How should a fund's management fee and carry be structured to align GP and LP interests?

Chamath Palihapitiya · Jul 13, 2020

Venture funds should run on budget-based fees rather than a flat percentage, with transparent disclosure of what partners pay themselves

If compensation were transparent, entrepreneurs would demand that investors pay themselves no more than the CEOs they back, which is reasonable, and investors would only make money by actually helping build successful companies

48:06 20VC: Chamath Palihapitiya on Why IPOs and Direct Listings Are Broken, Turning Social Capital Into A Combination of Berkshire Hathaway, Koch Industries and The Red Cross, Why Forecasts Are Worthless, What Creates True Defensibility & Why You Have To Be Pr

Nick Chirls · Sep 6, 2024 · hedged

A budget-based system is a better alternative to the standard fee model, and few VCs would be confident enough to do the job if they had to pay back management fees when they made no money.

Scope: offered tentatively as an answer to 'what's better'

8:20 20VC: Why VC is a Ponzi Scheme Today | Why Most VCs are Bankers | Why Big VCs Ruin Startups | Why Incentives in VC are Broken | Why American Dynamism is a Tool for VCs to Raise Money with Nick Chirls, Asylum Ventures

Nick Chirls · Sep 6, 2024

GPs should build a budget to hire the best talent, present it to LPs, and take not a single dollar above it.

He does this at Asylum — taking no salary and putting every dollar into hiring and building the firm — so it is practicable

10:18 20VC: Why VC is a Ponzi Scheme Today | Why Most VCs are Bankers | Why Big VCs Ruin Startups | Why Incentives in VC are Broken | Why American Dynamism is a Tool for VCs to Raise Money with Nick Chirls, Asylum Ventures

Semil Shah · Nov 21, 2022

Offering preferential fee or carry terms is acceptable only to get a first fund off the ground, and should not carry into future funds

It can set a weird precedent over time, but if you never get the plane off the runway there's nothing to talk about

Scope: Semil has never done it himself; survival case only; move away once stabilized

29:27 20VC: Semil Shah on The Biggest Mistakes VCs and LPs Made Over the Last 24 Months, Why LP Churn is Coming, Core Lessons on Scaling from $1M Haystack Fund I to Today and How To Find, Win and Manage LPs as an Emerging Manager

Harry Stebbings · Nov 21, 2022

Gating preferential terms to a single fund is the right approach but very tough to execute in practice because of the precedent it sets

Once given, the precedent persists into future funds

30:14 20VC: Semil Shah on The Biggest Mistakes VCs and LPs Made Over the Last 24 Months, Why LP Churn is Coming, Core Lessons on Scaling from $1M Haystack Fund I to Today and How To Find, Win and Manage LPs as an Emerging Manager

Taavet Hinrikus · Apr 28, 2025

Charging a 2–2.5% management fee does not make sense because it fails to align GPs with investment outcomes

Fee income is decoupled from whether the fund actually produces outcomes

0:00 20VC: VCs are Spreadsheet Monkeys and are Commoditised | Why Fees and Carry Misalign GPs and LPs | Why Founders Will Realise Multi-Stage Funds Damage Seed Rounds | Why We Need European Sovereignty More Than Ever with Taavet Hinrikus

Taavet Hinrikus · Apr 28, 2025

Charging a 2–2.5% management fee does not make sense and fails to align GPs with outcomes; funds should charge roughly half that.

Fees paid regardless of outcome don't tie GPs to results, and a lower fee frees capital for more investments — two extra deals in Fund I, likely four in Fund II — which means more shots on goal.

Scope: Plural still pays its team and five GPs well, just not ridiculously

14:52 20VC: VCs are Spreadsheet Monkeys and are Commoditised | Why Fees and Carry Misalign GPs and LPs | Why Founders Will Realise Multi-Stage Funds Damage Seed Rounds | Why We Need European Sovereignty More Than Ever with Taavet Hinrikus

Taavet Hinrikus · Apr 28, 2025

People in venture should not make a lot of money simply for deploying capital; they should be paid extremely well only once DPI is delivered.

