Venture Legal

Sydecar is not an option for VC firms. So don't waste any time on this matter until at least $1m US is hard circled via PACTs. This is one of the last decisions that a fund manager should make.  That being said, since you seem to be a C...

Sydecar is not an option for VC firms. So don't waste any time on this matter until at least $1m US is hard circled via PACTs. This is one of the last decisions that a fund manager should make.  That being said, since you seem to be a Canadian citizen, it will be much more beneficial for you to be domiciled in Ontario. 

Europe, in general, is not a good place to setup a fund. As a result, most new managers in the region setup their funds in Delaware and you can learn more information on this topic here. 

Europe, in general, is not a good place to setup a fund. As a result, most new managers in the region setup their funds in Delaware and you can learn more information on this topic here. 

No - generally speaking, a fund manager should not register any entities until ready to start closing the Fund. Entities set up asynchronously with the complete fund structure will at minimum require additional diligence/paperwork, and i...

No - generally speaking, a fund manager should not register any entities until ready to start closing the Fund. Entities set up asynchronously with the complete fund structure will at minimum require additional diligence/paperwork, and in most cases it is easier/cheaper to discard them than to re-use them.  Depending on the domicile, there may be a way to "reserve" the entity name if desired - for example this is possible with the Delaware Secretary of State directly (at an additional cost). However note that these reservations are usually time-limited, and will need to be "released" in order to actually use the reserved name. 

The Domicile of the fund is absolutely critical. It affects a number of factors such as operational costs, tax, investments, limited partners etc.. Read the following articles: Domicile Report https://govclab.com/2021/09/25/venture-cap...

The Domicile of the fund is absolutely critical. It affects a number of factors such as operational costs, tax, investments, limited partners etc.. Read the following articles: Domicile Report https://govclab.com/2021/09/25/venture-capital-domicile-report-by-vc-lab/ Delaware is the VC Domicile of Choice: https://govclab.com/2023/06/10/delaware-is-the-vc-domicile-of-choice/

While fundraising, a fund should not have a publicly viewable website in order to avoid any appearance of general solicitation.  The management company can have a website with information on its team members, their past activities (subje...

While fundraising, a fund should not have a publicly viewable website in order to avoid any appearance of general solicitation.  The management company can have a website with information on its team members, their past activities (subject to confidentiality obligations) and the types of startups that they are looking to attract.  The management company should not have any reference to any fund that is raising funds.

When a venture capital fund takes in investors who are subject to ERISA, the fund may also become subject to the numerous and onerous ERISA regulations without an exemption. Such regulations would make operating the fund untenable. For e...

When a venture capital fund takes in investors who are subject to ERISA, the fund may also become subject to the numerous and onerous ERISA regulations without an exemption. Such regulations would make operating the fund untenable. For example, the fund may be prohibited from paying carried interest to the fund managers. There are two exemptions through which a venture capital fund can avoid being subject to ERISA:   1. 25% Test Exemption: Less than 25 percent of each class of equity interests of the venture capital fund is held by investors who are subject to ERISA.   2. Venture Capital Operating Company (VCOC) Exemption: At least 50% of the venture capital fund’s assets are invested in operating companies in which the fund has contractual management rights.     In order to secure the VCOC Exemption, it has become customary for venture capital funds to ask each of its portfolio companies to sign a management rights letter providing the fund with such management rights.   It is important to note that a fund relying on the VCOC exemption should ensure that its first portfolio investment includes contractual management rights in order to satisfy the exemption requirement, and that it does not take LP money subject to ERISA before that first investment is made; otherwise, the fund be disqualified from being eligible for the exemption.   In addition, if the fund managers or their affiliates “warehouse” portfolio investments for transfer to the fund, it is important that the transfer documents provide that management rights with regard to such investments be transferred to the fund to ensure that the venture capital fund has the necessary contractual management rights to satisfy the exemption.   As ERISA regulations are complex, fund managers should seek the advice of the relevant professionals to ensure compliance if they will be receiving investor funds subject to ERISA.

The Cornerstone has a defined term: “Material Adverse Effect” means any activity relating to a Limited Partner’s participation in the Fund, if the Limited Partner or General Partner determines: (A) that such activity is reasonably likely...

