Who makes more money: Founders or VCs?

Need help with your startup’s bookkeeping, finance, or taxes? Visit Kruze to see if our team can help you! [ Ссылка ]

First, let's just talk about like the direct compensation structure for each group. So venture capitalists, they get, they make money in two different ways. The first is, either a fee stream from a fund they manage, or if they're not, that's like the main directors and the people who like own the fund and own the operating company that manages the fund, or if they're just an employee, you know, they still could be a partner, or a principal, or associate at the fund, but they are getting a paycheck, they're getting a salary. So, that's the first kind of cash component. The second component is what's called carry, and I've covered this in another video, so you can check that out, but basically, it's the profit sharing that comes with the fund. When the fund returns all its capital, and now, both the managing team of the fund and the investors in the fund start splitting the profits from that point on.

And the average carry's usually 20%, but there's a lot of superstar funds out there that get like 30% carry, so you can imagine every, you know, every $100 of profits, $80 goes to the limited partners and $20 goes to the management team. And so that can be very, very lucrative. If you have a Google, or a Facebook, or what's happening nowadays, there's tons of awesome exits. The carry in the venture capital funds is worth a ton.

Now, it is important to note, that the typical fund arrangement, like around year five, when like the active investing time has ended, the fee stream will actually go down, so it's not as high as a typical fee stream when a fund first starts. Okay, so that's the venture capital side of the equation. The entrepreneur side of the equation, this is not pretty at first. Most entrepreneurs or startup founders make very, very little money in the early years. They usually are successful building up their salary, as they start raising more and more money, and the company makes more progress.

Venture capital has developed, it's a more mature ecosystem. And this is something that VCs compete upon, you know. Like, are you going to take the term sheet from the venture capitalist, who wants you to starve and not pay your rent or worry about that kind of stuff, or are you going to take it from someone, who's a little bit more generous and has a longer view and wants you to build the company, so that everyone's successful? The choice is pretty obvious.

And, you know, you hear about venture capital funds that invested in Google, Facebook, many other awesome companies these days, having 10x funds, 20x funds, like that is a huge return on the capital investing. And because they're participating at a 20 or 30% level on that profit, like, they're going to make a lot of money. So, I would say, risk adjusted, venture capitalists probably make more money, but for those founders that do really, really well and are the lucky ones that get through, lucky and skilled, right, nothing's luck, nothing's 100% luck, nothing's 100% skill, right, we all have luck in our lives. Those people end up being billionaires, and flying around in private jets, and owning lake front property or ocean front property in Hawaii, right? They're the ones doing incredibly well. And one other trend that's helping entrepreneurs kind of level this, you know, with VCs making more money in the short term versus entrepreneurs, is the popularity in secondary sales. So, you know, this is happening more, a secondary sale is when a founder sells a little bit of their ownership in a round, so that they can take a little bit of money off the table, and again, focus on the long term, and build the company, and create value for everybody.

And so venture capitalists have gotten more comfortable doing, you know, like $1,000,000 secondary at Series A or Series B, still pretty early in the company, like no one knows if it's going to be successful or not at that point. But the VCs are going for two things, A) they want the entrepreneur focused and looking long term, and they also, frankly, probably want a little bit more ownership in the company. It's a good way to increase your ownership percentage. So, we're seeing that quite a bit more often. Probably the most famous example of this, is Mark Zuckerberg at Facebook was able to sell, I think it was $1,000,000 to Accel when they funded Facebook.

But also just remember those monetary things, they're actually really important, and are important source of satisfaction in your life. If you have any questions on this, hit us up at kruzeconsulting.com, whether it's about founder salaries, or VC equity splits, or anything else that you might have a question on. Thanks.

свернуть