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General VC Questions

GP carry raise: How can one perform valuation of a percentage of GP carry prior to fund closure or returns from fund (when DCF can be applied)?

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Dec 01, 2023
An LP has already signed my LPA and is bringing others into my fund as investors. He shared that a condition of bringing others is that I be full-time over the fund since this is the only way one can really run a successful venture. I agree, however I require more than my management fee provides for living expenses since Fund 1 is small. Even if I oversubscribe, it wont get us to the amount I need. My question: Investor is willing to provide me cash now for a percentage of carry as a one time payment to help support my transition to VC full time. He suggested I valuate a percentage with rationale and he will help me raise the capital  for the GP carry (NOTE: this is not Management Company carry, ONLY fund 1 GP carry and has been clarified with investor. Greatly appreciate guidance on how to valuate this.
1 answer
Accepted Answer
Dec 01, 2023
Do not form your fund and send LPAs to limited partners prior to you having at least $1m in PACTs signed or 10% of the fund, whichever is greater. This is a major mistake with dire consequences.  Also, please note that the arrangement that is suggested above has a very low probability of success and will possibly trigger broker-dealer issues as well. 

If you need working capital, you can take investors in the GP entity. You can determine the valuation on the GP entity by working backwards from a low or middle case scenario of the fund model. So, doing some back of the napkin math, if your model is projecting that you will do a 2x on $5m fund - the valuation of the GP entity (the carry) is $1m. So, an investor can purchase 10% of the GP entity for $100k. That $100k will flow through to the ManCo (you) as working capital. 

That being said, just because you can do this, it doesn't mean that you should. It's very rare that outsiders (including LPs) can help you with fundraising in a Fund 1. The LPs that invest in Fund 1s are mission aligned and are investing in the Managing Partner because they know and trust them. 
As a precautionary warning, any legal agreements pertaining to a Fund (such as the LPA) should not and cannot be signed until, 1) the Fund's entities are officially filed and formed with the appropriate agencies in its domicile, and 2) the Fund's entities' operating agreements (aka governing agreements) are finalized and executed. Should things be done out of order when it comes to fund formation, it typically creates major issues that are expensive to fix - and in some cases these issues are practically unfixable. The same pertains to startup formation, though at a different scale.
Dec 02, 2023 4:43pm
Thanks both! Very helpful.
Community Member
Dec 04, 2023 10:21pm
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