Our VC Firm’s Compensation Structure

We often receive word from an awesome person who wants to join our VC firm. For example, I today received an email from someone offering to join as an Associate and to do so without salary. It’s a very kind offer, but Kepha is a partners-only firm. And, we are an equal partnership for the investors.

I thought I’d explain why. This is a long post with maybe too much detail. But behind all this is a particular strategy we have, our deep belief that culture matters to support that strategy, and that compensation is a major driver of culture. It is all linked.

So, here goes:

Our strategy is to build really big companies through a low-volume and high-commitment way. We are not for quick flips. Our two funds are very focused on “venture building.” We want to build real companies that can go public, and we want get involved at an early stage. We invest in only two to three new companies a year and reserve quite a bit of capital from our funds for each one. We want to work with the best entrepreneurs.

As a result of that strategy, I think you could characterize us as a boutique. And, because company building is really hard and takes a lot of experience, we think the best people do that at Kepha are people who already know how to do so. So, we as a result are a partners-only firm and aren’t a fit for an Associate.

Eric is a great example of this. He used to be a CIO at Digital, and then was hand-picked by the founder of Siebel Systems to join there as a senior executive. Eric reported to the CEO and was a GM of a number of businesses at a software company that became the fastest-growing one ever. Eric then became a VC at Atlas for six years. Then, he joined Kepha.

Same with Ed, our CFO.  He was the CFO of six start-ups and took one public. He then became the CFO at North Bridge Venture Partners. He is incredibly experienced and our entrepreneurs really respect his views.

I think Associates can play a great role at a VC firm, and that’s how I started in the business. But, it isn’t the Kepha way. We think experienced investors are best positioned to source opportunities and then to help those entrepreneurs succeed. That approach, as a result, drove our compensation system.

Equal partnership encourages team play. My goal when I started the firm was largely selfish: I wanted to work with great entrepreneurs to create real businesses, and to do so in a team-oriented culture. I love VC, and I think it is best played as a team sport.

My hope was that an equal partnership among the investors would encourage team play. It would no longer be about “my investment” vs. “your investment.” We are incentivized to help our companies regardless of who sources the investment. Again, we are about building big companies.

At Kepha, Eric and I are equal. Ed has a significant 5% piece of the carried interest, and Eric and I distribute the rest.

I think that approach has largely worked. Eric and I try to go to each other’s board meetings as much as possible. We regularly open up our rolodexes to all of our entrepreneurs. For example, one of our companies is working closely with Walmart. Well, when I found out that a classmate of mine is a SVP there, I wrote that entrepreneur. Similarly, Eric sourced Bruce Reading, our CEO at VoltDB.

Our management company structure discourages growth for growth’s sake. As I’ve written before here and here, a VC firm’s management company owns and controls the firm. People may be partners in the fund, but they usually are not owners of the firm. Usually, it is a VC firm’s founders who are in the management company, and usually, control its voting; they may let in other partners over time, but at lower amounts so that they still control the management company.

Not always, but often, ownership in the management company in the hands of a few people encourages the owners to grow the firm and assets under management. That is because the owners get whatever is left over in the firm’s P&L at the end of the quarter. Once they pay the rent, credit card expenses and the salaries/bonuses of their staff, including their partners, they distribute the profit among the management company owners.

And, if you tack on another fund and don’t grow head count, all of the fees from that new fund are pure profit to the management company. If fees are 2% a year in a fund for 10 years, as an example, every $100 the management company raises equals $20 of total fees, which can be $20 of additional profit. So, again, not always, but therein exists the temptation to grow the firm and raise bigger funds more often.

That doesn’t happen if partners are equal owners in the management company, which is what Eric and I are at Kepha. My personal incentive is not to grow headcount, since a new partner is highly dilutive and would get the incremental fees in a bigger fund anyways. It could work, however, if the fit were right (more at bottom).

Our management company profits are distributed in an open way. At the end of the quarter,  I don’t distribute the management company profits just to myself. That’s because we assign zero value to our management company and it is treated as just a pass-through entity. And, the profits are distributed in the same way as carried interest is. Ed gets 5% of the profit and Eric and I distribute the rest. Easy, simple, transparent. No haggling. My hope was that system would nurture trust.

