Management Fee Model

The 2% management fee became standard in the 1980s when typical VC fund sizes were $50-100M and the fee generated enough to run a small team. At 2% on $75M, that's $1.5M/year — sufficient for salaries, office space, and operations. Today, the same 2% on a $1B fund generates $20M/year, which critics argue is excessive. Smaller funds often charge 2.5% because 2% on a $10M fund ($200K/year) barely covers a single salary.

A management fee offset reduces the fund's management fee by all or a portion of fees the GP earns from portfolio companies (board fees, monitoring fees, transaction fees). For example, if a GP earns $50K in board fees from portfolio companies, a 100% offset means the management fee is reduced by $50K. Most institutional LPA templates include 100% fee offsets to prevent GPs from double-dipping — earning fees from both the fund and its portfolio companies.

Most funds step down management fees after the investment period (typically years 5-6). During the investment period, fees are charged on committed capital (the full fund size). After, they step down to invested capital (cost basis of active investments), which decreases as companies are exited. Some LPAs include an annual step-down of 0.25% per year after the investment period. This structure aligns GP incentives with returning capital to LPs.

For larger funds ($100M+), management fees comfortably cover operations. But for emerging managers with sub-$25M funds, fees are razor-thin. A $15M fund at 2% generates $300K/year — barely enough for one GP salary plus fund expenses. This is why many first-time managers supplement with advisory work, teaching, or angel investing during Fund I, and why some charge 2.5% fees or negotiate organizational expense budgets separate from management fees.