No matter your seniority or how many negotiation battles you've won, untangling the intricacies of VC compensation is one complex animal that can leave even the most seasoned professionals scratching their heads. 

The truth is, to effectively navigate a raise or set pay expectations in this industry, one must first grasp VC economics – a notoriously tricky subject. Even after a decade in the VC platform space and spending a disproportionate amount of my time on this topic, having previously led the VC Platform Compensation survey efforts for many years, I still don't claim to fully understand all its nuances! 

In this edition of my newsletter, potentially one of the most crucial yet (it is your salary after all), I aim to demystify VC platform compensation to empower platform professionals to make informed decisions that reflect the true value of their roles. 

We’ve got a lot to cover – we’ll dive into VC economics 101, look at the components of VC compensation, and introduce frameworks for compensation decisions.

Whether you're entering the field, navigating your current role, or a GP seeking to fairly compensate your platform team, this is for you.

VC Economics

Before getting into VC platform compensation, we must understand how VC firms generate cash. In the most general sense, a fund can only pay out what they bring in. Funds primarily make money through two channels: management fees and carried interest.

Management Fees: 

Management fees are the lifeblood of a VC firm's operations. Paid by Limited Partners (LPs) as a percentage of assets under management (AUM), these fees cover everything from office rent and legal expenses to employee salaries. 

A VC firm's budget can vary significantly year over year due to compounding management fees. A firm’s operational budget will grow as it raises additional funds. However, this growth is not static - as funds mature, management fees often taper down, impacting the overall budget.

This graphic below illustrates how management fees evolve for a small fictional fund over 14 years:

In this example, the firm started with a $50 million Fund 1, followed by $100 million for Fund 2, another $100 million for Fund 3, and finally a $300 million Fund 4. All of these funds follow a typical (albeit simplified) fee structure, charing 2% in years 1 to 5, 1.5% in years 6 to 8 and 0.5% in years 9 and 10.

To highlight how fees fluctuate over time:

• Year 1 to 3: Only Fund 1 is active, with $50M in AUM. Total fees are $1,000,000

• Year 7: Funds 1, 2, and 3 are active. Fund 1's fee has already tapered down from 2% to 1.5%.  Firm has $200M total AUM.  Total fees are $4,750,000

• Year 13: Funds 2, 3, and 4 are now active. Fund 2's fee has decreased to 0.5%, and Fund 3's fee is at 1.5%. Firm has $500M total AUM.  Total fees are $8,000,000

As you can imagine, these cyclical shifts impact the fund's ability to hire and pay salaries. Understanding these dynamics is crucial for grasping how management fees affect overall compensation structures within VC firms.

Carried Interest: 

This is a key component of a VC firm's performance-based compensation structure that aligns the interests of fund managers with those of their LPs. Typically set at around 20% of the profits generated by the fund (though often dynamic, with a potential to increase to 25 - 30% if a fund performs better), carried interest is only realized after the fund meets a specified return threshold. This means that fund managers earn their share only when investments are successfully exited and the fund generates returns. 

To illustrate how these economics play out in real-world scenarios, let's consider a hypothetical fund:

A $100 million fund invests in a number of portfolio companies. Through several liquidity events, the fund's value grows to $250 million (a 2.5x net multiple). Here's how the returns might be distributed (note: this is a highly simplified example that doesn't take into consideration hurdles, fund expenses or other nuances of fund carry structures):

• First, the entire $100 million initial capital is returned to the LPs.

• The remaining $150 million is the fund's “profit”.

• Assuming a standard 80/20 split:

  • 80% of that ($120 million) goes to the LPs

  • 20% of that ($30 million) goes to the GPs as carried interest

In this scenario, LPs receive a total of $220 million (more than doubling their initial investment), while $30 million will be distributed across the team, the majority going to GPs but often shared against senior and sometimes junior members of the investment and platform teams.

For example, let's say you're the firm's Head of Talent and you had 5% of the GP carry (or 1 basis point of the fund's carry). You personally would be eligible to receive $1.5M of the $30M in carry distributions, assuming you fully vested your carry allocation over your tenure at the firm.

Components of VC Compensation

Now that we understand how a VC firm generates and manages its income, let's break down the two main components of VC platform compensation: Cash and Carry. 

