partners are a fund of this size might make between $200-250k per year. We’ll assume $225k and split the difference.
$1M - ($225k x 2) = $550k
We’ll assume that the 2 partners also have a principal on the team. For this type of fund, they would likely have a salary of $200k.
$550k - $200k = $350k
OK, so we have $350k to hire an associate for the team. Not bad!
Well, not too fast, this $350k also needs to include any expenses for offices, computers, travel, diligence costs, legal costs for the fund, etc.
That $350k can run out pretty quickly. In reality, most venture firms are actually running pretty lean from a cash flow perspective.
That takes us to the next component of compensation…
Carried Interest
Carried interest (shorthand = “carry”) is the percentage of investment profits that are shared with the partners in the VC firm.
Typically, VC firms will receive somewhere between 20-30% of the carried interest with the remainder being given to the Limited Partners (“LPs”).
You might have heard the term “2 and 20.” This refers to a 2% management fee and 20% carried interest. Historically, that’s been the most common structure for VC firms.
In most firms, the carry is divided up between the general partners* of the fund with a very small amount leftover for pre-partner VCs (if any at all).
*General Partners are usually the founders of the firm and the ones who raised the capital for the firm. They are also usually required to have a “GP commit,” which refers to putting their own capital into the fund (often ~2% of the total fund).
Alright, that’s a lot of VC lingo.
In essence, carry is the upside for a venture capitalist, just like equity is the upside for a founder or startup employee. This is how VCs hope to make their money in the long-term.
Now, there are a few issues with carry…
(1) Realized vs. Unrealized Carry
First, if you don’t realize a profit with your investments, there is no carry. Zero. Nada.
So if none of the investments perform, there will be no profits to share. Even further, there’s probably not going to be another fund, so you’ll be looking for a job.
Second, carry is usually only realized after the LPs have received 1x their invested capital back (also known as “European-style Carry”). After this point, the profits can then be distributed based on the carry structure (i.e., 20% to the VC firm / 80% to the LPs).
So, the fund needs to not only return the capital, but create significant profits as well.
This is hard. Really hard.
Most funds (i.e., +60%) fail to exceed returns available from investing in the public markets.
(2) Pre-partner Scraps
As I mentioned, this is hard. Really hard.
Most partners are keeping the majority (if not all) of the carry for themselves. They are the ones who own the relationships and reputation in the market, whether that be with founders, other VC, or most importantly, the LPs.
Bottomline, most pre-partner VCs do not receive much carry.
But, don’t trust me, let’s dig into the data…
2. What are the compensation differences between the type of fund, role, etc.?
The type of fund and your role will have a large impact on your overall compensation.
There are two rules of thumb:
The larger the fund, the higher the cash compensation (i.e., salary + bonus)
The closer you are to partner, the higher the cash compensation and carry
Not exactly rocket science, but it makes it simple.
Now, before we dig into the data, some notes on the information collected:
This data was drawn from 240+ pre-partner VCs in the EVCA community. If you’re new to the venture capital community, I highly recommend applying to join!
All of the respondents are analysts, associates, senior associates, vice presidents, or principals at institutional, corporate, or crossover (private & public) funds.
Cash compensation refers to salary + bonus.
Carry points refer to percentage points (i.e., 1.00 point = 1% of the carry).
The data has been classified by stage (which often drives fund size), defined as:
Pre-seed / Seed
Early-stage: Seed to Series B
Growth-stage: Series C to IPO
Stage Agnostic: Seed to IPO
OK, let’s get started…
Analysts
Analysts are entry-level roles with 2-3 years of experience.
Median cash compensation: $100k; pretty consistent across fund types
Carried interest: less than half actually received carry
Associates
Associates usually have 3-5 years of experience.
Median cash compensation: this is where you’ll see a difference in compensation due to stage and total fund size (i.e., growth-stage fund associates received $200k+ in median total comp.)
Carried interest: again, less than half of the associate received carry (usually less than 1%)
Senior Associates
Senior associates usually have 4-8 years of experience (depending on the firm).
Median cash compensation: hovers ~$190k (about a $30k bump from associate)
Carried interest: the majority of senior associates will receive carry (usually less than 2%)
Vice Presidents / Principals
Vice Presidents & Principals tend to have 8+ years of experience with 4+ years in venture.
