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pic-asher.jpgCONTRIBUTED BY
Asher Bearman
asher.bearman@dlapiper.com

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. Continue Reading How VC Funds Work – Structure Chart for Venture Capital Fund (US Fund)

pic-asher.jpgCONTRIBUTED BY
Asher Bearman
asher.bearman@dlapiper.com

As of the end of 2010, the debate over increasing the tax rates on carried interest seemed to have died but it’s now back as part of the Fiscal Year 2012 budget proposal from the White House.  Under the proposed budget, the tax on carried interest would be at ordinary income rates, rather than capital gain, representing more than a 2x increase in the current rate for most fund managers.  See page 186 of the budget proposal here.  A change to rdinary income rates would impose a higher tax rate than legislation proposed in 2010, which generally included blended rates at either 50/50 or 75/25 (assuming an extended holding period), rather than 100% ordinary rates.  That said, the prior legislative proposals were unable to get through the Senate, so this budget proposal probably needs to be considered in that historical context.Continue Reading Carried Interest Tax Update – White House’s 2012 Budget Includes Tax Increase Proposal

(in collaboration with Megan Muir)

We recently guest posted the below article on TechFlash.  At the end of this post, we have added some supplemental information in an effort to respond to a few questions we received from TechFlash readers.

* * * * *

As the founder of a startup, one of the first issues you need to address is how to finance your company’s operations.  If you are lucky enough to be able to fund your startup out-of-pocket, or through generous family members, congratulations.  You can probably skip the rest of this post and get back to building your business.  However, if you are like most founders, you won’t be able to self-fund your company entirely and your revenues won’t exist yet, or won’t be adequate to grow the company.  In some instances you may be able to obtain government grants or if you have some type of hard asset or significant accounts receivable to use as collateral, you may be able to borrow from a bank.

This post addresses a common method for financing the growth of a tech startup – by selling stock in your company.  What type of investor is right for your company – family and friends, angel investors, venture capitalists, or some combination of these – is something you will want to consider carefully.  We’ll save that discussion for another post as it’s an interesting topic on its own.Continue Reading Financing Your Startup: How to Sell Stock without Going to Jail

Ledbetter, Andrew D._photo_3659.jpgCONTRIBUTED BY
Andrew Ledbetter
andrew.ledbetter@dlapiper.com

The SEC yesterday proposed rules on the “accredited investor” net worth standard, to implement Section 413(a) of the Dodd-Frank Act. Not much “new” here, but the proposed definition is:

Any natural person whose individual net worth, or joint net worth with that person’s spouse, at the time of purchase, exceeds $1,000,000, excluding the value of the primary residence of such natural person, calculated by subtracting from the estimated fair market value of the property the amount of debt secured by the property, up to the estimated fair market value of the property.

The “excluding the value of” clause tracks Section 413(a) of Dodd-Frank (and should already be in forms at this stage). The “calculated by subtracting” clause is intended to clarify that you only exclude the net equity (e.g., include the net debt), which is consistent with the SEC C&DI issued on this topic following Dodd-Frank. Essentially, this means if you have net equity in your home, you can’t count any of that net equity in determining whether you meet the $1M net worth standard. And if you have any debt in excess of the value of the home, that net debt would count against your net worth.Continue Reading ** UPDATED ** Net worth standard for ‘accredited investors’

pic-asher.jpgCONTRIBUTED BY
Asher Bearman
asher.bearman@dlapiper.com

 Steve Yentzer and I just submitted comments to the SEC on the proposed rules issued under the Dodd-Frank Act.  Our comments generally echo those raised by the NVCA in its letter to the SEC, including our encouragement that the SEC relax the rules defining “venture capital funds” so that fund managers can operate without fear of inadvertently violating the rules and becoming subject to Adviser’s Act regulation. 

The full text of our letter is below.Continue Reading Our Comment to the SEC’s Proposed Rules under the Adviser’s Act

pic-asher.jpgCONTRIBUTED BY
Asher Bearman
asher.bearman@dlapiper.com

 The National Venture Capital Association (NVCA) just released its comment memorandum to the SEC regarding the definition of venture capital fund for purposes of the new exemption from Adviser’s Act registration under the Dodd-Frank Act.  I’ve previously written about the proposed rules on the blog here.

See this link to the NVCA blog post, including links to their comment letter.  Notably, the comment letter includes requests for the following:

  • Allowance for up to 15 percent of the fund’s capital to engage in activity that

…
Continue Reading NVCA Comment to SEC Regarding Adviser’s Act Rules

pic-asher.jpgCONTRIBUTED BY
Asher Bearman
asher.bearman@dlapiper.com

One question that I’m often asked is how the expenses and fees break down in a typical VC fund structure.  Typically, a VC fund will have three categories of charges (aside from profits or carried interest): organizational expenses, fund expenses and management fees.  This post is a rough overview, based on my experience, of how costs are categorized in those groups and paid by a typical fund.  These categories also control whether the expenses generally are paid by fund managers (out of fees) or by fund investors (as expenses).Continue Reading How VC Funds Work – Expenses and Management Fees

pic-asher.jpgCONTRIBUTED BY
Asher Bearman
asher.bearman@dlapiper.com

For those of you who have been following our blog over the past few months, we’ve previously written about the new tax legislation that passed last week, which extended many of the Bush tax cuts as well as the new tax-free rules for qualified small business stock.  For fund managers, it may be that what is missing from the legislation is as important as any of the new rules.  Specifically, despite proposals in recent months that would have increased tax rates on the…

Continue Reading Carried Interest Tax Update – No News is Good News

pic-asher.jpgCONTRIBUTED BY
Asher Bearman
asher.bearman@dlapiper.com

Shanghai Tower, Shanghaiphoto © 2008 uniquebuildings | more info (via: Wylio)

As I’ve written about previously here, the SEC has proposed new rules for implementing the Dodd-Frank Act in determining whether fund managers will be exempt from registration under the Adviser’s Act.  When the Dodd-Frank Act’s changes to the Adviser’s Act become effective starting on July 21, 2011, a much greater percentage of fund managers will be required to register and become subject to the Adviser’s Act, unless they qualify for one of the new, more limited exemptions.  This includes a greater percetage of foreign fund managers.  Even if a fund manager qualifies for an exemption, in most instances it will still become subject to some limited ongoing reporting requirements, and may be subject to SEC inspections, even though not required to register (see below).

The proposed rules are available here.

In today’s post, I’m turning from the definition of venture capital funds to focus on foreign fund managers (located outside the US that raise money from US investors) and how they may qualify for exemption from registration under the Adviser’s Act.Continue Reading Foreign Fund Managers – Exemptions under the new Adviser’s Act