If you are looking to invest in a venture capital fund, you need to understand the structure of the venture fund you are considering. This article will go over the key elements of a Venture capital fund structure, including the Management company, Limited partnership agreement, and Share purchase. Ultimately, your investment decision will determine the type of fund structure that will work best for you. Listed below are some of the most important details to consider before investing in a fund.
Investing in a venture capital fund
If you are interested in investing in a venture capital fund, you need to know how it is structured. Many venture capital funds use the Limited Liability Corporation (LLC) structure, which allows for the greatest tax benefits and liability protection. Some venture capital funds use a tiered approach, which increases the percentage of carried interest as the fund meets benchmarks. There are also several other types of VC fund structures. You can choose one that suits your goals and risk profile best.
Management company
Venture capital firms often oversee more than one fund, each with its own investment strategy, portfolio companies, risk profile, and investor base. For example, Krakatoa Ventures, which has already raised Fund I, may consider forming Fund III after raising the second fund. For Fund III, Krakatoa Ventures will form a new entity that will act as a GP. Standard VC fund structures will incorporate a Delaware limited liability company to act as the GP.
Limited partnership agreement
There are several important details you should consider when creating a Limited partnership agreement (LPA). The LPs will be a mix of private investors, angels, and family offices. In the early stages of the fund’s development, LPs are sensitive to the momentum of other investors. Toward the later stage, LPs are more concerned with deal flow and liquidity. Regardless of LP type, it is important to follow the process.
Share purchase
The preferred return clause sets rules for how profit will be distributed to investors. It stipulates that certain classes of equity will be distributed before others once a certain rate of return is achieved. VC funds also provide for a management fee offset. This means that portfolio companies pay the fund manager a reduced amount of money for the management services they render. The preferred return clause is not as important as it sounds, but it does play a role.
Returns
The return on investment for a venture capital fund depends on a number of factors. A successful fund will have a high turnover rate and require less management than an aging one. However, a successful VC will not charge a hurdle rate, which is a common practice in venture capital. The fees paid to the venture capital firm are also influenced by the terms of the merger or acquisition. A later exit will dilute the returns of seed stage investors, who get a majority of their initial investment.
