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Insights Limited Partners Resources

Why Invest In Venture Capital?

Today, venture capital is the global driving force of technological innovation and change.

Venture capital has long been considered as an ‘alternative investment’, due to the perceived high risk by investors and the inherent nature of the power-law that is within VC. However, historic backers of VC such as university endowments are enjoying unprecedented levels of returns thanks to the growth of technology, which is encompassing every facet of a companies operations and the economy.

We will explore some of the reasons why now is the perfect time to invest in the VC asset class and why becoming a limited partner in a VC fund is a very compelling and prudent choice, especially for angel investors. 

1. Historically High Returns

Venture capital is seeing incredible levels of growth accompanied by historic levels of liquidity and the asset class is performing well compared to public market indices. This year, Harvard Endowment recorded a 34% gain and swelled to its AUM to $53.2bn, while MIT’s endowment grew to $27.4 bn after a 56% return so far in this year and VC outperformed every major asset class over the last several years.  

Early-stage funds, particularly new fund managers in the pre-seed to seed stage, are enjoying high returns as the VC market is thriving. Exits in US VC-backed startups have already doubled in 2021, compared to levels seen in the previous two years and there is more liquidity in venture capital than ever before. We are seeing the atomization of venture firms, where founders are opting for either elite firms or specialist small fund managers. 

Historically, new fund managers typically outperform more experienced managers across the board. Recently the upper quartile of new fund managers attained 27.1% IRR on average while non-first time managers in the same bracket have achieved 19.6% IRR. New fund managers on average also attained a Total Value to Paid-In (TVPI) ratio of 1.85 while more experienced managers scored 1.75 in the upper quartile.

2. Reduced risk by a portfolio approach

Angel investors, in particular, should note that the diversified portfolio approach taken by VC funds reduces risk. However, due to the inherent power law in VC, a portfolio of startups also has the potential to generate very high returns. New fund managers typically outperform new angel investors in the long run and the tried and tested VC model offers LPs more time to engage in other activities.

Angel investors who are looking to make below 30 investments should be wary of the risks associated with an undiversified portfolio. Angels often need to manage their own portfolios and implement their own strategies. To make around 30 investments, an angel investor must meet with anywhere from hundreds to thousands of startup teams and conduct lengthy due diligence.

Below you can find an example of a venture capital portfolio. This example below is for demonstration purposes only. Please note that investing in a VC fund still has risks of a total loss, however, the probability is much lower.  Under a low scenario, a portfolio still has the potential to generate a positive return despite the fact that the majority of investments failed. Also, in the high scenario, one unicorn-level company can help the portfolio generate a massive return depending on the stage.

3. Focus on a thesis through a professional manager / expert

Early-stage fund managers are typically highly qualified specialists in a domain of expertise and have theses for achieving outsized returns. A fund manager is typically is a well-connected expert in a particular market, meaning that they have a well-thought-out strategy to capture value and have access to high-quality deals through their vast networks. 

The majority of high-quality deals rarely become public knowledge. Such deals are typically accessible via a large private network of entrepreneurs and venture capitalists and are often oversubscribed. It’s also important to note that the inbound deal volume of a VC firm is often an order of magnitude greater than that of the typical angel investor. Funds typically diligence 1,000s of companies per year and usually have systems in place for analyzing such opportunities at scale. They tend to also have larger teams with a broader set of domain expertise to help with diligence.

4. Opportunities to invest directly in portfolio companies

Becoming an LP in a VC fund does not necessarily mean the end of one’s angel investing career. In fact, being an LP in a VC fund will at times offer investors co-investing opportunities, giving LPs exclusive access to high growth opportunities at later stages which are often reserved to large growth funds. As Court Lorenzini, co-founder of DocuSign, LP in 15 funds and investor in over 60 companies, shared in an interview with VC Lab, at times he invests alongside the funds of which he is a LP.