The Cornerstone has a defined term: “Material Adverse Effect” means any activity relating to a Limited Partner’s participation in the Fund, if the Limited Partner or General Partner determines: (A) that such activity is reasonably likely to (i) result in a violation of a law, rule or government order, (ii) subject a Portfolio Company, such Limited Partner, the Fund or any Affiliate of the foregoing to any material filing, regulatory requirement or tax, or (iii) result in any Securities or other assets owned by the Fund being deemed to be “plan assets” under ERISA; or (B) that a Limited Partner or any of its Affiliates becomes subject to sanctions regulations from any country, the European Union, the United Nations Security Council or any other such organization that would impact the ability of the Fund to continue transacting with such Limited Partner.

From a tax perspective any K-1 income received from the fund would be tax deferred (assuming regular IRA) until the money is withdrawn from the IRA at which time it would be taxed at ordinary income rates. In effect the original characte...

From a tax perspective any K-1 income received from the fund would be tax deferred (assuming regular IRA) until the money is withdrawn from the IRA at which time it would be taxed at ordinary income rates. In effect the original character of the income would be lost so no long term capital gains rates or QSBS treatment if applicable. This is on top of the restricted transactions mentioned by Hans. 

As a general matter, a Fund Manager should strictly NOT provide any advice, especially with respect to legal or tax matters. These are highly regulated professions (specifics will vary by country) with specific rules about who, how, an...

As a general matter, a Fund Manager should strictly NOT provide any advice, especially with respect to legal or tax matters. These are highly regulated professions (specifics will vary by country) with specific rules about who, how, and under what type of relationship any such advice may be provided, and crossing the lines opens the door to liability, lawsuits, potentially unauthorized practice of law and more. TL:DR - don't do it. Decile Partners' subject matter experts may provide generalized explanations and/or guidance. If working with Decile Launch, in particular, additional assistance is usually available. However if specific advice is required or requested, then the safest course of action (for the Fund Manager) is for the party in question to engage their own legal or tax experts. Decile Partners can provide referrals on request, of course, and even provide guidance about how best to work with such experts. 

Yes. We strongly advise you not to pitch people who do no meet the accredited investor requirements in general. 

Yes. We strongly advise you not to pitch people who do no meet the accredited investor requirements in general. 

From the legal perspective, ending the relationship with a general partner is governed by the management company agreement and the general partner agreement, as well as any other related agreements, such as an employment agreement or the...

From the legal perspective, ending the relationship with a general partner is governed by the management company agreement and the general partner agreement, as well as any other related agreements, such as an employment agreement or the LPA. This legal complexity makes separations difficult and expensive. As a result, the best strategy is to have all parties agree on the separation amicably and have a sense of the terms for the separation before involving legal counsel. The common outcome of a separation is to remove any equity holding of the departing general partner in the management company and to negotiate how to handle any allocated carried interest. It is also important to negotiate any involvement by the departing general partner in ongoing operations, including portfolio support, and what the mutual messaging will be to the different stakeholders, often involving the exact wording.

Running a fund and an AngelList syndicate at the same time presents a number of problems.  First, most LPAs prevent managers from working on multiple funds at the same time because managers have fiduciary duties to their limited partner...

Running a fund and an AngelList syndicate at the same time presents a number of problems.  First, most LPAs prevent managers from working on multiple funds at the same time because managers have fiduciary duties to their limited partners, such as the duty of care to act prudently, prioritizing beneficiaries' interests. Second, there are conflicts of interest around investment decisions that arise from having two funds in one focus area, since a manager may choose to cherry pick deals or feel pressure to invest in deals with companies that are failing to save the company.  Third, there are issues around the time and attention that a manager must place on the respective funds that detract from time and attention required for the the other fund, such as when diligencing deals, working on reports, or managing operations.  These various problems can be overcome by disclosing everything to limited partners up front, having a limited partner advisory committee to clear conflicts, and providing full transparency during operations, but this can be time consuming and difficult for a manager to do, and may also make limited partners skeptical. 

It's not necessary to have one. This is typically handled at the ManCo level, not the fund. Also, see the Limited Operations Mode in the cornerstone LPA, downloadable here, which states:   “Limited Operations Mode. In the event the Limi...

