what do these VC terms mean?
I'm interviewing for a VC fund that has the following terms
Term: Evergreen
Fee: 20% high water mark
I tried googling it but still don't really understand it, could someone explain what these mean please?
From what I can see online
Evergreen: basically the fund never ends? there is no end date and investors can pull their money out whenever they want? Surely this wouldn't work in a VC
high water mark: I really don't understand this, it basically fucks over the VC and is the best thing ever for the LP? the VC fund needs to beat it's previous year's return to earn a fee? surely this is just an impossible way for the VC to earn fees
the fund doesn’t have a dated investment horizon. there are a whole bunch of agreed upon stipulations for profit distributions, redemptions, etc. the main point is the fund doesn’t take a bunch of money in and distribute all the principal + profit every X years then start a new fund and do it over again. many vc funds are already 7-10 years (longer than PE) bc you need time for your investment to go from $10 ARR to $500. the perk for this in VC is that you’re not handcuffed by fund life if you have an investment you think is going to the moon but your fund life is ending. PE funds use continuation vehicles or roll it between funds, but buyout funds are generally trying to flip vs hold whereas VC is holding till it goes to 0 or has an exit (generally).
if i give you $100 and you turn it into $200 in Y1, i owe you $20 for your 20% fee. in Y1 the value drops to $75. you get no performance fee. if in Y3 you turn it into $150, you don’t get anything with a high water mark. otherwise i would be paying you $20 in Y1, $0 in Y2 and $15 in Y3, so $35 total. over the whole horizon you grew my capital by $50 so a $10 fee. if not for the high water mark you would get money for the profits in Y1 AND for bringing the investment back up out of the red when in actually i haven’t made the profits commensurate with your fee.
addendum: these two things go together. in a dated life fund, the value that matters is the end. in an evergreen fund where you are making distributions every quarter, year, 5 years, whatever, the high water mark is used to stop the aforementioned situation.
This is very helpful thanks for this.
On the Evergreen, 1) does this mean the VC fund will never launch a new second fund and instead the first fund will just be there forever until the VC fund closes down when the partners retire? and 2) does this open structure also apply to initially investing into the fund as well e.g. would it mean LPs can invest into the VC fund anytime e.g. one LP invests into the fund today and then another invests into the same fund 3 years later
On the high watermark this is nicely explained thanks. In the top line, did you mean to say.. in "Y2" the value drops to $75.. instead of "Y1"?
Out of the fee structures which is normally more profitable/better for the VC fund and which is better/cheaper for the LP investing into the VC fund? E.g. traditional hurdle fees or a high water mark?
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