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1. VENTURE CAPITAL FUNDS 101:
Understanding How They Are Structured and Operated
Timothy Spangler
June 17, 2016

2. OVERVIEW
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 Jurisdictional/Formation Options
 Deal Flow and Management
 Special Considerations

3. JURISDICTIONAL/FORMATION OPTIONS:
GENERAL PARTNERS/LP/FUND MANAGEMENT CO. STRUCTURE
• Regulatory Issues:
– ’33 Act Compliance
– Investment Advisers Act
– Investment Company Act
• Investment Management/Advisement Mechanics:
– Organization of the Investment Manager
– Relationship to the Fund
– Third-party investors (limited partners)
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4. JURISDICTIONAL/FORMATION OPTIONS:
GENERAL PARTNERS/LP/FUND MANAGEMENT CO. STRUCTURE
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Venture Capital Fund
(Limited Partnership)
Venture Capital
Firm
(General Partner)
Limited Partners (Investors)
(public pension funds, corporate pension funds,
insurance companies, individuals, foundations, etc.)
Portfolio
Company
Portfolio
Company
Portfolio
Company
Portfolio
Company
Ownership of the Fund
Fund/Investment
Management

5. JURISDICTIONAL/FORMATION OPTIONS:
BASIC FUND FORMATION TIMELINE
Week 1:
•Form the Fund by filing the Fund’s Certificate of Limited
Partnership and obtain EIN for the Fund.
•Prepare a draft of the Fund’s private placement
memorandum (“PPM”).
•Prepare initial draft of the Fund’s limited partnership
agreement .
•Collect first draft of disclosure documents (if applicable).
•Consider which auditor to retain for the Fund .
•Incorporate Fund management company.
•Prepare accredited investor questionnaires .
Week 2:
•Review PPM.
•Review the Fund’s limited partnership agreement.
•Revise PPM reflecting comments.
•Revise limited partnership agreement reflecting
comments.
•Open bank accounts and wire instructions for the Fund’s
subscription account.
•Determine applicability of exemptions under Investment
Advisers Act.
Week 3:
•Prepare drafts of subscription agreement and investment
management agreement.
•Circulate drafts of subscription agreement and investment
management agreement (if applicable).
•Circulate/revise PPM, limited partnership agreement, and
subscription agreement .
•Prepare final versions of all offering documents and
arrange for execution of agreements .
•Circulate offering documents to investors.
Week 4 (and Beyond):
•Verify accredited investor status .
•Review completed subscription agreements and LP
agreement .
•Launch Fund (on Fund Launch Date).
•Prepare and file Form D and blue sky filings (if
applicable) for the Fund .
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6. JURISDICTIONAL/FORMATION OPTIONS:
ECONOMICS OF THE VENTURE CAPITAL FUND - CAPITAL
• Capital Commitments
– The Limited Partners do not always contribute money to the Fund at the closing.
They legally commit to provide a certain amount of capital when they are called
upon. This is called a Limited Partner’s Capital Commitment.
• Capital Calls
– When the General Partners find what they think is a good investment opportunity
they make a “Capital Call” on the Limited Partners. Example: a Fund has $500M
of capital and the General Partners what to make an investment of $10M. A
Limited Partner with a Capital Commitment of $50M will be required to send
$1M to the General Partners: 50M/500M = 10% times 10M = $1M
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7. JURISDICTIONAL/FORMATION OPTIONS:
ECONOMICS OF THE VENTURE CAPITAL FUND – VC COMPENSATION
• Management Fees
– The General Partners receive an annual
Management Fee, which is usually a
percentage of the Capital Commitments
to the Fund.
– A typical fee is between 2.0% to 2.5%.
– The Management Fee is used by the
General Partners to run the Fund business
–e.g. it pays the salaries of the General
Partners, the associates, the support staff
and the office rent.
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8. JURISDICTIONAL/FORMATION OPTIONS:
ECONOMICS OF THE VENTURE CAPITAL FUND – VC COMPENSATION
• Splitting the Returns
– The General Partners make investments and they hopefully harvest some of
those.
– The returns from the investment are split between the Limited Partners and the
General Partners. A typical arrangement is as follows:
o The Limited Partners receive 99% of all the returns and the General Partners
receive 1% of all returns until the Limited Partners receive back 100% of
their Capital (plus in some cases “interest” on that Capital).
o Thereafter the splits go 80% to the Limited Partners and 20% to the General
Partners. This 20% part is called the GP’s “Carried Interest.”
– General Partners with a great track record will receive a higher Carried Interest-
e.g. 30%.
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9. JURISDICTIONAL/FORMATION OPTIONS:
STAFFING
• Talent Selection Criteria:
– Industry/business expertise (familiarity within internal business groups and
strategic objectives)
– Private equity, venture capital or emerging company expertise and network access
• Attracting and Retaining Talent:
– Compensation:
o Comparable to corporate management
o Carried interest (“2 and 20 system”)
– Advancement:
o Internal recruiting
o Operational/management opportunities
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10. DEAL FLOW AND MANAGEMENT:
DEAL SOURCING
•The personal and
professions networks of
existing employees can be
an excellent resource.
•Industry conferences can
offer access to
information regarding
start-ups in desired
markets.
•Conferences that cater
specifically to emerging
companies offer an
excellent opportunity for
networking directly with
start-ups.
•Establishing strong
relationships with
traditional VC’s offers co-
investment opportunities
and access to a steady
stream of investment
opportunities.
Traditional
Venture
Capital
Funds
Start-Up
Conferences
Internal
Business/
Operational
Teams
Industry-
Specific
Events
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11. DEAL FLOW AND MANAGEMENT:
DEAL SELECTION
Decision Making
Investment
Strategy
Post-Investment
Monitoring
• Investment Committee
• Investment Authority
• Internal Procedures
• Lead vs. Co-Investor
• Investment Amount
• Customary Practices
• Information/Management Rights
• Board Seat Right
• Right of First Notice (of acquisition
offers)
• Operational Oversight (“smart money”)
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12. DEAL FLOW AND MANAGEMENT:
INVESTMENT GOALS
Strategic
Advantage
New
Technologies
Human
Capital
Emerging
Markets
Potential
Acquisitions
Product
Synergy
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13. SPECIAL CONSIDERATIONS: INTERNATIONAL
ISSUES
• U.S. Foreign Policy Considerations:
– CFIUS:
o Uncertain CFIUS implications for
investments in U.S. companies by non-U.S.
investors
– Export Controls:
o Potential export control implications
regarding portfolio company software and
technology sharing
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14. SPECIAL CONSIDERATIONS:
U.S. TAX CONSIDERATIONS
• U.S. Tax Considerations:
– U.S. Entities
- Subject to U.S. tax on capital gains investments
– Non-U.S. Entities
- Not subject to U.S. tax on capital gains investments
- Subject to any applicable U.S. withholdings taxes on dividends paid by U.S.
companies to investors
– Non-Stock Investments (treatment of interests in LLCs)
- “Engagement in a U.S. trade or business” as a member (investor) of a U.S.
limited liability company (requiring the filing of U.S. tax returns reporting
business income from such U.S. limited liability company)
- U.S. Limited Liability Company Jurisdictional Considerations (California
versus Delaware)
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15. Questions?
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