Just as in startups you want to hire people desperate to build rather than those chasing the biggest salary — and reward them richly through equity if it works (as with Wise, where early support agents made a million dollars) — venture teams should earn their upside through outcomes.

15:44 20VC: VCs are Spreadsheet Monkeys and are Commoditised | Why Fees and Carry Misalign GPs and LPs | Why Founders Will Realise Multi-Stage Funds Damage Seed Rounds | Why We Need European Sovereignty More Than Ever with Taavet Hinrikus

Oren Zeev · Feb 2, 2026

GPs should structure radical alignment with LPs — taking no personal income from management fees and seeing nothing until LPs have their capital back

Being the largest LP in every fund plus 30% carry means ~40%+ of the economics, so he is incentivised to optimise long-term value for LPs rather than to shortchange himself as an LP; it is substance over appearance

Scope: only feasible because he has no team and no expenses

39:47 20VC: 50% of Funds Will Go Out of Business | Why Growth Expectations Today are BS and Will Not Last | Why Oren Zeev Takes $0 Management Fees But 30% Carry | Why GPs Should Not Tell LPs Their Strategy

Harry Stebbings · May 8, 2023

The venture capital product is structurally broken, with deep misalignment between GPs and LPs

The fee-and-carry model makes large-fund GPs NBA-player money regardless of performance, while LPs get no carry in their own vehicles and are optimizing not to get fired

49:02 20VC: Why VC Subsidizes the Wrong Type of Business, Why Capital Gains Tax is Crazy, The Biggest Misalignments Between VCs, Founders and LPs, Why Business Model - Product Fit is as Important as Product-Market-Fit with Chris Paik @ Pace Capital

Taavet Hinrikus · Apr 28, 2025

The misalignment in venture is a fault of the model rather than of individual GPs — blame the game, not the player.

GPs are playing the incentives the industry sets; as the industry evolves things may change.

Scope: says it goes both ways

16:48 20VC: VCs are Spreadsheet Monkeys and are Commoditised | Why Fees and Carry Misalign GPs and LPs | Why Founders Will Realise Multi-Stage Funds Damage Seed Rounds | Why We Need European Sovereignty More Than Ever with Taavet Hinrikus

Hunter Walk · Jan 30, 2023

There is nothing wrong with management fees; the real question is whether a firm is built to maximize fees, because that choice dictates many other decisions

The alternative is building a model at the intersection of success and happiness and accepting the short-term implications

18:21 Fees themselves are fine the real question is whether the firm optimizes for fees or for returns

Semil Shah · Nov 21, 2022

Selling a slice of GP carry to a large anchor LP can be worth it for a single fund if it buys scale, brand and network, but it becomes a real problem if it runs in perpetuity or spreads to the rest of the LP base

The jet fuel to get off the ground is more expensive; the danger is other LPs demanding the same terms and the arrangement never ending

30:30 Selling carry to an anchor lp is worth it for one fund but risky if perpetual or extended fund wide

Harry Stebbings · Nov 21, 2022

Fund managers shouldn't take carry kickers; a 5-6x fund already makes you plenty of money and institutions appreciate the restraint

Not being greedy on terms earns goodwill with institutional LPs

31:30 Avoiding carry kickers signals restraint that earns institutional lp goodwill

Semil Shah · Nov 21, 2022

There is no need to deviate from standard two and twenty fund terms

The best-run funds, like USV, simply do standard two and twenty on every fund

31:48 Standard two and twenty terms are sufficient and used by the best run funds

Hemant Taneja · Sep 22, 2025

A venture firm's incentives should be built around carry and performance rather than fees, and distributing fee income to partners is a distraction that creates pressure for ever-bigger funds

If partners can take bigger distributions from bigger funds, they will want bigger funds; reinvesting all fees back into the business keeps the focus on the highest-risk, highest-reward early-stage work

62:34 No fee distribution prevents pressure for bigger funds

Hemant Taneja · Sep 22, 2025

Paying partners below-market salaries is a useful filter rather than a recruiting risk — the right partners choose performance and value creation over rich, fat, happy salaries

If you deliver on your dream at GC you'll make more money than anywhere else, but incentives must be aligned to performance, and a salary-focused culture is not the culture GC wants

63:56 Below market salaries filter for performance driven partners

Nick Chirls · Sep 6, 2024

Every private asset class has its own version of a Ponzi scheme, and venture's is that a GP collects 2% management fees for ten years and puts roughly 20% of the fund in their pocket without having to return a single dollar.