Additionally, becoming an LP will give you more deal-flow opportunities in other areas as well. Since most new managers have small fund sizes, they often will need to syndicate their pro-rata stake to their LPs. Since funds usually have more deal-flow than individuals, your fund manager may often refer high-quality deals that do not fit the fund’s thesis, but you may be interested in. This will consequently lead to you expanding your inner VC network and building an array of founders and entrepreneurs who will also refer deals to you.

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Insights Limited Partners Resources

The Basics of VC Funds

The venture capital industry is the driving force behind technology companies that are changing the world. Many new investors are now rushing into the asset class to get exposure to the companies producing unprecedented levels of growth and returns. Find out what a venture capital fund is and how it really works. 

The Venture Capital Fund

A Venture Capital fund is a pooled investment fund by which the Venture Firm allocates capital to startups in exchange for equity. Typically, VCs are focused on technology startups with characteristics that enable them to scale and grow quickly. These companies are regarded as highly risky, however have the chance delivering high returns. Note that a VC firm may have more than one fund at any given time with varying areas of focus and strategy.

The Stakeholders

It’s important to note the distinction between a venture fund and a venture firm. While a venture fund is an entity upon which investments are made into startups, the venture firm is the overarching entity that encapsulates all of the funds and management company.

  1. Limited Partner

Limited Partners (LPs), are the investors in a venture fund and contribute most of the capital. They invest directly into the fund and receive earnings once / if the fund produces returns. Typically, once returns are actualized, LPs receive their entire investment into the fund after which the remainder of the profits is split 80:20 between the LPs and GPs respectively, depending on the fund.

LPs are often endowments, pension funds, institutional investors, family offices and HNWIs.

  1. Managing Partners

Managing Partners are in charge of the operations of the Venture Firm, and the particular fund’s long-term strategy. They make investment decisions and distribute the capital they’ve raised from LPs and typically put up 1-2% of the fund’s capital.

Fund managers are often VCs / investors with experience, entrepreneurs and domain experts.

To learn more on the other roles in venture capital click here.

The Structure

To invest in a startup in venture capital, several entities must be formed. The venture firm is a construct of all of these entities combined. These structures can become very complex, below is a representation of the most popular structure.

Source: VCpreneur, Ahmad Takatkah
  1. The Limited Partnership

Investors into the fund will put money into a limited partnership entity, which will then distribute capital to portfolio companies. This entity is where the capital is held and distributed.  

  1. General Partnership

The General Partnership is made up of the partners in the fund and this entity receives carried interest.

  1. Management Company

The management company is used to manage the fund’s expenses such as salaries and rent. Managing Partners are owners of the management company and thus control the venture firm. 

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Insights Resources The Domicile Report

VC Domicile Update – Q4 2021

Following up on our Domicile Report, here is a quick update on the most popular domiciles around the world.

The following information is provided for illustrative purposes only and is based on publicly available information as of September 2021. The complexity and evolving nature of securities regulations and global tax law may change the analysis below. There may be other factors to consider when choosing where to domicile your fund, so you should consult legal counsel or a tax advisor when determining where and how to structure your fund.

Americas

Since releasing our Domicile Report, jurisdictions in the Americas have not seen much radical change. Delaware continues to be the most popular domicile in the Americas, thanks to its superior speed, efficiency and cost.

Delaware

Delaware is the clear winner out of all the domiciles globally. Forming a fund is relatively quick, cheap and easy. There are many affordable advisory, tax and legal services available to fund managers.

Key updates:

Conclusion: Delaware continues to be a  popular domicile for venture capital funds. It has a great set of legal precedents and US LPs will expect you to domicile here. Since most LPs are US citizens there is a high likelihood of this happening. Delaware is also starting to gain traction from fund managers across the globe due to increased KYC and AML measures in other fund domiciles.  

