Accounting & Taxes

Max Exposure, as a percentage of Committed Capital, typically refers to the maximum amount of the fund's total capital commitments (at the time of the investment) that can be invested into any single portfolio company. This is often set ...

Max Exposure, as a percentage of Committed Capital, typically refers to the maximum amount of the fund's total capital commitments (at the time of the investment) that can be invested into any single portfolio company. This is often set at a specific percentage, such as 10%, to prevent the fund from concentrating too much risk in any one investment. Please note that this % is NOT OF THE TARGET FUND SIZE. 

The fund will need to open up a single secondary account for pre-funded contributions. Then, the fund would call the appropriate amount of capital from this pre-funded account.

The fund will need to open up a single secondary account for pre-funded contributions. Then, the fund would call the appropriate amount of capital from this pre-funded account.

This report is used by Fund Accounting every January to identify which of your vendors should receive a 1099. In order to be be required to send 1099s, the Fund/ManCo would need to be domiciled in the US, and only US-based LLCs and law f...

This report is used by Fund Accounting every January to identify which of your vendors should receive a 1099. In order to be be required to send 1099s, the Fund/ManCo would need to be domiciled in the US, and only US-based LLCs and law firms receive 1099s. 

Though it is possible to diversify your fund's bank accounts, it's not a realistic option for the small funds of emerging managers. First, your banking options are very limited. Most big banks don't want to work with emerging managers, h...

Though it is possible to diversify your fund's bank accounts, it's not a realistic option for the small funds of emerging managers. First, your banking options are very limited. Most big banks don't want to work with emerging managers, have excessive fees and are very difficult to deal with. Second, it's a big pain for you to manage multiple accounts operationally. It's not only going to be more expensive due to the added fees, but it creates a lot of treasury and compliance lift for your firm and for your fund administrator. For example, the administrator would need to reconcile multiple bank accounts on a regular basis which more then doubles their work and their fees. Finally, the majority of emerging managers the operational experience to handle this level of complexity or the time. Once an emerging firm becomes an enduring firm, you can afford to hire treasury and accounting resources in house and you can experiment with more complexity like this. Finally, the risk that you're trying to hedge against is minimal because: 1) VCs don't have a lot of money in the account for a long period of time. If they do, this is an indicator that they are mismanaging their capital call schedule which then creates a major drag on metrics like IRR. 2) By managing the capital call schedule well, it's unlikely that the bank account will have more money your bank account for an extended period of time beyond what's insured by FDIC 3) Changing bank accounts is fast and relatively easy. We had Decile Partners on SVB during the crisis and we migrated them off SVB in less then a week because bank accounts are pretty easy to change later.

Non-U.S. citizens generally do not need to pay U.S. taxes on capital gains from a Delaware fund as an LP, as capital gains are not sourced to the U.S. and are not taxed there. However, they may need to pay taxes in their home country. Al...

Non-U.S. citizens generally do not need to pay U.S. taxes on capital gains from a Delaware fund as an LP, as capital gains are not sourced to the U.S. and are not taxed there. However, they may need to pay taxes in their home country. Always recommend that LPs consult with a tax professional for specific advice and avoid providing LPs with tax advice. 

Interest collected on called capital is typically not subject to management fees and is not recognized by the carried interest provision as another source of fees. The interest earned on called capital is usually credited back to the Lim...

Interest collected on called capital is typically not subject to management fees and is not recognized by the carried interest provision as another source of fees. The interest earned on called capital is usually credited back to the Limited Partners (LPs) and is not considered part of the General Partner's (GP's) compensation. The management fee is generally calculated based on committed capital, and carried interest is based on the profits from investments, not on interest earned from deposits.

Your Fund Admin will take care of this. Right now, the back-office function is for Decile Partners. On a high level, depending on the legal structure, the GP will have its own capital account in hub and the accounting team reflects this. 

Your Fund Admin will take care of this. Right now, the back-office function is for Decile Partners. On a high level, depending on the legal structure, the GP will have its own capital account in hub and the accounting team reflects this. 

If being considered "already committed to portfolio companies", this is probably what led to the error, so yes - this sounds like a journal entry error.