It's not necessary to have one. This is typically handled at the ManCo level, not the fund. Also, see the Limited Operations Mode in the cornerstone LPA, downloadable here, which states:   “Limited Operations Mode. In the event the Limited Partners claim there exists a Material Breach, Limited Partners holding more than 66 ⅔% of the aggregate Commitment Percentages held by all Limited Partners (“Requisite Majority”) may cause the Fund and General Partner to enter into “Limited Operations Mode.” The period of Limited Operations Mode shall commence at the time that a Requisite Majority provides written notice to General Partner particularizing the facts constituting a Material Breach and ending automatically on the date ninety (90) days later, which period may be extended by successive ninety (90) day periods if, and only if, a Requisite Majority provides written notice extending such period. During Limited Operations Mode General Partner and the Limited Partners will negotiate in good faith to resolve the dispute. ”

DO NOT INCORPORATE ANYTHING. Stop now. This is a major waste of time and effort. You need a minimum of 10%+ hard circled via PACTs to begin a formation process. Then, you need to work with super specialized VC formation attorneys to get ...

DO NOT INCORPORATE ANYTHING. Stop now. This is a major waste of time and effort. You need a minimum of 10%+ hard circled via PACTs to begin a formation process. Then, you need to work with super specialized VC formation attorneys to get this done and the only viable place is Delaware.  Your law firm must incorporate all 3 entities at the same time and also create all the operating agreements. Decile Launch includes all 3 entities and the operating agreements: ManCo, GP & LP.  With respect to tax, don't provide tax advice to your LPs. This is for your reference only. LLCs are flow through entities. Tax burdens are created when money is distributed to your LPs and they must pay it on their personal returns. Capital gains are not sourced to a specific location. They are taxed in the jurisdiction of the ultimate beneficiary. 

Most LPAs have an 'investment period' clause and 'successor fund threshold' to provide alignment around expectations. If you're planning on deploying significantly faster then the investment period, then you should clear this with your L...

Most LPAs have an 'investment period' clause and 'successor fund threshold' to provide alignment around expectations. If you're planning on deploying significantly faster then the investment period, then you should clear this with your LPAC at a very minimum because it affects the return profile and the potential temporal diversification of the fund. 

Reverse solicitation occurs when an investor reaches out to you first to request fund information. Many jurisdictions have a reverse solicitation safe harbour exemption that says if an investor reaches out to you first to request informa...

Reverse solicitation occurs when an investor reaches out to you first to request fund information. Many jurisdictions have a reverse solicitation safe harbour exemption that says if an investor reaches out to you first to request information regarding the fund offering then you do not have to register the fund offering in the jurisdiction. Reverse solicitation is fact-based, so in order to rely on any reverse solicitation safe harbour you need to be able to prove (with email or text evidence) that you did not market the fund to any investor without them requesting fund information first.

The Cornerstone Agreement provides that the general partner is prohibited in engaging in conduct which could constitute a conflict of interest without Approval.  See the Conflict of Interest and Successor Fund provisions which prohibit a...

The Cornerstone Agreement provides that the general partner is prohibited in engaging in conduct which could constitute a conflict of interest without Approval.  See the Conflict of Interest and Successor Fund provisions which prohibit activities that could potentially compete with the fund.

Venture capital funds are typically formed as limited partnerships which have general partners and limited partners. In a  limited partnership, the general partner faces unlimited liability while the liability of the limited partners is ...

Venture capital funds are typically formed as limited partnerships which have general partners and limited partners. In a  limited partnership, the general partner faces unlimited liability while the liability of the limited partners is limited to the amount of their investment.  For example, if the fund is has debts or is sued or incurs liabilities, the limited partners will not be subject to paying for the fund's liabilities while the general partner will face exposure to such debts and liabilities.

Indemnification provides certain protection for a party by contract.  For example, in the Cornerstone, the General Partner is indemnified by the Fund for its services in connection with the Fund provided that the General Partner acted in...