Cayman Islands

The Cayman Islands was ‘blacklisted’ by the EU council in early 2020. The Cayman Islands has since enacted the Private Funds Law 2020 and implemented new reforms to its framework on Collective Investment Funds in an attempt to shed its “tax haven” moniker, as mentioned in our domicile report. Doing so has meant that the EU council removed the Cayman Islands from its blacklist. However, this development has resulted in stricter and more onerous compliance measures for fund managers and LPs who are domiciled there.  

Key updates:

  • Fund managers are required to register with the CIMA and face ongoing operations obligations which adds administrative costs for the fund
    • Yearly audits of the fund’s financial statement
    • Implement a compliance regime
    • Annual fees to CIMA
  • Increased KYC & AML regulations

Conclusion: The Caymans, since being blacklisted by Europe and subsequently removed from the blacklist, have lost their appeal to some LPs. Also, the increased costs and onerous compliance procedures make it unviable for funds smaller than $15 MM.

Asia

Notable developments in Asia are coming from Hong Kong which is developing new and streamlining existing regulations. In Singapore, the Monetary Authority of Singapore is also working to streamline the VCFM licensing processes.

Hong Kong

After the creation of the Limited Partnership Fund in 2020, Hong Kong is now working to capture formation opportunities after streamlining some new regulations. Fund managers looking to domicile in Hong Kong should note the costs and time associated with the application process.

Key updates:

  • GPs need to set up :
  • Time to set up a fund is from 3-4 weeks, and an additional 3-4 weeks to set up a bank account 
    • GPs have unlimited liability under this structure
    • Only one LP needs to be listed on the LPF
      • Subsequent LPs are anonymous in government filings
      • These LPs only have an investment agreement with for the LPF

Conclusion: Hong Kong’s time to market is relatively quick for the region, which is seeing an increase in licensing procedures.

Singapore

Fund managers considering domiciling in Singapore should take note of recent developments and key requirements of the Venture Capital Fund Manager (VCFM) license application process. The Monetary Authority of Singapore (MAS) is actively working to educate emerging fund managers about their requirements and streamline the process.

Key updates:

  • VCFM license application process nowadays takes 2-3 months in most cases 
    • Longer when applicants fail to comply with Monetary Authority of Singapore rules and/or are less responsive to regulators
  • To domicile in Singapore, the management company must have at least 2 full-time resident professionals or representatives
    • A fund’s director could serve as representative (there is a minimum requirement of 2 directors, at least 1 of whom must reside in Singapore)
  • Monetary Authority of Singapore requires GPs to:
    • Have a physical office in Singapore
    • Fulfill AML/KYC requirements
    • Preferably have backgrounds in investing/financial services

Conclusion: Historically, Singapore has been the most popular domicile in Asia. Currently, It is suboptimal for a fund under $15MM to domicile in Singapore as the fund formation and operating costs are relatively high. However, MAS is trying to streamline the process for venture funds to set up in Singapore. 

Europe

The EU council has gone on to label and blacklist, domiciles that have not met guidelines regarding tax evasion, fraud and avoidance as well as money laundering.  As a consequence of this crackdown, we are seeing increased KYC and AML procedures across the world. This is substantially increasing the time to market for new funds, making jurisdictions less desirable for both LPs and GPs.

Netherlands

The Netherlands’ ‘Small Managers Regime’ is great for new funds with less than €100m. Both the costs of setting up and advisory services are relatively affordable for Europe. However, the speed to market has continued to be an issue across Europe and the Netherlands.

Key updates:

  • New KYC and AML regulations increasing an already complex process
  • It takes around two months to obtain a license under the ‘Small Managers Regime’ 
    • Can be extended if additional documentation is required

Conclusion: The Netherlands offers good value to new fund managers in Europe via its ‘Small Managers Regime’. Advisory and legal services are ample and relatively affordable. However, the application process is complicated and arduous. Nevertheless,  with the regulatory climate in Europe, the Netherlands may be the best option for new fund managers.

