“Should I charge management fees on my SPVs?” It’s a question we’ve heard time and again from syndicate leads in our community. As one can imagine, there’s not a one-size-fits-all answer. The fee structure you choose for your SPVs should be informed by your strategy and your LP base, among other factors. Read on to discover the pros, cons, and considerations of different fee structures.

Management Fees: A Foundation for Operational Stability

Management fees, typically ranging from 1.5% to 2.5%, are calculated on committed capital and collected annually or as a one-time, up-front fee upon closing. These fees cover operational costs such as salaries, office expenses, and professional services. Management fees provide a predictable revenue stream, which allows syndicate leads to cover the costs of handling essential tasks like deal sourcing and due diligence. 

However, management fees can raise concerns if not aligned properly with investor interests. Overcharging on management fees could shift attention away from investment performance, causing a disconnect with your investors.

Table: Pros & Cons of Management Fees

Carried Interest: Aligning Interests Through Success 

Carried interest (“carry”) represents a share of the profits from the SPV’s investments and is typically 20% (though it can range from 15% to 25%). Carry serves to align the syndicate lead’s interests with those of the investors by rewarding good performance. Since the majority of a syndicate lead’s compensation typically comes in the form of carry, it keeps them highly focused on generating returns for investors. This structure promotes a shared focus on maximizing returns, but, carry is contingent on the SPV's success, making it an unpredictable revenue stream–it may take years to see them, if they occur at all. We’ll discuss SPV profitability more in-depth shortly.

Other Fees

Beyond management and carry fees, syndicate leads might impose other charges for specific services, ranging from 0% to 5%, enhancing income while promoting strategic differentiation. These fees cover a variety of activities, such as deal sourcing, portfolio monitoring, or other professional services (e.g., tax, accounting, audit). When charging additional fees, a syndicate lead must be transparent with investors and justify these fees clearly. This avoids potential misalignments or conflicts of interest that could undermine trust or affect SPV performance.

Crafting Your Fee Model: A Strategic Approach

Choosing the appropriate fee model is more an art than a science, requiring a thoughtful analysis of several factors, including SPV size, investment strategy, and market positioning. Managers should aim to strike a balance that ensures operational viability while aligning closely with investor expectations and SPV performance goals.

Here are key considerations for setting your SPV's fee structure:

• Operational Needs vs. Incentive Alignment: Assess the balance between covering essential operational costs and incentivizing performance.

• Market Positioning: Understand your competitive edge and how it justifies your fee structure.

• Investor Expectations: Engage with your investors to gauge their preferences and requirements for fee alignment.

• Transparency and Flexibility: Ensure your fee model is clear, fair, and adaptable to changes in investment strategy or market conditions.

After determining what the best fee structure is for your situation, you may be thinking, “Okay…now when am I going to start making money?” Turning a profit from SPVs often involves a long-term commitment, requiring significant patience and planning. Syndicate leads must understand the timeline for returns and what supplementary income streams exist in order to manage their financial stability effectively.

A Decade to Profitability

It typically takes seven to ten years for a company to reach IPO stage from its founding. Considerable carry returns from seed-stage SPV investments can similarly take a decade to realize. GPs who run a fund can hedge their bets against this delay by charging management fees, providing them with a reliable source of income as they wait for potentially significant carry returns in the long term. Here’s a rough estimate of what GPs can expect to earn on a 2% management fee after other necessary expenses, organized by funding round & fund size: 

However, for SPVs, not all GPs charge a management fee, as Cindy Bi highlighted in our recent Sydecar Session. Likewise, many syndicate leads choose to forego management fees due to investor pushback, relying instead on carried interest. This approach can lead to financial uncertainty due to the lack of a steady income stream. To boost their financial stability, syndicate leads look to other sources of income. Some of the top ways syndicate leads generate additional income include: 

• Consulting fees: Offering advisory services for a fee.

• Early exits: Gaining interim income from early-stage company exits.

• Secondary investments: Selling stakes in companies that have increased in value, before a liquidity event.

• Non-venture investments: Earnings from public stocks or cryptocurrencies.

• Part-time roles or other ventures: Many syndicate leads take on additional, part-time roles to supplement income. Some even pivot to working full-time for a VC fund for the guaranteed salary.

• Newsletter: Operating a newsletter with a large audience to attract advertisers and generate ad revenue. 

• Membership programs: Launching a membership program, similar to Alex Pattis and Zach Ginsburg's "Deal Sheet" from Last Money In, offers a powerful way to generate revenue. Deal Sheet is a paid weekly newsletter that delivers top, actively investable startup investment opportunities directly to subscribers.

Running a syndicate involves balancing immediate financial needs with long-term gains. The typical syndicate lead experiences periods of low income, with occasional high returns. This leads to high turnover among syndicate leads, who may opt for more stable income sources.

With this in mind, deal leads must carefully plan their fee structures and consider their income strategies. In developing a fee model and profitability timelines, it is necessary to balance operational costs with the delayed returns common in venture capital. Syndicate leads should aim for a fee structure that supports operations, aligns with investor success, and remains adaptable to growth and market shifts. 

As you get closer to realizing returns from seed-stage investments, your approach to fees may evolve, reflecting both your strategic vision and market realities. While the path to profitability is lengthy, the potential rewards can justify the investment for those prepared for the challenges.

Sydecar makes it easy for syndicate leads to adjust management and carry fees and provides LPs with complete visibility into deal fee structures. Request a demo below to learn more about how we streamline fee setup.