> Now, fast forward to when the fund is over; most funds have a 10-year life with two or three 1-year extension periods. Assume that all of the $140 million in

> Now, fast forward to when the fund is over; most funds have a 10-year life with two or three 1-year extension periods. Assume that all of the $140 million in interim marks proved ephemeral and all of the companies that comprised those marks proved to be worth no more than the paper this post was originally written on. In our last example, the fund generated only $60 million in total returns on a fund of $100 million, but the GP distributed $12 million to itself back when the prospects for the fund were looking up. In this case, the GP has over-distributed to itself and is subject to what’s called a “clawback” — the money needs to get returned by the GP to be distributed to the LPs. That sucks, but is fair in that the GP never would have been entitled to that money had it waited to distribute the $60 million until the fund was over. I find this to be an interesting divergence from a typical hedge fund. For a hedge fund the end of year number is everything. For instance if you start the year with $100 million in assets and finish the year with $110 million even if none of the gains are realized, then under a 2 and 20 model you keep 2 million for your bonus pool. Next year if you end up down such that you end up back at $100 million you don't give back the previous 2 million in performance fees, that's a completed transaction. Now some funds have a high water mark, which means you don't earn performance fees again until you get above your previous year end high, but not all funds have such a requirement. It must be tough for VC funds to pay out bonuses when you can't really claim realized gains until after the entire fund is closed. I guess this leads to a focus on two things: 1) the management fee to help smooth cash flow over, which means most VC funds probably wont' lower their management fee and additionally this may incentives the VC to try and raise as much as possible, even if this excess capital might be a drag on returns. This focus on management fees does happen in the hedge fund world, but I know quite a few funds that only take 1% or 0.5% as a management fee and take a larger portion of the gains 30% in return. 2) This benefits established funds as they'll have retained earnings from previous funds to help pay key people for their work on a current fund while its waiting on cashing out its returns. Especially important in today's environment of companies staying private longer.