If being considered "already committed to portfolio companies", this is probably what led to the error, so yes - this sounds like a journal entry error.

The dataset is incorrect in the system leading to errors in how the SOI is being reflected.

The dataset is incorrect in the system leading to errors in how the SOI is being reflected.

Yes, I can confirm the dataset is incorrect in the system.

Yes, I can confirm the dataset is incorrect in the system.

Yes, you can enable the GP to pay management fees by going to Back Office > Entity Management > Fund "Edit" > Click "Enable GP management fees"

Yes, you can enable the GP to pay management fees by going to Back Office > Entity Management > Fund "Edit" > Click "Enable GP management fees"

The Liability section in the balance sheet of a fund’s account can include various components such as: - Management Fee Payable - Legal formation fees - State domicile filing fees - Blue Sky Fees - Form ADV Filing - Annual Tax Preparati...

The Liability section in the balance sheet of a fund’s account can include various components such as: - Management Fee Payable - Legal formation fees - State domicile filing fees - Blue Sky Fees - Form ADV Filing - Annual Tax Preparation - CPA/Accountant fees for bookkeeping and financial statement preparation - Legal Operations - KYC/AML and other compliance expenses - Treasury (banking) fees These components represent the various obligations and expenses the fund is responsible for.

It's calculated by taking the difference between the FMV and Cost of the investment.

It's calculated by taking the difference between the FMV and Cost of the investment.

There is a separate line item for the GP commit labelled Capital Contributions - General Partners.

There is a separate line item for the GP commit labelled Capital Contributions - General Partners.

The dataset in the system is incorrect, which is incorrectly reflecting investments and their values.

The dataset in the system is incorrect, which is incorrectly reflecting investments and their values.

Within the Fund Overview page, you can generate your annual report.

Within the Fund Overview page, you can generate your annual report.

Yes, the interest earned from a convertible note is typically added to the cost base in the schedule of investments when the note converts to preferred. The interest is usually converted into additional shares of preferred stock at the t...

Yes, the interest earned from a convertible note is typically added to the cost base in the schedule of investments when the note converts to preferred. The interest is usually converted into additional shares of preferred stock at the time of conversion. The cost base becomes the original investment amount plus the accrued interest at the time of conversion. However, the specifics can vary based on the terms of the convertible note agreement and the fund's accounting policies.

PFIC/CFC rules are complex and you may be required to distribute additional tax documentation to US investors, so you should reach out to your fund's tax provider to determine if your fund has any annual filing requirements. More info on...

PFIC/CFC rules are complex and you may be required to distribute additional tax documentation to US investors, so you should reach out to your fund's tax provider to determine if your fund has any annual filing requirements. More info on PFIC below: https://www.lexology.com/library/detail.aspx?g=e3626fb7-eb6b-4402-b9b8-aeb5f2a34816 https://www.amicorp.com/AmiNews/2017/july/US_tax_implications_and_reporting_requirements.php

Yes! Only the fees outlined in the engagement letter will be charged by Decile Group. Other fund expenses, such as Delaware annual renewals, tax filings, Form ADV amendments, or registered agent fees are examples of additional costs to c...

Yes! Only the fees outlined in the engagement letter will be charged by Decile Group. Other fund expenses, such as Delaware annual renewals, tax filings, Form ADV amendments, or registered agent fees are examples of additional costs to consider to maintain your fund.

Decile Group requires automatic debits for monthly or quarterly payments. If you are on an annual payment plan, you may elect to pay via a traditional invoice with a wire transfer.

Decile Group requires automatic debits for monthly or quarterly payments. If you are on an annual payment plan, you may elect to pay via a traditional invoice with a wire transfer.

To make the PTET election an estimated payment must be made by June 15th of the tax year in question so if that was not done the first available option is for the 2024 tax year. Generally the PTET election is not recommended unless the t...

To make the PTET election an estimated payment must be made by June 15th of the tax year in question so if that was not done the first available option is for the 2024 tax year. Generally the PTET election is not recommended unless the tax savings would be material. Tax savings are computed by taking your expected taxable income multiplied by the CA PTE rate of 9.3% (your deduction) then multiplying this by the federal rate (37% is the max rate). Potential costs incurred to make the conversion to S corporation should be factored in to determine if the tax savings are worthwhile. 