Indemnification provides certain protection for a party by contract.  For example, in the Cornerstone, the General Partner is indemnified by the Fund for its services in connection with the Fund provided that the General Partner acted in good faith and in the best interests of the Fund and such actions did not constitute Malfeasance.  The indemnification means that the fund will pay for damages as well as legal and other expenses suffered by the general partner in connection with the fund.

This does not have to be memorialized in any agreement. You can just offer the opportunity as they come up with an SPV. If an investor asks, you can offer a side letter for this right.

This does not have to be memorialized in any agreement. You can just offer the opportunity as they come up with an SPV. If an investor asks, you can offer a side letter for this right.

It would be extremely unusual for a fund to provide buy-back or redemption provisions in an investment agreement.

It would be extremely unusual for a fund to provide buy-back or redemption provisions in an investment agreement.

Key man provisions are typical for fund that rely on the skill and expertise of particular key individuals.  The Cornerstone provides certain protections for investors relating to the key individuals.   For example, if all Key Individual...

Key man provisions are typical for fund that rely on the skill and expertise of particular key individuals.  The Cornerstone provides certain protections for investors relating to the key individuals.   For example, if all Key Individuals are Incapacitated, the Fund automatically enters Limited Operations Mode.

Under U.S. securities laws, the sale of securities, including fund interests, require either registration with the S.E.C. which is expensive and time consuming, or such sale must be exempt from registration under the rules.  Regulation D...

Under U.S. securities laws, the sale of securities, including fund interests, require either registration with the S.E.C. which is expensive and time consuming, or such sale must be exempt from registration under the rules.  Regulation D is the primary regulation relied on by funds and companies to be exempt from registration.  Rules 506(b) and 506(c) of Regulation D are the primary rules that funds  raise capital with an exemption from registration.  The  distinction between the two rules is that under 506(c), the issuer is permitted to advertise the offering, also know as general solicitation, however the issuer must take reasonable steps to verify that the purchasers are "accredited investors" under the rules.  It is common for issuers to hire a third party service provider to perform the verification.  Under a 506(b) offering, each investor is permitted to self-certify they are an accredited investor.

An outline document defining the terms of a following legal agreement.

An outline document defining the terms of a following legal agreement.

A standardized Limited Partner Agreement (LPA) developed by VC Lab to enable the streamlined formation of VC Funds which reduces paperwork and legal expenses. Cornerstone V3 can be downloaded from VC Lab here.

A standardized Limited Partner Agreement (LPA) developed by VC Lab to enable the streamlined formation of VC Funds which reduces paperwork and legal expenses. Cornerstone V3 can be downloaded from VC Lab here.

Under U.S. securities laws, “accredited investors” are eligible to invest in certain unregistered securities.  In order to qualify as an accredited investor, an individual or entity must meet certain criteria.  Individuals can qualify by...

Under U.S. securities laws, “accredited investors” are eligible to invest in certain unregistered securities.  In order to qualify as an accredited investor, an individual or entity must meet certain criteria.  Individuals can qualify by meeting certain financial criteria: (a) net worth over $1 million, excluding primary residence (individually or with spouse or partner); or income over $200,000 (individually) or $300,000 (with spouse or partner) in each of the prior two years, and reasonably expects the same for the current year. Individuals can also qualify by meeting certain professional criteria: (a) investment professionals in good standing holding the general securities representative license (Series 7), the investment adviser representative license (Series 65), or the private securities offerings representative license (Series 82); (b) directors, executive officers, or general partners (GP) of the company selling the securities (or of a GP of that company); (c) any “family client” of a “family office” that qualifies as an accredited investor; or (d) for investments in a private fund, “knowledgeable employees” of the fund.  Entities can qualify as an accredited investor as follows: (a) entities owning investments in excess of $5 million; (b) corporations, partnerships, LLCs, trusts, 501(c)(3) organizations, employee benefit plans, “family office” and any “family client” of that office with assets in excess of $5million; (c) investment advisers (SEC- or state-registered or exempt reporting advisers) and SEC-registered broker-dealers; or (d) a bank, savings and loan association, insurance company, registered investment company, business development company, or small business investment company or rural business investment company.

You should use a VP agreement. There is no set #. It depends how you use your VPs. If you are using a network of VPs for deal flow and support, then you may have quite a few. If you’re using the VPs for specialized advice for example, yo...

