"First, the Chief Partner cannot be fired without his/her consent. Every other partner at a VC firm can be, including the ones who have worked hard to earn pieces of the management company. So, a partner at a venture firm is usually an employee-at-will. They can be fired at any time."
and this:
"I want to point out that this type of ownership structure is usually the norm in other asset classes."
But then they do it this way (edit: pitched as "why we are better for you"):
"when Eric joined the management company, he received his shares for free. So, we are equal partners and equal owners."
What is lacking here is some data highlighting how typical the practice is of partners being able to be fired "at will" edit: and how many firms deviate from the practice of "every other partner can be fired". How often does that happen? The OP points out that they don't do it that way (at least not with the two partners mentioned). So what percentage of VC firms operate in a similar way?
Also, how typical is it even if it is this way for a partner to get fired because business is bad? If you were from Mars and learned about speed limits you would think you get a ticket for going 56 mph in a 55 zone. But of course that is accepted to be a rare event.
It's possible that overt firing may be rare, but what would amount to constructive termination wouldn't be (I assume all you have to do to constructively terminate a VC partner is to veto their deals at partner meetings); I've talked to VCs who left larger funds to start their own, and perhaps stuff like that is why.
Until reading this, and assuming true, I was always impressed with someone who was a "partner" at a VC firm. Thinking of it similar to being a partner at a better law firm vs. an associate. Associates leave if they don't make partner (used to be 7 years but that has changed obviously).
(I mean I was probably 10 when I found out that at a bank everyone is a Vice President.)
1. Investing in the best funds is competitive for LPs. Top funds often have more demand for investment than the fund will accept, so the partners have greater leverage to dictate terms. It's like an entrepreneur having multiple term sheets.
2. The big bucks come from fund returns, not management fees. In this sense, LPs and partners are highly aligned, since 80% of those returns go to LPs (assuming a 20% carried interest fee - obviously this varies by fund).
Wait, didn't Kauffman suggest that many funds were getting most of their returns from fees? That the fee structure was encouraging the creation of huge funds so that partners could profit from those fees, despite the fact that larger funds are harder to invest well? That most funds are underperforming the market?
Kauffman's portfolio included Bessemer, Benchmark, and General Atlantic, among others. They weren't talking about shady funds.
If you really are expecting to get a giant locked-in chunk of your return from fees, than the interests of partners and the "chief partner" are not necessarily aligned.
No, Kauffman simply said returns were lower for big funds and generally higher for small funds. But it doesn't really matter - most funds actually pay management fees back to LPs before they're allowed to generate carried interest.
For example, if a fund earns $10M in management fees, it would pay back that $10M from the first returns generated by the fund. Then, only after getting "breaking even," would the partners earn carried interest. If the fund doesn't hit that watermark, it loses money for investors.
There are exceptions, though most of the industry has moved this way.
Personally, I don't put much weight into it. It's conclusions are heavily skewed by the decade after 2000, which destroyed returns for most investing asset classes. (Despite the report's claims that it covers "20 years" of funds, most charts and examples, esp about mega funds, are recent).
Little known fact: most funds pay back management fees with initial investment returns. Partners earn carry after the fund breaks-even. You can't jump into VC and make millions without delivering returns.
Many people were able to raise $100-400M funds during the 2003-2007 time period, and thus their management fees were $2-8m per year. That can make several people millionaires over the course of the fund life. Most of these funds did not have good returns.
As an interesting aside, I'm pretty sure the technique used in this related post: [1] is how the press figured out that Romney was involved in Bain Capital after his supposed departure in 1999.[2]
The 2-and-20 structure is well known, but the management company details were fresh for me.