Venture Capital Adopts New Transparency Models
In response to recent high-profile startup exits with no payout to employees, venture capital firms are adopting new transparency models. 16VC published a detailed 'transparency note' on its 2026 fund structure, aiming to better communicate how fund economics and equity waterfalls work for founders and employees.
- A "liquidation preference" is a key term in venture capital that gives investors the right to be paid back first in an exit. This can mean that if a company is sold for less than the total amount invested, the investors get all the proceeds, and employees with common stock options receive nothing. - Some liquidation preferences, known as "participating preferred," allow investors to get their money back *and* then also take a share of the remaining proceeds, further diminishing the payout for founders and employees. - The structure of 16VC as "SPV-first" means they create a separate legal entity for each investment (a Special Purpose Vehicle) rather than pooling capital into a single, large fund. This model provides investors with more direct transparency and choice over the specific companies they back. - Traditional VC funds, in contrast, are "blind-pool," where limited partners (LPs) entrust the fund managers to make all investment decisions over the fund's lifecycle, which is typically around 10 years. - The push for greater transparency is also being driven by new regulations. For example, California's Fair Investment Practices by Venture Capital Companies Law, effective in 2026, will require venture capital firms with a California nexus to report aggregated demographic data of the founding teams they back. - The current venture landscape is seeing a "flight to quality," with more selective investments and an anticipation of increased M&A activity and a reopening of the IPO market in 2026. - AI-focused companies are a notable exception to the trend of startups reducing equity compensation for employees, as they continue to attract significant capital. - This move toward transparency aims to rebuild trust with founders and employees, as a firm's reputation for being founder-friendly can be a competitive advantage in securing deals.