You should use a VP agreement. There is no set #. It depends how you use your VPs. If you are using a network of VPs for deal flow and support, then you may have quite a few. If you’re using the VPs for specialized advice for example, you may only need 2-3

yes it does

yes it does

Please review VC Lab's Venture Partner agreement template here: https://govclab.com/venture-share-2/

Please review VC Lab's Venture Partner agreement template here: https://govclab.com/venture-share-2/

The Venture Share agreement is for individuals, not companies.

The Venture Share agreement is for individuals, not companies.

No, you don’t want to sign stuff with advisors until you are closing.  There should be a confidentiality provision in the agreement you sign with an advisor.

No, you don’t want to sign stuff with advisors until you are closing.  There should be a confidentiality provision in the agreement you sign with an advisor.

Any funds selling to U.S. investors are required to comply with U.S. securities laws including requirements to register with the SEC and the applicable exemptions.  You can request an intro to a legal advisor directly from your VC lab re...

Any funds selling to U.S. investors are required to comply with U.S. securities laws including requirements to register with the SEC and the applicable exemptions.  You can request an intro to a legal advisor directly from your VC lab representative.

Under US securities laws, certain private funds are not required to be registered or regulated as investment companies laws such as under the following exclusions: ·       Traditional 3(c)(1) Fund (no more than 100 beneficial owners) ·  ...

Under US securities laws, certain private funds are not required to be registered or regulated as investment companies laws such as under the following exclusions: ·       Traditional 3(c)(1) Fund (no more than 100 beneficial owners) ·       3(c)(7) Fund (limited to qualified purchasers) ·       3(c)(1) Qualifying Venture Capital Fund (no more than $10M from no more than 250 beneficial owners). Fund advisers are required to register with the SEC unless they are exempt from applicable registration requirements such as investment advisers who solely manage qualifying venture capital funds or solely manage private fund assets of less than $150 million. They are, however, required to make certain filings and report certain information annually to the SEC as exempt reporting advisers.

Everything is defined in the LPA. As a rule, you don’t want any one LP to own 25% or greater, otherwise they control the fund. You could build in custom protections. You can read a sample and simple LPA with the Cornerstone for some exa...

Everything is defined in the LPA. As a rule, you don’t want any one LP to own 25% or greater, otherwise they control the fund. You could build in custom protections. You can read a sample and simple LPA with the Cornerstone for some examples on how the control provisions work with the Majority in Interest of the Limited Partners.

Once LPs have invested in the fund, you will need to provide reports on your companies. Before that, you can show select companies in your data room to investors who have signed a letter of intent.

Once LPs have invested in the fund, you will need to provide reports on your companies. Before that, you can show select companies in your data room to investors who have signed a letter of intent.

Yes. The Firm is the brand. The fund can be called something else if you want.

Yes. The Firm is the brand. The fund can be called something else if you want.

We don’t have a template affirmation agreement. Everyone does this differently, but in general most people start with a verbal agreement first.

We don’t have a template affirmation agreement. Everyone does this differently, but in general most people start with a verbal agreement first.

Fund vehicles in Delaware are commonly set up as LLCs. Please do not think about set up until you have at least 10% of your fund Hard Circled. This is an absolute waste of time.

Fund vehicles in Delaware are commonly set up as LLCs. Please do not think about set up until you have at least 10% of your fund Hard Circled. This is an absolute waste of time.

“The information herein is strictly confidential and is intended for authorized recipients only. The content of this presentation is shown for information purposes only and is not intended as investment advice, or an offer or solicitatio...

“The information herein is strictly confidential and is intended for authorized recipients only. The content of this presentation is shown for information purposes only and is not intended as investment advice, or an offer or solicitation with respect to the purchase or sale of any security. The strategy presented herein represents the strategy of the General Partner of the Fund as of the aforementioned date and may vary at the discretion of the General Partner. There is no guarantee that any investment objective will be achieved. Past performance is not indicative of future results. Actual results may differ materially from those expressed or implied. Recipients should not assume that any companies identified in this presentation, are or will be, investments held by the Fund. Any projected returns presented herein are shown for illustrative purposes only. There can be no guarantee the Fund will achieve these results. Venture investing is risky and you could lose some or all of your investment.”

yes, they are for the life of the fund

yes, they are for the life of the fund

Generally speaking for Delaware domiciled funds, the ManCo and GP entity are LLCs, and the fund itself is a Limited Partnership. The fund managers own the ManCo, which owns the majority of the GP entity. The Limited Partnership (where th...

