How to choose a VC domicile

Here is everything you need to know about picking a domicile for your VC fund. At VC Lab we’ve helped many ambitious fund managers such as yourself pick and launch their VC funds and we’ve simplified the process so you can focus on what matters most.

Domiciling is a complex and opaque process because of the many factors one has to consider. Each fund manager has a unique set of needs to consider with regards to their funds. You must take into account: your fund size, geography, thesis, LPs, and much more.

Read more in our ‘Best VC Domiciles‘ article.

The 7 key factors:

1. Fund Vehicles
2. Taxation / Cost
3. Speed to market
4. LP / Investor preferences
5. Sophistication of the national regulator
6. Legal system and certainty
7. Ease of doing business

• Sign up to our Decile Launch, to automate your fund structuring.

1. Fund Vehicles

Fund vehicles are entities by which investors and LPs can invest into forms of assets. Alternative Investment Funds (AIFs) can invest into startups considered high risk.

These vehicles give managers flexibility on many different aspects of their fund. The fund vehicle affects taxation, speed to market, regulation, pre-marketing, and other important functions, such as where your fund can invest in and who you can raise money from. They also determine the liability assumed on your part as well as the LPs.

2. Taxation / Cost

Taxation and cost is the most important aspect for you to consider.

You will have to decide on how your fund will be treated as a legal entity. Depending on the jurisdiction you choose, you will have several options such as transparent and opaque tax structures.

• Opaque (open) structure: Fund entity itself is taxed and shareholders in the fund are taxed in relation to their dividends.
• Transparent tax structures: Flow through entities where gains and losses flow directly through to investors in the fund.

This set of decisions will determine if the funds can be exempt from certain taxes that are levied upon them. When making a decision also consider the tax rates in each of these domiciles.

Further factors to consider are the cost of setting up as well as the maintenance. Although some domiciles are incredibly well renowned and preferred by LPs they may prove to be very expensive for new fund managers who are often managing micro funds. Yearly subscription costs to the national regulator alongside the costs associated auditing and legal fees must also be taken into account.

3. Speed To Market

Depending on the domicile you choose, there will be a different array of fund vehicles which will allow a different set of options to get to market.

Some fund vehicles have a much quicker time to market very with less regulation from their respective national regulators. This enables them to raise funds quicker. Other domiciles are highly regulated, meaning that getting to market is a long and arduous journey that often racks up hefty legal and advisory fees.

• Tip: New managers should opt to get to market quickly and prefer domiciles with tailored vehicles to do this.

For example:

• In Luxembourg, the 2016 Reserved Alternative Investment Fund (RAIF), facilitates quick market entry via reduced regulation, with the option of converting to a more regulated fund in the future.
• The Estonian LPF and the lighter regulated “Small Managers Regime” in the Netherlands have similar advantages in speed to market for newer smaller funds. Provided certain conditions are met.

4. LP / Investors Preference

Fund managers should note that LPs have a very large say in where a fund will be domiciled.

LPs often invest in funds that are domiciled in highly reputable locations, which additionally offer them the best taxation advantages possible.

It is prudent to find out what your potential LPs think about where you should domicile.

• Tip: We advise new fund managers to prolong making a decision until having 10%+ hard and 10%+ soft commitments. LPs usually dictate where a fund is domiciled, which might be a deal breaker or force you to re-domicile in the future.

5. Sophistication Of The National Regulator

Highly competent national regulators offer fund managers a plethora of tools, tax / regulatory schemes and fund vehicles.

Regulators set up the legal framework that adjudicates and determines how and what actions funds can take. One example is the proactive Estonian FSA, who have tailored a new fund vehicle for smaller funds, incorporating some of the best aspects of fund vehicles in both the UK and Luxembourg. Said actions and the formation of fund structures tailored to the needs of emerging fund managers has significantly increased appeal of this domicile to new fund managers.

6. Legal System And Certainty

The best domiciles have a clear-cut legal system with set precedence.

For example, Delaware in the US is very highly regarded because of its set of precedence. This will allow you and your legal counsel to operate with a higher degree of certainty. It will also put your LPs at ease and allow you to conduct capital recalls from them efficiently.

• Tip: If you are operating in the US, your LPs will expect you to domicile in Delaware due to its business-friendly laws and precedence of rulings.

7. Ease Of Doing Business

Things to consider for example are double tax treaties which affect cross-border investments and LPs you can raise money from.

Domiciles also affect how you can market their funds to both professional and non-professional investors. Furthermore, as a fund manager, you must evaluate the ecosystem of local advisories as well as the legal firms in place which will help them set up their funds and maintain them. Certain domiciles lack services required to construct and support a VC fund, while some domiciles are offer plentiful array of services with different cost structures.

• Tip: If you are operating in the EU, you will need to obtain a set of licenses, pursuant to the Alternative Investment Fund Managers Directive such as a pre-marketing passport.

Read our article on ‘The Best VC domiciles‘.

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