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No, that money doesn't go directly into the partners' pockets. It also goes to pay the VC firm's rent, travel cost, salaries of associates and support staff, l

No, that money doesn't go directly into the partners' pockets. It also goes to pay the VC firm's rent, travel cost, salaries of associates and support staff, legal/accounting costs associated with the deal, and a bunch of other things. It is generally accepted that a vast majority of a VC partner's income comes from their share of the fund's return, not from the management fee. It is not unheard of for a VC firm's costs exceed the management fee, such that the partners loose money unless the fund has a positive return.

patio11 15y ago
legal/accounting costs associated with the deal Industry standard practice is that startups pay for costs associated with deals, not capitalists. That one is virtually universal. The grapevine tells me that it is not uncommon to see VCs travelling as board members. Some of them don't exactly fly coach.
- staunch 15y ago
  The management fees do pay for the swanky offices, assistants, expensive meals, strippers, golf, computers, very significant travel expenses (unrelated to board meetings), etc. And fees are not necessarily split equally across partners. One senior partner might take 20-50% in some cases.
trevelyan 15y ago
Honestly, why should anyone here care that the VC has to pay rent or salary expenses? Are they eating ramen or living in the office? As a founder, I'm delighted the AirBNB guys are charging for admission to their equity sale. Call the payout back wages paid at market rates and call it a day. And if investors are reacting in shock to the sticker price they can get out of the showroom. Sorry you won't be joining us - perhaps there is a cheaper model you can lease somewhere else?
- philwelch 15y ago
  At 20 million dollars, that would be a rather significant premium above market rates.
  - trevelyan 15y ago
    Early-stage investors aim for a 10x return on capital, yet AirBNB has consistently delivered 15-20x compound annual growth. That makes ten million per founder significantly less than their first few months of foregone salary if you compound the investment at the same rates investors are getting. This guy is getting skittish that 1/100th of the valuation of the company is going in a payout to the founders? That's only 100k over a 10 million round. Seems pretty conservative to me.
    - philwelch 15y ago
      Yes, it does look a lot better based solely on made-up numbers. Back in the real world, there's a 120 million dollar "investment" of which 1/6 is actually a no-strings-attached gift of cash money. That's an atrociously bad deal for the investor, and it's totally sensible to balk.
      - trevelyan 15y ago
        Phil, If the deal doesn't make sense, it doesn't make sense because the company is overvalued. But for a VC to agree that a company is worth X and then complain when 2% of that is used to de-risk founders is hypocrisy: the payout constitutes a smaller percentage of deal value than the VCs charge for allocating capital. Any VC that finds these compensation figures absurd should have balked at the proposed valuation LONG before this point. This is in principle no different than de-risking founders 100k each out of a round valuing their company at over 10 million.
        philwelch 15y ago
        VC's take 2% of invested funds as a fee. The Airbnb founders are apparently taking 1/6 of invested funds as a "one-time dividend". You're not comparing like with like. VC management fees end up being less than 2% of the valuation of the VC portfolio assuming the portfolio earns any money at all. The point of investment is that the money is supposed to allow the company to grow. When 1/6 of that investment isn't even invested in the company, but rather given as a no-strings gift, it's not an investment anymore.
lutorm 15y ago
It is not unheard of ... that the partners loose money unless the fund has a positive return Doesn't that seem reasonable? With the huge potential upside, shouldn't there be an associated risk?

patio11 15y ago

legal/accounting costs associated with the deal Industry standard practice is that startups pay for costs associated with deals, not capitalists. That one is virtually universal. The grapevine tells me that it is not uncommon to see VCs travelling as board members. Some of them don't exactly fly coach.

staunch 15y ago
The management fees do pay for the swanky offices, assistants, expensive meals, strippers, golf, computers, very significant travel expenses (unrelated to board meetings), etc. And fees are not necessarily split equally across partners. One senior partner might take 20-50% in some cases.

trevelyan 15y ago

Honestly, why should anyone here care that the VC has to pay rent or salary expenses? Are they eating ramen or living in the office? As a founder, I'm delighted the AirBNB guys are charging for admission to their equity sale. Call the payout back wages paid at market rates and call it a day. And if investors are reacting in shock to the sticker price they can get out of the showroom. Sorry you won't be joining us - perhaps there is a cheaper model you can lease somewhere else?

philwelch 15y ago
At 20 million dollars, that would be a rather significant premium above market rates.
- trevelyan 15y ago
  Early-stage investors aim for a 10x return on capital, yet AirBNB has consistently delivered 15-20x compound annual growth. That makes ten million per founder significantly less than their first few months of foregone salary if you compound the investment at the same rates investors are getting. This guy is getting skittish that 1/100th of the valuation of the company is going in a payout to the founders? That's only 100k over a 10 million round. Seems pretty conservative to me.
  - philwelch 15y ago
    Yes, it does look a lot better based solely on made-up numbers. Back in the real world, there's a 120 million dollar "investment" of which 1/6 is actually a no-strings-attached gift of cash money. That's an atrociously bad deal for the investor, and it's totally sensible to balk.
    - trevelyan 15y ago
      Phil, If the deal doesn't make sense, it doesn't make sense because the company is overvalued. But for a VC to agree that a company is worth X and then complain when 2% of that is used to de-risk founders is hypocrisy: the payout constitutes a smaller percentage of deal value than the VCs charge for allocating capital. Any VC that finds these compensation figures absurd should have balked at the proposed valuation LONG before this point. This is in principle no different than de-risking founders 100k each out of a round valuing their company at over 10 million.
      - philwelch 15y ago
        VC's take 2% of invested funds as a fee. The Airbnb founders are apparently taking 1/6 of invested funds as a "one-time dividend". You're not comparing like with like. VC management fees end up being less than 2% of the valuation of the VC portfolio assuming the portfolio earns any money at all. The point of investment is that the money is supposed to allow the company to grow. When 1/6 of that investment isn't even invested in the company, but rather given as a no-strings gift, it's not an investment anymore.

lutorm 15y ago

It is not unheard of ... that the partners loose money unless the fund has a positive return Doesn't that seem reasonable? With the huge potential upside, shouldn't there be an associated risk?