The fee structure means compensation is decoupled from performance, which is the main driver of incentives across the industry

6:44 Fee model decoupled from performance is a ponzi scheme

Harry Stebbings · Sep 6, 2024 · hedged

If pay were clawed back for missing targets, almost nobody would take the job — the same logic applies to any profession, not just venture.

He would have zero applicants at his door if he only paid on delivering a 3:1 LTV/CAC with repayment otherwise

8:33 Clawback based pay would empty the talent pool

Chris Paik · May 8, 2023

Management fees were never intended to stack across multiple closed-end funds at ever-larger sizes, which is a core LP–GP misalignment.

Hedge funds charge fees on large AUM but have redemption mechanisms; closed-end venture funds have no such mechanism, so capital and fees cantilever structurally.

56:56 Management fees were never meant to stack across multiple closed end funds unlike hedge funds with redemption mechanisms

Chris Paik · May 8, 2023 · hedged

Cross-fund carry clawback plus rationally budgeted management fees would genuinely align GP and LP incentives.

If losses in one fund could be clawed back against carry from prior funds, GPs would bear real consequences rather than accumulating fees across funds.

57:59 Cross fund carry clawback plus rationally budgeted fees would genuinely align incentives

Chris Paik · May 8, 2023

Cross-fund carry clawback cannot exist today because LP supply and demand doesn't support it; it would require significant dislocation in the LP ecosystem.

The current state of supply and demand in the LP ecosystem doesn't clear that bid.

58:18 Cross fund carry clawback is infeasible today given lp supply demand dynamics

George Zachary · Oct 12, 2020

Once fund sizes grew large enough for managers to live off management fees, GP incentives diverged from LP incentives and the industry started thinking of itself as an investing business rather than a returns business

Living off fees removes the dependence on returns, so the mental model shifts to check writing

12:13 Large management fees let managers live off fees shifting the industry from a returns business to a check writing business

Jake Gibson · Jul 14, 2023

Most managers who take full fees are not actually reinvesting them in their firms — they could pay themselves large salaries and still have plenty left to build with.

With a $300M AUM fund's 2% fee, two partners could take $2M salaries each and still have $2M for firm building, which is a lot of money

17:43 Full fee collection without reinvestment in the firm reveals misalignment

Harry Stebbings · Jul 14, 2023 · hedged

Declining full management fees is short-sighted, because that capital can be invested in the firm at a more efficient rate and deliver outsized returns.

Investment in the firm itself compounds at a higher rate than the fund capital would

17:31 Taking full fees to reinvest in the firm compounds at a higher rate than declining them

Stan Boland · Apr 10, 2025

Fee and carry terms should be split differently across LPs in the same fund rather than fought over uniformly — e.g. pension funds pay 0.5% with higher partner carry while BBB pays 3% with lower carry, netting out to two-and-twenty

There is too much hand-wringing about pension funds refusing 2% fees; the job is to bring capital in and mesh it with public money to mint large funds

29:01 Differentiate fee and carry terms by lp type rather than uniform terms

Roger Ehrenberg · Feb 19, 2024

The durability of two-and-twenty will be a function of performance: differentiated managers will keep charging premium fees while commoditized late-stage and pre-IPO strategies see fee compression

Venture will normalize like the hedge fund industry, where the very best funds charge exorbitant fees and still outperform after fees, while big asset gatherers compete down to 1-and-20 or lower

12:32 Fee durability tracks performance like hedge funds best managers keep premium fees commoditized strategies see compression