> Conway also believed his former partner to be paying himself far and above the fund’s $250,000 annual salary cap by skimming off of SV Angel funds through a t

> Conway also believed his former partner to be paying himself far and above the fund’s $250,000 annual salary cap by skimming off of SV Angel funds through a technique known as a fee waiver, a fairly common way for fund managers to cover the costs they are expected to invest upfront. Can anyone clarify how this would be considered skimming? Here's a definition of a Fee Waiver from Mondaq.com: A management fee waiver or conversion is a strategy whereby the general partner or management company of a private equity fund "waives" the management fee (often up to 2 percent of assets or committed capital per annum), which would typically be paid quarterly and treated as ordinary income for tax purposes, in exchange for an increased "carried interest," which often qualifies for long-term capital gain treatment. In many cases, the receipt of an additional carried interest pursuant to a fee waiver can be used to satisfy the general partner's capital contribution obligation. The key to the strategy is to change the management fee, which is unconditionally payable, into a payment that is conditioned upon future profitability of the fund. However, that does not necessarily mean that the fund has to have an overall net profit for the general partner or manager to earn the waived fee. In many variants of the strategy, the additional carried interest obtained as a result of the waiver results in a priority allocation of the fund's profits from certain investments and/or during certain fiscal periods, unlike the basic carried interest. In these cases, the general partner can realize some carried interest (and, effectively, some portion of the "waived" management fee) even if the fund has a net loss at the end of the overall investment lifecycle. If the structure is upheld, a management fee waiver effectively allows the general partner to largely convert ordinary income (management fee), currently taxed at a maximum federal rate of 35 percent, into capital gain, currently taxed at 15 percent. There also may be a deferral benefit — delaying current taxation on the waived management fee income and pushing the tax to later years when the gains that produce the additional carried interest are realized. Limited partners who are individuals may also avoid limitations that might otherwise apply to management fee deductions. Finally, the waived amount is categorized as a "profits interest," which is not subject to employment taxes, whereas management fee income generally is. For New York taxation purposes, there is no rate differential between ordinary income and capital gains, although there could be a deferral benefit. In addition, some non-resident general partners who waive their management fees take the position that no New York income or New York City unincorporated business tax is due on the additional carried interest.