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Know How Your VC Gets Paid

The bear market brings several implications for startups looking for funding.

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This story appears in the April 2009 issue of Entrepreneur. Subscribe »

Startups planning to raise venture capital in these turbulent times should pay attention to the way investors get paid during bear markets. Compensation incentives drive the behavior of venture capitalists more than they do for angels and other noninstitutional investors.

Most funds pay staff salaries from a management fee that's calculated as a percentage of assets under management. Warren Buffet likes to call these investment professionals the "2-and-20 crowd," because the formula used to calculate their fees is typically 2 percent of funds under management and 20 percent of the upside return. Some VC funds with specialized skills or storied histories can justify fees of 3 percent and 25 percent to 30 percent of the upside.

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