VC Fund Structure Explained: A Walk-Through Guide
Breaking down a typical fund structure with a one page example and overview.
In this post, we'll break down the typical VC fund structure using a hypothetical example: Graph Ventures. Our example fund follows a standard 2% management fee and 20% carry structure, which we'll explain in detail in a future post. For now, let's focus on the core components of the fund structure.
You can download this overview for free here
We also made a simple walkthrough video that explains it even further.
1. Limited Partnership (LP)
Definition: The LP is the actual fund, where capital from investors is pooled.
Structure: Investors become limited partners, committing capital and receiving limited liability protection.
Example: Graph Ventures Fund I LP
Sally Smith's Family Office commits $500,000 to Graph Ventures Fund I, L.P.
As an LP, Sally's liability is limited to her $500,000 commitment (i.e. max loss is $500k).
If the fund faces legal issues, Sally's other assets are protected.
2. General Partner (GP)
Definition: The GP makes investment decisions and manages the fund.
Structure: Typically an LLC owned by the fund's managing partners.
Example: Graph Ventures Fund I GP, LLC
Annie Easley, the founding partner at Graph Ventures, owns 100% of Graph Ventures GP LLC.
Annie commits personal capital as part of the GP commitment to the fund.
The LLC structure protects Annie's personal assets beyond her commitment.
3. Management Company
Definition: Handles day-to-day operations and administration of the fund.
Structure: A separate entity that employs staff and manages fund operations.
Example: Graph Ventures Management Company, LLC
Employs analysts, operations staff, and administrative personnel.
Receives management fees (2% in this case) to cover operational costs.
Keeps operational expenses separate from fund investments.
Putting It All Together
In our Graph Ventures example:
Sally Smith's Family Office invests $500,000 in Graph Ventures Fund I LP.
Annie Easley, through Graph Ventures GP LLC, makes investment decisions for the fund.
Graph Management LLC handles operations, using management fees to pay salaries and expenses.
This structure provides clear roles, liability protection, and operational efficiency. Sally's investment is protected, Annie's personal assets are shielded, and the fund's operations are streamlined.
Key Takeaways
Clear Separation of Roles: Each entity (LP, GP, and Management Company) has distinct responsibilities, ensuring transparency and accountability.
Liability Protection: The structure limits the liability of both LPs and GPs, protecting their personal assets beyond their commitments.
Operational Efficiency: A single management company can handle operations for multiple funds, reducing overhead and streamlining processes.
Regulatory Compliance: This structure helps the fund meet various regulatory requirements, including those set by the SEC.
Scalability: As the firm grows and raises additional funds, this structure can be replicated, maintaining consistency across fund generations.
Tax Matters Matter: This is not tax advice and we are not tax advisors, but you should consider taxes. Fund fee income is taxed at the personal income level, while investment profits are taxed with capital gains.
Remember, while this example simplifies the structure, real-world implementations can be more complex. Always consult with legal and financial professionals when setting up or investing in a VC fund.