I left a VC firm 3 years ago and am now back in the game. I am being offered a partnership at a boutique non-traditional firm located in Milwaukee WI. (My friend is a partner there)
Here is the issue, there will be no salary, no bonus, and no carry but a lucrative compensation upon successful exit of the portfolio companies.
What worries me is that the firm does not charge a management fee. (how does it pay its bills?)
The firm's equity position is pretty weak, it only takes a 11-13% equity position upon successful funding.
My concern is that if the firm has a low equity position, it will never be able to enforce an IPO or acquisition meaning no profit or revenue if the entrepreneur decides otherwise.
Should I proceed and take the risk? (the buy in is 80K at 6% giving a valuation of $1.33 mill) The upside, there are 3 very promising companies in the current portfolio.
Thanks!
William
This is the oddest structure for a venture firm that I've ever seen. What's the funding source? Are there traditional LPs? What exactly is "lucrative compensation upon successful exit of the portfolio companies"? If there's no carry how are you paid a % of the profit?
Well I would not say lucrative, but I would receive 6% of the 11% percent equity position. Let's say the portfolio company exits at 40 million, I would receive $264,000. The funding source is pretty much angel investors and institutions.
The LPs get paid based on their ownership in the company. I heard from my friend that they used to co-invest but recently stopped. It is really confusing to me because this the first time I have every seen a firm like this. The LPs were successful entrepreneurs who have successfully sold their company and made over 10 millions, which is how they are able still survive.
Should I take this deal or no?
None of this makes any sense. First off, if you aren't being paid, how the hell are you gonna live/pay rent/food/etc. Exits (on average) in venture capital take 5-7 years. That means you won't receive a single DIME for 5-7 years.
If what I'm understanding is correct, it sounds like the LP's all invested into a "fund" and sometimes co-invest as well. It sounds like you have to contribute 80k in order to get a 6% equity stake in the fund. And essentially you are going to be running the fund (and making investments on behalf of the fund) and you are saying you basically get a 6% equity stake if the fund takes a 11% position, which makes no sense cause that is the same as you saying you have an effective equity ownership level of 55% (as opposed to 6%).
Frankly speaking, taking an 11-15% equity position is perfectly fine. Assuming you guys can invest pro-rata and also work in traditional VC terms into deals (i.e. liquidation preferences, board seats, drag-along rights, etc.) owning 11-15% of a company is a pretty sizable equity stake and it should give you decent control. Just because an entrepreneur doesn't want to IPO or exit, doesn't mean your fund can't liquidate its equity holdings through a secondary sale on the private market and/or extract capital through a leveraged recapitalization. Additionally, assuming you have 11-15% equity stake in the company, you'd probably have other investors whose interests are aligned with your own so overall you guys should be able to have more leverage over the entrepreneur.
If I had to be blunt, this doesn't make any sense what you're saying and the fact that you don't understand this is pretty concerning as well.
Agree with the above, though his math is off. The OP is getting 6% of 11% so effectively .66% of the proceeds of every exit. This is the strangest structure for an investment firm I've ever seen. You and your partner are basically doing all the legwork for no fee and getting a disproportionately small amount of carry. Every other VC would charge 2% of the fund per year as a fixed fee and 20% of whatever profits you generate. Assuming you and your partner are equal partners in the fund you should get 10% of profits. Unless you are extremely positive about the portfolio and have the net worth to survive on nothing for over 5 years I wouldn't go near this thing.
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