Pawson Foundation Essay

2484 Words Jun 28th, 2014 10 Pages
PAWSON FOUNDATION: AUGUST 2006
Case Study
FNCE611 Private Equity and Venture Capital

Present to:
Professor LIM, MENG ANN
Present by:
HU, XINYIN
LI, LUXI
LIU, YUANCHANG
RATANASIRIGULCHAI, TEEMAR

Compensation Methods: Budget-based vs Flat-Rate Management Fee | |
Mayfield charged a budget-based management fee to appeal to potential LPs. Because industry practice was traditionally a 2/20 based fee, Mayfield had a competitive advantage against other VCs as the budget-based fee was attractive because: * Transparency. Budget-based fees encourage transparency by requiring Mayfield to produce an expense list, providing LPs greater information compared to the traditional management fee based on committed capital. *
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Mayfield can differentiate itself from other VCs and market themselves as more aligned with the LPs, thus, allowing itself quick raising of funds and greater negotiating power when the fund is oversubscribed. * Because the terms of the fund are a product of the negotiations between the LP and GP, greater bargaining power is significantly favorable. * Greater Funds to Invest. Because fees are less, there is greater amount to invest, and, in the case that there are many attractive investments, Mayfield can capture more investments.

However, there are potential costs to the budget-based fees which should also be considered. * Talent Acquisition. Because the fees are budget-based, there may be an incentive for high-level talent to work for Mayfield, especially if salaries may be restricted by the budget-based nature of the fees; thus, high-level talent may move to firms with a 2/20 structure. * No Fixed-Rate. The GP has the opportunity cost of not charging the fixed-rate; because their costs are well below the 2.5% cap, Mayfield is has a trade-off of the difference between the fixed rate and the budget-based charges - however, at the same time, they are compensated with higher carried interest. * The GP may be severely affected if the economy declines or there are no good deals to be found; the budget-based approach was based on the concept of alignment of interest, however, the VC has less control over the industry

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