Cash: 

This is your bread and butter, the predictable, steady income that pays your bills. It typically includes your base salary and any cash bonuses. 

Unlike many industries, VC lacks standardized norms for bonuses. While about 75% of firms offer bonuses, others prefer a higher base salary without bonuses, often due to the challenge of objectively measuring performance. Neither approach is inherently good or bad. For fair comparisons, I recommend focusing on the total annual cash compensation for the year, which combines base salary and bonuses.

Carry:

Here is where things get more intricate. Carried interest generally refers to an individual financial incentive tied to the long-term performance of the fund. This can take several forms based on role and fund structure:

1. Standard Carried Interest: This is the most standard way to allocate a share of the fund’s profits as a returns-based incentive. In the US, you'll receive a K-1 form annually, reflecting your ownership portion. This form of carry will sometimes require an initial capital commitment, though some firms may offer a loan to cover this.

2. Profit Share: More common in larger funds or private equity, profit share distributes a portion of the fund's annual gains among employees. It's essentially a bonus based on the fund's overall performance that year.

3. Phantom, Shadow, or Synthetic Carry: This operates similarly to standard carry in terms of payout timing (typically 10-12+ years), but doesn't require a capital contribution. It's often paid out as income rather than capital gains.

The tax implications of these different forms can be significant. In the US, standard carried interest is typically taxed at a lower rate (15-20%) compared to phantom carry or profit share, which are usually taxed as regular income (25-37%).

It's important to note that these structures and their tax implications can vary by country. Always consult with a financial advisor to understand the specifics of your jurisdiction. 

Cliffs and Vesting

Two other components worthwhile to understand when it comes to carry and navigating your package effectively are cliffs and vesting.

Cliffs:

In VC compensation, a cliff is the initial period during which carry is awarded, though not considered earned until you reach a specific tenure milestone.

While many VC funds match the startup industry standard with a 12-month cliff, some funds may extend this period to 24 or even 36 months. This means that if you leave your position before that period ends, you could forfeit 100% of your carry. It's crucial to clarify these terms with your fund, as there is no universal standard.

Vesting:

In the context of VC carry, vesting refers to the process by which you earn your share of the fund's profits over time. Unlike the typical four-year vesting schedule in startups, carry can take much longer to vest, often between 6 to 10 years. Some funds use straight-line vesting, where you receive equal portions of your carry each year, while others may take a non-linear approach. For example, it's common for 80% of the carry to vest over the first four years, with the remaining 20% extending over the following six years.

With such a range of cliff and vesting structures across different funds, it's important to ask comprehensive questions to ensure you understand how your fund structures carry.

A Word of Caution on Carry

While carry can be an exciting component of VC compensation, it's crucial to approach it with a healthy dose of realism. My recommendation is to treat carry, or any carry-like incentive, as Monopoly money. Here's why:

1. Long-term payoff: Carry typically takes 10 to 12 years to materialize. That's a long time to wait for a payday.

2. High volatility: Very frequently, carry ends up being worth $0. The VC world is unpredictable, and not every fund hits it big.

3. 🛥️"Boat money": If you're lucky enough to see a significant carry payout, think of it as "boat money." It might allow you to splurge on a luxury item or two, but it's not something you should count on for life's essentials.

Most importantly, carry should never be considered an alternative to traditional retirement savings or responsible financial planning. Continue to approach your personal finances with caution, contributing to your 401(k), IRA, or other retirement vehicles as you normally would.

So, what's my carry actually worth?

As you can see, calculating and understanding carry is a complex task.  While there is a ton of nuance required to understand this, I built a "Carry Allocation Calculator" that you can use to get a better sense of what a carry award payout could look like based on the unique dynamics of your fund.

When starting a role / hiring for a role

For anyone who is reading this and considering taking their first role in a venture, I invite you to take a break, take a deep breath, and acknowledge just how complicated the topic of compensation is in this industry. And for GPs hiring someone into their first platform role, I implore you to realize these concepts may be foreign and help candidates understand them fully. 

To support folks in this, I want to introduce a three-step framework for how to approach a platform offer and ensure you sign the dotted line with confidence, clarity, and excitement.

1. Permission to ask

First and foremost, give yourself permission to ask questions. VC economics are complex, and it's crucial to understand what you're signing up for. 

