Accel Partners VII

What are the implications of the shift from a 20% carried interest and 2.5% annual management fee to a 30% carried interest and a 2.5% annual fee? What is the NPV of Accel's compensation and the IRR to the limited partners under the different fee structures as a function of Accel's gross returns. How much better does Accel have to be (in terms of IRR) from the typical VC fund in order to justify the greater carry?

Use the following assumptions:

- the fund has a ten-year life, with committed capital (the total amount of funds including fees that the investors have promised to provide) of $500 million.

- the funds are invested in 4 equal installments in each of the first 4 years.

- the management fee is 2.5% of committed capital for the first five years, payable in advance at the beginning of the year. The fee declines to 1.5% of committed capital for the final five years. - each of the annual investments is held for 5 years and then sold / distributed. Assume that the investments earn the same annual gross rate of return. In the base case, assume that the investments earn a 45% annual gross return over 5 years. Then, show how the analysis changes using different annual gross rates of return - e.g., 5%, 25%, 45%, 65% and 85% - and different holding periods - 3 and 7 years.

- Assume Accel does not receive its carry until the investors have received distributions equal to their committed capital ($500 million). Accel does not have a preferred return or hurdle rate.

- Use a 15% discount rate for Accel's compensation.