Luxembourg

Though Luxembourg has been one the most reputable domiciles in Europe and has flexible fund vehicles, recently both the cost and time to market have been increasing. Establishing a fund in Luxembourg is two to three times more expensive than Delaware and is mostly viable for large established funds.

Key updates:

  • Labelled by the EU alongside the Cayman Islands and Estonia 
  • Increased KYC regulations by the CSSF, similar to the rest of Europe
    • Even with quick and unregulated vehicles such as the RAIF, time to market has gone up considerably 
    • If a single LP holds more than 10% of the fund, further time-consuming KYC requirements are triggered
    • Currently takes a couple of months to set up a fund
  • Regulated funds must conduct independent yearly audits and submit accounts and NAV data to the CSSF

Conclusion: Luxembourg’s long-standing reputation was somewhat tarnished due to the EU council labeling. Additionally, new KYC / AML procedures have significantly increased what was an already expensive licensing process.

Estonia

Though Estonia has been emerging as a fast and cheap alternative domicile in Europe, there have been some notable developments. The EU council and other regulatory entities have put restrictions on Estonia due to reports / allegations of questionable activities. Consequently, fund managers should be warned that the time to set up a fund has increased considerably.

Key updates:

  • Labeled the same way as Luxembourg and the Cayman Islands
  • In response, EFSA has increased KYC measures and licensing approval process
    • Now application process may take longer than 120 days, whereas before it was as quick as a week
  • GPs must also gain approval from the FIU
    • Funds must have a compliance officer on their payroll

Conclusion: Currently, it is really hard to get a license from EFSA and FIU, as the domicile is cleaning up and conducting reviews of the funds there. The process which was previously seamless has become considerably complicated, long and expensive.

This content is provided by VC Lab, the venture capital accelerator. 

The free 16 week VC Lab program provides guidance, structure and a network to complete a fund closing in 6 months or less. Since mid 2020, VC Lab has helped launch 83 venture capital firms around the world.

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Cornerstone LPA Insights Resources

How to Use Cornerstone to Form a Fund

Cornerstone by VC Lab is a lightweight and easy-to-use Limited Partnership Agreement (LPA) designed to simplify investing in the venture capital asset class by reducing the use of high-priced fund formation attorneys. Venture capitalists starting a new fund can customize and negotiate investment terms without engaging a law firm. 

The Cornerstone Agreement is short, easy to read and easy to customize. The economic terms of the fund are clearly laid out in the beginning of the Cornerstone Agreement, and General Partners can customize certain terms to fit their fund’s needs. On a high level the process is as follows:

  1. A General Partner takes the Cornerstone Agreement and customizes plug variables in the Key Economic Terms for a new fund offering.
  2. The General Partner shares the customized Cornerstone Agreement with potential Limited Partners for feedback on the terms.
  3. Once the terms are agreed, the General Partner engages with a law firm to form the fund entities using the pre negotiated Cornerstone Agreement.

In this article, we are going to explain the process to customize the Key Economic Terms for the needs of a specific fund. There are 24 terms to customize in the Cornerstone, listed alphabetically. For the purpose of explaining the terms, they are re-grouped by purpose.

Each key term is bolded and in parenthesis and is followed by the term’s definition. If there are options for the term, General Partners can choose from the bracketed pre-filled options. The commonly used options are underlined to help see what most next generation General Partners choose.

To prepare the Cornerstone Agreement, simply choose the item in brackets or fill in blank spaces, and remove any other unused options. Then, save the agreement, preferably as a PDF, and you are ready to share with potential investors. Let’s look at the specific terms.

The Team Terms

The Cornerstone provides an easy access way for General Partners to define the various roles within a venture fund. 

First and foremost, there are the Key Individuals who are primarily responsible for running the fund and should devote most of their time to the affairs of the fund . Next are the Advisory Committee members, which often include Limited Partners, who adjudicate conflicts of interest or making investments outside of the fund thesis. Lastly, there is the Partnership Representative, who is the main contact person for US tax purposes.

