In this installment of how VC funds work, I’m illustrating a basic venture capital fund structure. As you’ll see, even a basic venture capital fund organizational structure often uses at least a few entities, for a variety of business and tax planning purposes.
This is for an entirely US-based fund. For a sample Cayman Islands structure for a non-US fund, please see my offshore fund chart.
Fund: This is the main venture capital fund entity that makes investments in other companies.
Parallel Fund: In some circumstances, the fund may be setup as a couple of funds that invest in parallel into portfolio companies. These may be created for Investment Company Act purposes (such as 3(c)(1) and 3(c)(7) funds) or to allow the fund manager’s principals and affiliates to invest in the fund on a no-load basis (i.e., without charging themselves management fee or carried interest).
General Partner: This entity is the decision maker for the fund and also receives the carried interest paid by the fund (i.e., 20% of profits in a typical “2 and 20” fund). Usually, successor funds will have a new general partner to faciliate potentially different carried interest allocations.
Management Company: This is the business of the fund. The management company receives the management fee from the fund and uses it to pay the overhead related to operating the venture firm, such as rent, salaries of employees, etc. Usually, you form this entity where the fund manager’s busniess will operate. In this case, I’ve used Washington but it can be any state.