Fund Structure
Fee Netting
The practice of offsetting management fees against future carry distributions, reducing the total fees paid by LPs over the fund's life.
Fee netting is a fund structuring practice where management fees are deducted from the GP's future carried interest distributions rather than paid directly from fund capital. This effectively makes the GP bear the cost of management fees out of their own returns, reducing the total fee burden on LPs. In practice, fee netting is rare in its pure form, but partial netting through management fee offsets is more common.
In Practice
Under the fund's fee netting provision, the $2M in annual management fees were tracked as an advance against future carry. When the fund generated $20M in carry, the first $20M in accumulated fees (over 10 years) was netted, reducing the GP's actual carry distribution to $0 until fees were fully recovered.
Why It Matters
Fee netting fundamentally changes GP economics by making management fees recoverable from carry. LPs increasingly request netting provisions because they align GP incentives more closely with performance rather than asset gathering.
VC Beast Take
Fee netting is the purest form of fee alignment, but most GPs resist it because management fees are their operating budget. The compromise — management fee offsets for monitoring fees or transaction fees — is more common and achieves partial alignment.
Related Concepts
Newsletter
The VC Beast Brief
Join thousands of founders and investors. Every Tuesday.
VentureKit
Ready to launch your fund?