The Key Individuals and the Partnership Representative are specified by the General Partner before sending out the Cornerstone to Limited Partners. It is recommended that the Advisory Committee members are elected once you are close to closing and have a sense of any Limited Partners that you want on the Committee. Being on the Committee can be offered as a perk to potential investors.

Key Individuals” means the following individuals identified as signatories of General Partner:
[First_Name Last_Name]
[First_Name Last_Name]

Advisory Committee”initially means the individuals listed below. If no individuals are listed, then an Advisory Committee may be formed at the discretion of General Partner. 
[First_Name Last_Name, Phone Number, Email, Address]
[First_Name Last_Name, Phone Number, Email, Address]
[First_Name Last_Name, Phone Number, Email, Address]

Partnership Representative” initially means:
[First_Name Last_Name].

The Strategy Terms

The Cornerstone Agreement encourages General Partners to have a defined focus and strategy for their fund. The General Partner can input the Sector, Stage and Territory for the fund thesis, which gives Limited Partners comfort that the fund will focus resources on mutually agreed areas.

Like most LPAs, the Cornerstone Agreement also defines a series of Prohibited Sectors that the fund will not invest in, and there is a common list of sectors that you can choose from. As an example, Limited Partners often do not want venture capital firms to invest in real estate, gambling, or alcohol. It is recommended to choose as many of these as possible given your industry and expected investments, and it is possible that some Limited Partners may ask for more.

Sector” means the following Sector or Sectors in which the Fund expects to invest: 
[___________]

Stage” means the anticipated stage of Portfolio Investments: 
[Accelerator] [Angel] [Pre-seed] [Series Seed] [Series A]

Territory” means:
[Worldwide] [United States]

Prohibited Sectors” means securities traded publicly on a securities exchange and the following sectors or industries:
[Alcohol] [Gambling] [Weapons] [Real Estate] [Cryptocurrency] [Blockchain] [Controlled Substances banned under U.S. Federal Law] [________]

The Timing Terms

The Cornerstone Agreement includes a number of timing related terms, and many of these are important. The most important is the Fund Duration, which is the amount of time that the fund has to make primary investments, make follow-on investments and secure exits. Most Limited Partners expect the Fund Duration to be set at 10 years, and there is normally a Fund Duration Extension of 2 one year periods, since exits are taking longer and longer to occur. For early stage funds, rather than extending the Fund Duration, it is more common to have a Fund Duration Extension for three or four years, as the extension years do not have fees.

Some other important timing settings are the Investment Period, which is the amount of time that a fund has to make primary investments, and the Fundraising Period, which is the amount of time after the first close that the General Partner has to complete fundraising for the fund. The standard Investment Period is 4 years, and a recommended Fundraising Period is 18 months. The shorter the Investment Period, the shorter the Fundraising Period should be, logically.

The last two timing terms are the Fiscal Year, which most funds set as the calendar year to align with tax filings, and the Capital Call Notice Period, which is the amount of time Limited partners have to wire funds. For new managers that do not know their Limited Partners well, it may make sense to set the Capital Call Notice Period to either 15 or 30 days.

Fund Duration” means the following anniversary from the Initial Closing Date:
[10th year] [12th year] [8th year]

Fund Duration Extension” means:
[2 one-year periods] [1 year] [0 years (no extension)]

Investment Period” means the period from the Initial Closing Date up through the date that is the following number of years after the Initial Closing Date, during which the Fund can make its initial Portfolio Investments:
[4] [3] [5]

Fundraising Period” means the period commencing the Initial Closing Date and ending on the date that is the following number of months from such date:
[18 months] [12 months] [9 months]

Post-Investment Period” means the period after the last day of the Investment Period.