Don't wait until you receive an offer with an impending decision deadline to address your burning questions. While it may not be appropriate to dive into detailed inquiries about carry and vesting during a first interview, don't hesitate to sprinkle these topics throughout the interview process. Your goal should be to gain clarity on both how the firm operates and what a potential compensation package might look like.

Remember, concepts like carry, profit share, and management fees can vary significantly from fund to fund and can be confusing even to industry veterans. This complexity is precisely why you should request a conversation with the fund's CFO or legal counsel to clarify any ambiguities before accepting an offer. 

For partners hiring platform professionals: Transparency is key. I urge you to clearly explain the compensation structure to potential hires. No one wants to make a career decision based on misunderstood terms.

2. Understand the context

If you are transitioning from an operating role, it’s important to brace yourself for some differences with regard to compensation. Despite being in the money business, VC firms often operate on surprisingly tight budgets, especially smaller funds. This is because they're managing investors' money, not their own, which leads to careful allocation of resources. As a result, you might face a significant pay cut compared to roles at large tech companies or venture-backed startups. 

But remember, while immediate financial rewards may be lower, you're investing in a wealth of experience and exposure: connections, insider knowledge you'll gain, and a bird's-eye view of the startup ecosystem. Often this means trading short-term financial gains for long-term career capital.

Understanding the unique model of VC is one thing to consider, but there are other factors that can greatly impact how to understand and approach compensation, namely:

1. Fund Size: This is perhaps the most crucial factor. Fund AUM has one of the strongest correlations with salary. A platform role at a $100 million fund will likely offer a vastly different compensation package than that of a similar position at a billion-dollar fund, due to differences in management fees and available budget.

2. Functional Responsibility: Your specific role and scope of oversight greatly influence compensation. A Talent Partner will be compensated very differently from a Head of Content, reflecting the varying strategic importance and specialized skill sets required.

3. Timing: Strategic timing can significantly impact your compensation. For example, if your firm is actively raising a new fund or plans to in the next 6 - 12 months, you can consider pre-negotiating a pay bump when the firm starts collecting new management fees on the upcoming fund. This approach acknowledges both the current fee constraints and the anticipated future increase in available budget.

4. Geography: Compensation should align with your location, considering significant regional and country differences. A platform role in Silicon Valley may command a different package than one in emerging markets.

3. Lean on the Data 

Before diving into compensation negotiations, arm yourself with industry data. The VC Platform Global Compensation Report, which was published this week, is an excellent starting point, but it shouldn't be your only reference. For a comprehensive view, especially if you're in private equity or growth equity, consider other resources like the True Search Talent Partner Survey and take a look at investor-specific reports as an additional data point such as the EVCA Annual Survey. Remember, these surveys offer guidelines, not hard rules. Every fund is unique, and your compensation should reflect your specific situation.

Whether you find yourself in the 9th or 99th percentile, ensure the offer aligns with your expectations and the impact you aim to make. 

In addition to asking those at the fund you are potentially joining, leverage your network. Reach out to connections you may know in VC platform roles for their insights.

When re-evaluating your role

For those working in VC, it's a well-known paradox: while VCs empower some of the world's most structured companies, their internal processes are often ad hoc and organic. This is particularly evident in performance reviews and many platform professionals are surprised to find that annual reviews aren't standard practice, with no dedicated time for discussions on performance, career path, and compensation.

As a platform professional, it's crucial to proactively set time for compensation discussions with your partners. If you fall into the camp of platform professionals who don’t have an upcoming performance review scheduled on your calendar, consider this your wake-up call. Request time from partners to sit down and discuss your performance, impact, desires, and any concerns you may have.

For GPs reading this, I highly encourage you to take responsibility for meeting with your firm’s platform professionals (and investors) at least annually, if not more frequently, to have these important conversations.

Whether you're approaching an annual review or feel your role and compensation need re-evaluation, below is a two-part framework for navigating these conversations with confidence and increasing your chances of achieving your desired outcomes.

1. Communicate your Impact

Begin by clearly communicating your past impact, and how you have provided leverage by executing top priorities aligned with driving fund returns. Highlight specific achievements and metrics that demonstrate your claims. 

Communicating this impact is its own nuanced journey. But luckily, I have already dedicated an entire piece to this exact topic, which I recommend reading through as you prep for this kind of conversation with your partners.

