The Seven Immutable Rules of VC Compensation

Principles to understand why you're getting paid the way you are.

Venture Upward is a field guide for surviving, getting ahead, and succeeding as a venture capitalist. Created by David Beisel (@davidbeisel) and Rob Go (@robgo) at NextView, it is a blog written specifically for non-partner VCs working their way through the ranks.

Few topics garner as much curiosity as compensation. Our data at Venture Upward reveals a telling trend: posts on VC pay are not only our most-read content, but also the most revisited. This silent fascination underscores a universal truth in the industry - compensation is a topic of high interest yet low conversation.

In reviewing the data of numerous reports, having been in the industry for decades at three different firms (including starting our own), and actually talking about comp with some of my peers, I've distilled an often shrouded topic into seven defining rules that shape how VC professionals are paid:

Seven Immutable Rules of VC Compensation

1. The larger the firm, the more money you’ll make. Simply put, there’s more money to go around in larger firms. The more substantial funds lead to higher absolute compensation for all individuals. The Corollary to this rule: The journey to the top in larger firms is often longer and more competitive, which can delay reaching the highest compensation levels. These firms often have structured, tier-based compensation systems, providing clearer pathways for salary progression, but with more steps along the way.

2. There is more variability in compensation as your career progresses. Early in your career, salaries tend to be relatively uniform, but over time in the industry compensation diverges significantly. At the early part of your career with titles like Analyst, Associate, and Senior Associate, the compensation ranges are fairly tight. You and your peers are probably making about the same amount of money. But as your career continues, the relative variability in your compensation increases. All the way up to the top, small-p partners and General Partners compensation differs based on how large their funds are, how many partners they have, and how they divide the pie among themselves.

3. Extreme AUM & fund sizes produce atypical situations; in the middle things are more standard. Mid-sized funds typically adhere to industry-standard compensation, balancing competitiveness with financial viability. This standardization helps attract & retain talent while maintaining long-term viability (and profit for the General Partners). If you’re at a really small fund, they’re likely either just getting started or struggling to survive, so there’s not a lot of cash or carry to go around. But the nature of these kinds of situations can be wildly different, so approaches to comp can be radically different as well. On the other side of the spectrum, at the top end of the range of sized funds, multi-sector multi-stage multi-geography aircraft carrier firms with $B’s under management… well, they’re also their own unique beasts. Comp structure at these shops can also vary greatly. But firms in the middle of the pack generally will follow industry practices rather than defy them.

4. Assignment of carried interest compensation is wildly divergent. Current cash compensation tends to gravitate around a mean/median within a standard deviation, but carried interest comp varies fiercely. Some funds have equal partners, whereas some are a tall pyramid with a king or queen at the top and their subjects below. Some funds share the wealth, whereas some hoard it. Some funds pay cash and capture the variable upside while “renting” their employees, whereas some use equity carried interest comp to motivate and align long-term interests. There isn’t a one size fits all, and what you’ve been assigned in carry likely differs quite a bit from your peers.

5. Seeing a carried interest payday will take a very long time. Assignment of carry most often comes later in your career, and that’s where the real money is made… if you ever see it. You’re not really get paid anytime soon. I know people who have been in the industry for decades and still haven’t seen a meaningful carry check. Really. But the real asymmetric outcomes in compensation happen here.

6. General firm performance is highly correlated to your personal compensation. Broadly-speaking, if the firm is doing well, so will its partners and employees. Larger funds and more frequent fund cycles along with substantial exits translate into more dollars flowing around the system, and more generosity all around. A rising tide lifts all boats. The flip side of that is that in challenging periods, compensation can be more conservative, reflecting the cyclical boom-and-bust nature of this industry.

7. There will always be someone in a similar situation who makes more than you, and someone who makes less. The former tends to hurt a lot more than the latter is comforting. You can always jump ship, but this maxim will hold true wherever you land.

If you’re going to continue a career in venture capital, begin to make peace with all of the rules above. You might not like them, but they’re not changing anytime soon.