Median cash compensation: $200k+ for all firms; nearing $400k for growth-stage investors
Carried interest: nearly all receive carry; typically less than 3%
3. How should you approach an offer or think about the different aspects of compensation?
OK, we know the terms and we have the data.
Now, let’s discuss how to approach it.
Before you start negotiating different offers, you need to decide on two things:
Investment stage – Where would you like to invest?
Role – What role fits your skill set?
Let’s look at these two questions in more detail.
(1) Investment stage – Where would you like to invest?
The first thing you want to think about is the stage. What stage do you want to invest at?
Do you want to invest at the pre-seed /seed stage where you’ll mostly be betting on a founder and an idea?
OR…
Do you want to invest at the growth stage where it is much more focused on the fundamentals of the business and reaching an IPO-type trajectory?
As you can see from the data, the stage where the fund invests will significantly impact the potential range of your cash compensation.
(2) Role – What role fits your skill set?
The next is the appropriate role for you at a VC firm.
Of course, we’d all like to be partners and receive those types of economic benefits, but that will hold you to completely different standards.
Within VC firms, results matter. They are also relatively easy to observe.
If you’re say an analyst or associate and you’re not generating high-quality deal flow, the data will prove this out. Most firms are tracking all of their deal flow in some type of CRM system. The numbers will show whether or not the deals you’re finding are good investment targets.
If you’re a VP or principal and you’re not leading/closing deals, the data will again prove this out. The partners expect you to be able to run these processes and close investments.
To summarize, if you’re unable to perform to the level of your title and responsibility, the firm will move onto the next in line (and it’s usually a very long line of candidates).
Now, on the other hand, you don’t want to pick a role that’s too junior for your skill set. Essentially, if you apply for an analyst role when you’ve been working for 10+ years, it’s going to look a little odd.
So, what should you do?
Well, be honest with yourself.
Figure out the right role for you today. Then, identify your gaps for the next position, and work on them. Go after that promotion.
I’ve mentioned this a few times already, but it bears repeating – this is hard.
Give yourself time to learn and develop.
Negotiating & Evaluating a VC Offer
Once you’ve made those decisions, we can then think through what matters.
Remember, venture capital is a long-term game.
It’s about long-term investments, relationships, and visions. You should take this same approach when choosing and negotiating your offer.
I recommend thinking about the following:
Opportunities
Time value of money
Fund lifecycle
Seat at the table
First, before the compensation, evaluate the opportunity.
Will you have a chance to learn and grow here? Will you learn the skills you need to reach partner-level?
Venture capital is known as an “apprenticeship industry.” However, not all venture capitalists are the best teachers. It can be hard to find someone willing to invest in your development.
Prioritize this.
Prioritize finding an investor or a firm that will teach you, give you opportunities, and allow you to learn from experience.
Second, remember the time value of money.
Carry is awesome, but remember that (1) it isn’t a sure thing, and (2) it may not come for a long, long time (think 10+ years).
Like any good investor, think about what matters most to you and whether you see yourself at this fund for the long-term (something we’ll discuss more in getting a seat at the table).
Unless you’ve found a firm where you believe you can grow into a partner-level role, it may be better to negotiate the cash compensation.
Third, figure out where the fund is in its life lifecycle.
Just like a startup may push the pedal on hiring after it raises a new round of capital, funds go through a similar process.
When VC firms raise a new fund, they are often looking to hire and fill out their team. This is the perfect time to target a VC firm and negotiate your compensation.
Usually, the partners are still in the process of allocating management fees AND carry. This will be the period where they have the most flexibility in terms of their offers.
Finally, a seat at the table is the most important thing.
A lot of VC firms, especially smaller ones, just don’t have room to negotiate.
They are operating on thin margins and really can only offer a certain level of cash compensation.
That’s OK. Getting a seat at the table is the most important thing.
A key part of your job (once you’ve gained a role in venture capital) will be to network and trade deals with other venture capitalists. So, in essence, you’re perpetually interviewing.
Whether it be in a catch-up call, on a deal, or in the Boardroom, you’re constantly demonstrating your skills to the market and other investors.
Remember – in this industry, people are always watching. It’s always an audition.