When approaching this discussion, remember one crucial point: regardless of your various accomplishments throughout the year, what truly matters is the role you've played in impacting your fund's ultimate returns. Frame your perspective of impact through this lens, ensuring it aligns with your fund's needs and your partners' motivations. This alignment with the GPs’ objectives is key to a successful conversation.

2. Have a Clear Perspective 

When entering this conversation, the first thing to determine is what exactly you’re asking for. 

Are you seeking a raise? Are you asking for carry? Do you already have carry and feel you deserve more? Do you feel like your compensation when hired was below market and you haven't yet had the opportunity to voice your feelings?  Have recruiters been calling you for roles at competitive firms that you don't want to take, but feel tempted by higher salary offers?

As you reflect on these questions, consider the following:

• Responsibilities: Has your role expanded significantly? Has the makeup of your team changed? Have you taken on new responsibilities and made a bigger impact than you initially thought possible?

• Fund Dynamics: Have the dynamics of your fund changed? Whether you're actively fundraising or have recently closed a new fund, your team may have more budget and resources to allocate based on your performance.

Whatever the context, it’s crucial to have a clear perspective on why you’re having this conversation.

If you identify with one of these scenarios and the timing is right to advocate for a change in compensation, be prepared to discuss both immediate and long-term incentives. A few points we have already addressed above that it is worthwhile to remember:

1. Lean on data to support your case. 

2. Be realistic and fair in your expectations.

3. Your argument should align with your team's equity structure (more on this below).

4. Finally, outline your vision for growth. This is your opportunity to communicate what you plan to achieve in the coming year and set the roadmap for future conversations about your impact and compensation.

Fairness in Compensation Across the Team

The question of VC platform compensation versus investor compensation at a fund is a hotly contested one. To me, what's crucial is that firms approach the compensation of all team members through a lens of fairness. This doesn’t mean that everyone should receive equal salaries or carry allocations, but rather that compensation should be determined based on an understanding of the proportional impact each role has on the fund’s overall objective of delivering outsized returns.

This perspective parallels how I advise portfolio companies to handle compensation. I wouldn’t expect a portfolio company to pay their CTO, CFO, and Chief Revenue Officer the same - they play different roles, have varying educational and professional backgrounds, and experience different market demands. It is expected that the CRO will earn significantly more in cash than the CTO; however, the CTO may receive a more substantial equity package. This is considered industry standard. The key is that all these leaders receive competitive cash salaries and equity and feel aligned as one team building towards one unified objective.

For VC funds, my perspective is the same. This means that if Vice Presidents on the investment team receive carry in the fund, then your platform Vice Presidents should also receive carry (ideally at a somewhat similar level). From a cash perspective, while the salary difference between investors and platform personnel may range from 20% to 50%, your investment team should not be earning double the salary of a peer on the platform team with comparable career tenure and impact on the fund.

Dig into the data

You are now equipped with the intricacies of VC economics, the complexities of VC compensation, and the nuances of advocating for your worth in this industry. Bravo!

With this knowledge as your new tool, I encourage you to dig deep into this year's VC Platform Compensation survey which was just released. For those of you who know me, you know that one of my proudest achievements throughout my involvement with the VC Platform Community was developing and expanding this survey which we started publishing in 2017.  This year’s report is the best one yet featuring data from nearly 700 participants.

On behalf of the entire industry, I want to share my heartfelt gratitude to Erica Amatori and Anna Ott who led the effort on this year’s report alongside Josh Goodfield, Dan Holahan and the team at Sequoia Consulting. I can tell you from experience just how much work this requires. This report is such a valuable asset to the industry and brings to life all of the concepts I shared above.

Here are some highlights of the report:

And here’s the link to dive in and review the entire report:

Remember, the key to success in navigating VC platform compensation lies in your ability to articulate your value, understand the broader context of your firm and the industry, and approach negotiations with confidence and data-driven arguments. Whether you're just starting in your VC platform role or looking to reassess your current compensation, the insights and strategies we've discussed should serve as a solid foundation.

As the VC industry continues to evolve, so will the compensation structures and expectations of the platform role. Stay informed, continue to network with your peers, and don't hesitate to advocate for your worth.

This post is brought to you with the help of Yaffa Abadi of Abadi Brands, a premier personal branding firm for leading executives and VCs.