For single-asset deals like SPVs on Seed Labs, you may encounter an investor who says "I need $100,000 to make it to the target portfolio company. Let me know how much I need to wire to make this happen."

While this may seem like a simple question, calculating it can be quite complicated. In this article, we'll break down exactly how fees at the level of each investor are calculated.

Fees are net-down, not grossed up

When someone invests $100,000 on Seed Labs, all fees are deducted from that amount (net-down), not added to that amount (gross up). This means the $100,000 commitment is the total amount of money the investor will wire.

To calculate how much in funds will make it to the portfolio company after all fees, the formula is:

Net invested capital = commitment - lifetime management fee - pro rata share of passthrough expenses

Where the lifetime management fee is a percentage of the commitment.

For example, assume an LP is investing $100k on Seed Labs with a 10% lifetime management fee, and that their share of expenses is $1,000. Their net invested capital would be:

$100,000 - ($100,000 × 10%) - $1,000 = $89,000

So $89,000 would make it to the target company.

Apply this math to each LP, and you'll have reconstructed the full capital account for a simple deal transaction.

Problem: expenses aren't always known ahead of time

The tricky part of this approach is determining the split of expenses upfront, as they are burdened to LPs pro-rata. Without knowing the expense amount—which changes with respect to filing fees—and without knowing what percentage of the deal the LP's investment represents, it is impossible to know the precise expense figure an LP is paying until the deal closes.

There are a few ways around this:

Solution 1: Estimate expenses

If you can approximate the size of your vehicle as well as the expenses, you can use an approximate number. You won't have an exact figure, but if the investor is OK with that, this method should suffice.

Solution 2: Deduct expenses from the management fee

Revisiting the formula above, you can make the pro rata share of passthrough expenses $0 if you elect to deduct all expenses from your management fee. This is an option you can configure when requesting a deal. Of course, this decreases the Manager's take-home.