Generally speaking for Delaware domiciled funds, the ManCo and GP entity are LLCs, and the fund itself is a Limited Partnership. The fund managers own the ManCo, which owns the majority of the GP entity. The Limited Partnership (where the limited partners invest into) is managed by the GP entity. 

This is handled by LPAs by something called a Key Person Clause. You can see how the Cornerstone LPA handles this by searching the agreement for ‘Key Individuals’ and for ‘Limited Operations’ mode: But, basically, you can tell them ...

This is handled by LPAs by something called a Key Person Clause. You can see how the Cornerstone LPA handles this by searching the agreement for ‘Key Individuals’ and for ‘Limited Operations’ mode: But, basically, you can tell them that the fund will go into limited operations mode and then, the interests of the fund will likely be distributed to the limited partners based on the terms of the LPA.

For Fund 1, you should pick one approach. It’s hard enough to sell one or the other (FoF is a much harder sell BTW). The LPA will need to updated by counsel if you want to go with this approach.

For Fund 1, you should pick one approach. It’s hard enough to sell one or the other (FoF is a much harder sell BTW). The LPA will need to updated by counsel if you want to go with this approach.

Offer to get on a call. You need to have a pre-existing relationship and to ensure that they are wealthy before officially pitching them. If you are just getting feedback from a friend, then that is fine.

Offer to get on a call. You need to have a pre-existing relationship and to ensure that they are wealthy before officially pitching them. If you are just getting feedback from a friend, then that is fine.

Yes - there will so many conflicts for you to have to work through, that it likely will not be worth it

Yes - there will so many conflicts for you to have to work through, that it likely will not be worth it

Under U.S. securities laws, the issuance of securities requires registration with the SEC or an exemption from registration.   For employees who are not accredited investors, the fund should consider ways to compensate such employees tha...

Under U.S. securities laws, the issuance of securities requires registration with the SEC or an exemption from registration.   For employees who are not accredited investors, the fund should consider ways to compensate such employees that do not involve the issuance of securities unless there is an exemption such as through a stock option plan. Note that the definition of accredited investor does include "knowledgeable employees" of certain private funds.  This includes directors and certain executive officers of the private fund, or of an affiliated person of the private fund that manages the investment activities of the private fund (“affiliated management person”). This also includes employees who participate in the investment activities of the private fund or other private funds or investment companies managed by the affiliated management person.

Most LPAs don't give LP this option without specific approval which may be withheld.

Most LPAs don't give LP this option without specific approval which may be withheld.

Funds are viewed as high profile targets for lawyers, so choose a safe name that does not have conflicts with other trademarks.

Funds are viewed as high profile targets for lawyers, so choose a safe name that does not have conflicts with other trademarks.

No. “Fund rules” represent how you manage areas of conflict. For example, many VCs created rules that preclude them from making investments outside of their fund. “Investment criteria” represents what you look for in a company. I.e....

No. “Fund rules” represent how you manage areas of conflict. For example, many VCs created rules that preclude them from making investments outside of their fund. “Investment criteria” represents what you look for in a company. I.e. pre-seed in Italy etc…

The General Partnership Entity manages the carry and is governed by the Stewardship agreement that you are referring to. The Limited Partnership Entity is where the LPs invest and it allocates the carry to the General Partnership Entity....

The General Partnership Entity manages the carry and is governed by the Stewardship agreement that you are referring to. The Limited Partnership Entity is where the LPs invest and it allocates the carry to the General Partnership Entity. The Limited Partnership Entity is governed by the Cornerstone LPA. Class V shares are typically reserved for investors in the General Partnership Entity. So, if you have an investor that wants to make an investment in the General Partnership Entity, you would use Class V shares. Class A are for everyone else (GPs, VPs etc..)