What your investors’ remuneration says of their priorities
Raising funds transforms the life of a startup, but also profoundly changes the balances between its stakeholders. Behind each investor in development capital or venture capital is a management company, whose remuneration depends closely on your performance. Understanding how these structures earn money makes it possible to better understand their priorities, their behavior in board, their expectations in terms of reporting, and sometimes their exit decisions.
This model is based on three separate pillars, starting with the management committee, which finances the functioning of the company; The Carried Interest, which rewards performance; And transaction costs, often less visible but sometimes sources of tension. For an entrepreneur, knowing these springs is better preparing to dialogue with his investors. It is also to understand that, behind the promises of accompaniment, are played out of very precise economic dynamics.
The management committee is what makes the machine run
The first source of income for a fund is the management committee (Fee management). It is deducted each year from the capital engaged by investors, around 2 %, and is used to finance the operation of the management company, namely the salaries of the teams, audit costs, compliance, trips, fixed charges.
For you, founder, this means that your investor is not paid to make you grow, but to manage a wallet, even if it does not make no added value. This remuneration is however called upon to decrease, after the investment period (often after 4 to 6 years), the calculation base is reduced to the capital actually invested. Suffice to say that it is at this point that the pressure on performance increases.
The Carried Interest, where the essential is played out
The second lever is the one that makes you dream and sometimes cringe. The Carried Interest, or carriedis the share of capital gains that the management company can capture if the fund exceeds a certain profitability threshold (the HURDLE RATE).
Concretely, if a fund invests 100 million euros and resells its participations for 200 million, the added value of 100 million can be shared at 80/20: 80 million for investors, 20 for the management team.
For your business, this means that your growth, and especially the success of your exit, directly conditions the variable remuneration of your investor. THE carry is neither automatic nor guaranteed, it depends on the exit timing, the value of valuation, and the overall arbitration of the portfolio.
Transaction costs, between technical remuneration and tensions
Certain management companies also receive transaction costs when acquiring or transferring a company. They compensate for the work of analysis, structuring and negotiation of the deals.
These costs can represent a marginal source of income, but they are sometimes poorly perceived, in particular by entrepreneurs who discover them at the bend of an audit. Increasingly, institutional investors require that these costs be partially or completely donated to the fund, in the name of transparency and alignment.
How does the logic of the fund influence your room for maneuver?
The investor remuneration scheme is not neutral. It structures their behavior throughout the life of the fund. An investor at the start of the cycle may favor more risky acquisitions, while an investor at the end of the investment period will seek fast and rewarding outings.
This influences:
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- The way they get involved in governance (strong at first, more distant afterwards);
- their reactivity in the face of additional financing needs;
- Their desire to support a long project against short -term return logics.
In addition, most managers must invest personally in the fund, often up to 1 to 2 % of the total raised. This co-investment strengthens their involvement, but also makes them sensitive to the aggregate performance of the portfolio. Your company is therefore evaluated in a set where arbitrations can exceed its trajectory.
An asymmetrical system, dominated by a few funds
Finally, it should be remembered that this model is very selective. Some management companies capture most of the Carried Interest worldwide. For the others, poor performance on a fund can compromise the next lifting, or even the very survival of the investment fund.
This pressure explains certain practices, starting with a rapid deployment of capital, the search for deals with high valuation, or even a standardization of the processes. This should not disqualify the proposed support, but invites to scrutinize the real incentives of each interlocutor.
Protective clauses: secure performance before sharing it
Beyond their direct remuneration, management companies structure their participation with a series of contractual clauses aimed at regulating the risk and we will return to this particular point. Among the most significant is the preference liquidation (Liquidation preference), which guarantees the fund to recover primarily or part of its initial investment, or even a multiple of it, above all shares with the founders or shareholder employees.
For example, a non -participating 1x preference assures the investor to recover at least 100 % of his contribution in the event of an exit below expectations. A participating preference allows him, in addition, to benefit from a proportional part of the remaining gains. Other clauses such as anti-dilution ratchets, veto rights, or joint outing clauses (Drag-Along) often complete this framework, by offering investors additional control and protection levers.
For the founders, these devices are not neutral. They influence the effective distribution of capital in the event of exit, modulate long -term incentives, and can create significant differences between perceived valuation and the value actually captured by the founders. Their weight in the equation is all the more important since the exit scenario moves away from the “best case”.
Better understanding to better negotiate, at the right time and on the right levers
Knowing how your investors are paid is to understand what guides their decisions at each stage of the relationship. Because this remuneration is not played in absolute terms, but in a precise time frame. Are you their first investment or the tenth? Is the fund in the active deployment phase, or already close to its liquidity period? THE Carried Interest Is it already in sight, or far from being achievable?
Your place in the portfolio also counts. A fund that has already secured several successes may be more patient or daring. Conversely, a fund in difficulty or at the end of the cycle could seek a quick exit, to the detriment of a long -term development plan. In some cases, the risk profile that you represent, innovation of rupture, long sales cycle, dependence on the economic situation, can be amplified or attenuated depending on the economic pressure that the fund undergoes at that time.
In short, raising funds is not only to convince an investor that your project is solid. It is also a question of understanding in which economic logic itself is, when you enter its strategy, and what type of value, immediate or delayed, it expects from you.