Fiscal Year” means, unless otherwise required under the Code, each year ending on the date below. In the case of the first and last Fiscal Years of the Fund, Fiscal Year shall mean the fraction thereof commencing on the Initial Closing Date or ending on the date on which the winding-up of the Fund is completed, in each case unless otherwise determined by General Partner and permitted under the Code.
[December 31] [September 30] [June 30]

Capital Call Notice Period” means the following number of days after a Capital Call Notice allowed for a Limited Partner to deliver cash to the Fund in the amount requested:
[10 days] [15 days] [30 days]

The Economic Terms

The economic terms in the Cornerstone Agreement are the backbone of the agreement, and all of these are important. The Carried Interest Percentage sets the carry for the fund, and, with most new managers, this will be 20% for the classic “2 and 20” model.

The Management Fee is split in the Cornerstone between an Investment Period Management Fee and a Post-Investment Period Management Fee. If you wanted a straight 2% for the ten years of the Fund Duration, then you could set both periods to 2%

However, most funds require more effort during the Investment Period, so the Management Fee might be higher, such as 3.5%. With a 3.5% management fee for 4 years of the Investment Period, then a 1% management fee for the remaining 6 years of the fund, the average management fee is 2%.

The next term is the GP Commitment Percentage, which is the amount of money that the GP agrees to invest in the fund. Most Limited Partners in funds over $5 MM will ask for this to be set at 1%, but this is negotiable. The GP capital contribution to cover the GP Commitment Percentage is paid at the same ratio and same time as capital calls are made, so this is a smaller commitment than it may seem.

The Maximum Portfolio Investment Percentage defines how much of the fund can be invested in any one single portfolio company as a percentage of the fund. This is an important economic term for fund strategy, as it affects the number of portfolio companies that a fund can invest in. Most funds set this at 10%, which means that they will have at least 10 portfolio companies, since no one company can get more than 10% of the fund. For smaller funds that have a more focused investment strategy, this amount may be higher, such as 25%.

The Organizational Expenses Cap refers to a spending limit on the various setup expenses for a fund. Normally, the fund pays for the expenses to get established separate from the management fees, and Limited Partners want these expenses to be capped. Any overages are normally paid for from the management fees. The Organizational Expenses include legal, registration and other filing fees, which tend to scale with the size of the fund. A typical amount for a smaller fund is $50,000.

The Recycled Amount refers to the amount of money as a percentage of the total fund size that a fund can claim back from distributions to invest in additional deals. Recycling is a good way to reduce the effect of management fees and increase portfolio diversity, but it can also be complicated to manage from a fund administration standpoint. As a result, most new managers avoid recycling and set this to 0%.

The last economic term, Successor Fund Threshold, is important because it defines how much of the first fund must be invested before the General Partner is permitted to raise an additional fund. The lower the threshold, such as 50%, the faster the General Partner can start building the firm value. Most Limited Partners want 70%, and most new managers will want 50%

Carried Interest Percentage” means, for purposes of calculating the Carried Interest of General Partner, the following percentage:
[20%] [25%] [15%] [10%] [__%]

Investment Period Management Fee” means the annual management fee during the Investment Period determined by multiplying the following percentage by the aggregate amount of Capital Commitments of all Limited Partners:
[3.5%] [2.0%] [3.0%]

Post-Investment Period Management Fee” means the annual management fee during the Post-Investment Period determined by multiplying the following percentage by the aggregate amount of Capital Commitments of all Limited Partners:
[1.0%] [2.0%] [1.5%]

GP Commitment Percentage” means, for the purpose of calculating General Partner’s commitment to contribute to the Fund, the following percentage:
[1.0%] [0.0%] [0.5%] [__%]

Maximum Portfolio Investment Percentage” means the following maximum percentage of the aggregate Capital Commitments made by all Partners to the Fund that may be invested in any single Portfolio Company:
[10%] [5%] [25%]