I feel that it has. There’s no secret slush fund for me and everyone knows what everyone makes. So, compensation is not a distraction at our firm. There isn’t a constant battle of trying to get into a management company if you’re a younger partner, or defending your ownership if you’re a founding partner. This dynamic is highly emotional and can be enormously time-consuming at a VC firm.

We don’t have that at Kepha. We are focused on our entrepreneurs and helping each other.

Our philosophy encourages transparency. We believe that if you’re not investing a fund, you shouldn’t be in the management company. We don’t believe you can do VC part-time. You’re all-in or all-out. So, one day, when I want to enjoy my golden years (kids out of the house and my wife and I still have our health), I will just leave the management company.

I won’t hold the partners hostage for a sale price, I won’t ask for a tail of fees. I may invest as an angel and will continue to work with entrepreneurs, but I don’t want to commit to a 10-year fund if I really don’t believe I will be working my butt off in Year +10. It wouldn’t be fair to our investors.

Our management company structure discourages “Founder-itis.”  Founder-itis happens when founders become tyrants or stay on for too long. If I personally own 100% of the management company, I have a huge incentive to build a large firm and control it for as long as I can. VC funds last 10 years, and over time, LPs will ask me about succession planning eventually. As I age, our investors will eventually ask me the following: “Ahem, as you um, wisen in years, who will take over the firm? And, do we know them and trust them to take over the firm?”

In other words, in that structure, I would need to hire, train, develop and promote to partner a new generation. Then, when I approached retirement, I would sell my management company shares over time to them. Or, I’d simply maintain control of the firm while others did most of the work. Or, I would negotiate a tail of management fees in future funds.

It was widely reported, for example, that Mitt Romney upon leaving Bain Capital negotiated to get a piece of the fees from each new fund raised over 10 years. In other words, he could still be getting fees 20 years after retirement, if a fund is raised in Year +10 and is a standard 10-year fund.

There is absolutely nothing wrong with that approach. A founder takes the risk and should be compensated.

At Kepha, we are doing things differently. Just our choice. Eric has 1/2 of the management company. And, I didn’t sell it to him. He received it as, again, we assign zero value to our management company. Checks and balances against Founder-itis.

Sound irrational, but this is actually selfish of me: I want to be a VC, and I don’t want to be a general manager of other VCs. Again, when I started the firm, it was for selfish reasons. I’ve tried to create a system that allows me to be a VC and not grow the firm. I don’t want to be distracted by bringing on, training, evaluating, promoting/firing new hires. I don’t want to be a general manager of other VCs.

My friend Brad Feld seems to have a similar philosophy at Foundry. Brad has written publicly that they’re partners-only and equal. He has shared with me that he has freed up 25% of his time, as a result. I agree with that. Being a manager of other VCs is a major time commitment.

I’m instead free to focus on what I love, which is working with Eric and Ed to help our entrepreneurs have tremendous impact.

We are open to adding to the team, but it would have to feel right. For us, we may find a next generation of partners to whom we hand off the firm. It would be easy and transparent. Having no value assigned to the management company makes that super-simple.

Given our structure, our incentive is to find a perfect fit and not just grow the firm. That’s why we invited our LP Advisory Board members, as a final step, to interview Eric before he joined. At Kepha, adding a partner is a major deal, and it must fit for everyone involved, including our LPs. We wouldn’t be doing it just to grow assets under management.

So, if you’re a VC and like the Kepha vibe and want to have a confidential talk, ping me or Eric.


So, that’s our approach and why we are partners-only and equal. We are having a great time at Kepha. There are some challenging days, but we love going to work as a partnership. We truly get along well and are very excited by what our companies are doing. Our 2nd fund is still very fresh and we have ample time and capital for new investments.

Most important, it is incredibly freeing and motivating to be able to live my life in such a transparent way with all of you, my partners, my entrepreneurs and my investors.

All cards on the table.

4 thoughts on “Our VC Firm’s Compensation Structure

  1. Great post and great philosophy which we share. Super helpful to the world for you to put it out there so entrepreneurs understand the clarity of this way. And yes – by having no “management overhead” of partners, junior partners, principles, associates, and analysts, I easily get 25% of my time back!

  2. Good post – thanks for the transparency.
    So you believe there is only room for junior VC’s in the bigger funds? What are your thoughts of the “USV MBA” – a 2 year rotation making it clear there is no partner track, just a great opportunity to learn.

    There must be annoying parts of your job that you could hand off to someone lower down and free up time for higher value activities, or junior VC’s really add no value?

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