Organizational Expenses Cap” means the following cap on fees, costs and expenses, including that of counsel to General Partner, incurred in connection with the organization of the Fund and the offering of Partnership Interests:
[$50,000] [$100,000] [$75,000]

Recycled Amount” means, for the purpose of allowing the Fund to make additional  investments from distributions provided to the Limited Partners, the product equal to such Limited Partner’s Capital Commitment times the following percentage:
[0%] [10%] [20%]

Successor Fund Threshold” means when the following percentage of Total Capital Commitments has been invested into or committed for Portfolio Investments  and Fund Expenses: 
[50%] [70%] [0%]

The Reporting Terms

The Cornerstone Agreement has a key reporting term, Financial Statements, that defines how the General Partner prepares the fund’s financial statements. Most new managers and small funds will choose “Certified by General Partner,” since Reviewed or Audited financial statements can cost in excess of $10,000 per year to complete, and require extensive time and effort to accomplish.

Financial Statements” means the following type of balance sheet, income statement and cash flow statement for the Fund:
[Certified by General Partner] 
[Reviewed by a Certified Public Accountant] 
[Audited by a Certified Public Accountant]

The Control Terms

The Cornerstone Agreement control terms focus on defining what percentage of Limited Partners by ownership can take action within the fund, which is the Majority in Interest of the Limited Partner. The two primary actions are choosing an Advisory Committee member and entering Limited Operations Mode, where fund operations are put on hold. This is commonly set at a supermajority, 66 ⅔%. A lower percentage favors control by the Limited Partners, and a higher percentage favors the General Partner.

Majority in Interest of the Limited Partners” means Limited Partners holding more than the following aggregate Commitment Percentages held by all Limited Partners:
[66 2/3%] [75%] [50%]

The Final Agreement

Once a General Partner sets all of the terms in the Key Terms section of the Cornerstone Agreement, the document will look like the example below. It is recommended that you create a PDF of the Cornerstone Agreement, and email it to potential investors for feedback.

Categories
Insights Resources The Domicile Report

Venture Capital Domicile Report by VC Lab

The following information is provided for illustrative purposes only and is based on publicly available information as of September 2021. The complexity and evolving nature of securities regulations and global tax law may change the analysis below. There may be other factors to consider when choosing where to domicile your fund, so you should consult legal counsel or a tax advisor when determining where and how to structure your fund. 

Overview

Launching a venture capital fund can be challenging due to the complexity of the factors to consider, which often creates a high barrier to entry for emerging fund managers. In particular, fund structuring and determining where to domicile the fund can be confusing, costly, and time consuming due to the lack of forthcoming information available. This report aims to provide some guidance regarding potential fund domiciles for venture capital funds. The jurisdictions included here are not exhaustive, however they include commonly used and established fund domiciles. 

Below are the factors that are frequently considered when determining where to domicile a fund:

  • Tax Optimization
    • Where are your investors located?
    • Where do you intend to invest?
  • Cost
    • What are the set up and formation costs?
    • What are the annual maintenance costs?
  • Timing
    • How long does it take for formation?
    • How long does setting up bank accounts and other fund support activities take?
  • Fund Marketing Regulations
    • Do you need registration or licenses to market the fund and how long to these take to get?
    • What are the requirements about who you can market to and how many investors can you have in a fund?
Popular Domiciles by Region
North America

Popular > Delaware, Caymans

Canada > Canada

USA > Delaware

Mexico > USA, Canada, Caymans, Mexico

Central & South America

Popular > USA, Canada, Caymans

Brazil > Brazil

Australia & New Zealand

Popular > Local

Europe

Popular > Local, Luxembourg, Netherlands

UK > UK

Middle East

Popular > Local

Africa

Popular > Mauritius, Delaware

Asia

Popular > Singapore, Caymans

Hong Kong > Caymans

Singapore > Singapore

73 Next Gen Venture Capital Firms launched with VC Lab

A first time fund manager will likely have limited resources (both time and money) to devote to determining where to domicile their fund. While fund formation costs can be paid from fund expenses, engaging legal counsel or a tax advisor can be costly and so most fund managers have some sensitivity when it comes to the cost of seeking fund structuring advice. In addition, the time to form a fund differs across jurisdictions as some jurisdictions have more onerous filing requirements. There are some service providers that can handle fund formation on behalf of a fund manager, however these services often come at a hefty price.

Broadly, fund managers should consider the regulatory regimes that apply to the fund because this will inform how a fund manager can engage potential investors and approach fundraising activities. Fund managers should also be aware of compliance requirements related to securities laws and any ongoing compliance requirements for the fund or its affiliates. Some jurisdictions also have physical presence requirements that fund managers should be aware of before proceeding with forming their fund. 

Perhaps the most important factor to consider is tax treatment. Fund managers should be optimizing for tax efficiency for the fund and its investors. This can be a sticking point for potential investors, so fund managers should consider where the fund’s potential investors are located, where the fund will be investing, and whether there are any applicable tax treaties that make a certain jurisdiction an attractive option for the fund’s investors.

It is important to note as well that fund managers may structure their fund entirely in one jurisdiction or they may take a “hybrid approach” in which the fund entity, the general partner entity, and the management company are formed in different jurisdictions. Taking a hybrid approach may be more tax efficient for the fund manager.   

There are some valuable resources online that can be helpful, particularly free templates or guides published by law firms or the official venture capital association of a jurisdiction. For example, the National Venture Capital Association in the US publishes helpful guidance and template documents on their website. The breakdowns linked to below include links to the relevant venture capital associations, if any. 

More Domicile Analysis

For more information on fund domiciles, including details and analysis below:

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Insights Legal Templates Resources

The PACT

PACT (“Pledge Agreement for Capital Transaction”) is a non-binding letter of intent signed by a qualified investor to indicate their desire to invest a specific amount of money into a startup or into a venture capital fund. The PACT is a Commitment Letter, which is commonly used in financial transactions.

The PACT Letter was developed in 2018 by the Founder Institute to solve the problem of internal fund offerings having excess investor interest. Before the creation of the PACT, it was difficult to identify which potential investors were serious about investing, commonly referred to as Hard Circled, and which other investors were casually exploring the investment, referred to as Soft Circled. Collecting signed PACT Letters provides a clear way to calculate the Hard Circled total, which reduces the uncertainty and guesswork of closing a multi-party investment round.

When a potential investor signs the PACT, they indicate their clear desire to invest, and they specify the amount of their desired investment. The PACT Letter asks the potential investor to self-identify as qualified and includes some limited confidentiality around the sharing of the deal terms. Lastly, the PACT also asks potential investors to provide correct information on the individual or entity making the investment, which is often needed to customize the closing agreements.

The process to secure PACT Letters from potential investors works as follows. All potential investors that express interest in an offering are provided a PACT to fill out and sign, ideally digitally. The PACT lists three options for the desired investment amount based on the size of the round, also offering a field to enter a custom amount. The legal language in the PACT is non-binding and in plain English, so filling out and signing a PACT Letter takes a couple of minutes.

A PACT template is below for anyone to use, and a couple of sample emails are also provided for assistance. The Founder Institute has successfully used the PACT in both the Funding Lab and VC Lab programs, helping startups raise capital in 3 to 6 months and helping new venture capital managers complete a first close in 4 to six months.

The PACT Letter Template

Sample Email to Limited Partners

Subject: Appreciate your feedback

Hello,

Thank you for reviewing the materials on [our new fund]. We are now collecting feedback on our term sheet before preparing the definitive agreements for our first close.

If you would like to review the draft term sheet and receive the final closing documents, can you please sign and return the attached PACT Letter? I have also sent this to you for digital signature through [this digital signature service].

I look forward to receiving your feedback on the closing. Thank you.