Some business expenses that are typically paid from management fees include: Laptops & Equipment, Salaries, LP Events, Software, Due Diligence and Travel. Please review this article on fund expenses: https://govclab.com/2022/11/07/mana...

Some business expenses that are typically paid from management fees include: Laptops & Equipment, Salaries, LP Events, Software, Due Diligence and Travel. Please review this article on fund expenses: https://govclab.com/2022/11/07/managing-fund-expenses-for-venture-capitalists/ Below is a summary. [Screen Shot 2024-01-03 at 6.20.08 PM.png]

It's really difficult to build an enduring VC firm on AngelList. Consider getting off AL. If you're going to setup a fund in BVI, all entities need to be in BVI. It's super expensive and inefficient for you to have entities in multiple d...

It's really difficult to build an enduring VC firm on AngelList. Consider getting off AL. If you're going to setup a fund in BVI, all entities need to be in BVI. It's super expensive and inefficient for you to have entities in multiple domiciles, especially for a small fund 1. By having entities in multiple domiciles, your operations costs will go to exponential because you need 2 sets of lawyers, 2 sets of fund admin, 2 sets of tax, 2 sets of treasury. Then, they have to talk to each other etc... The operational complexity is just not worth it.

Accrual base accounting is the preferred method for VC Funds.

Accrual base accounting is the preferred method for VC Funds.

As long as all of the QSBS requirements are met, then carried interest would qualify for it.

As long as all of the QSBS requirements are met, then carried interest would qualify for it.

The difference would only come if there were offsetting fees that would reduce the base management fees. The base management fees would be calculated from what is stated within an LPA.

The difference would only come if there were offsetting fees that would reduce the base management fees. The base management fees would be calculated from what is stated within an LPA.

Capital calls are not typically treated as taxable events. They represent the contribution of committed capital from limited partners (LPs) to the fund, which is then used for investments or to cover ongoing expenses. This is a transfer ...

Capital calls are not typically treated as taxable events. They represent the contribution of committed capital from limited partners (LPs) to the fund, which is then used for investments or to cover ongoing expenses. This is a transfer of capital rather than income or profit, so it does not generally trigger a tax liability. However, any gains or income generated from the use of that capital in investments could potentially be subject to tax. Always consult with a tax professional for specific advice.

Venture Capital funds typically do not specify whether a capital call is for investment or management fees when requesting funds from Limited Partners (LPs). The capital call is generally used to cover both investments and ongoing expens...

Venture Capital funds typically do not specify whether a capital call is for investment or management fees when requesting funds from Limited Partners (LPs). The capital call is generally used to cover both investments and ongoing expenses such as management fees, legal and accounting fees, and other operational costs. The specific allocation of the funds is determined by the fund manager as per the terms of the Limited Partnership Agreement (LPA).

Markdowns for a struggling portfolio company that hasn't raised funds in 3 years are determined by the valuation policy adopted by the fund. The valuation policy should provide guidelines on how to value such investments. This could invo...

Markdowns for a struggling portfolio company that hasn't raised funds in 3 years are determined by the valuation policy adopted by the fund. The valuation policy should provide guidelines on how to value such investments. This could involve considering the company's financial performance, market conditions, or other relevant factors. If the company's performance has deteriorated or if it's facing significant challenges, a markdown may be appropriate.

The fund admin functionality which includes the capital call tool is currently only available for Decile Partners firms. 

The fund admin functionality which includes the capital call tool is currently only available for Decile Partners firms. 

Clawbacks would be very unusual - here are two examples of situations in which the Fund may need to claw back distributions to satisfy the Fund's obligations (but this is by no means all-inclusive): • If proceeds have been over-distribut...

Clawbacks would be very unusual - here are two examples of situations in which the Fund may need to claw back distributions to satisfy the Fund's obligations (but this is by no means all-inclusive): • If proceeds have been over-distributed, particularly in a fund with "deal by deal" distribution; or • In lawsuits where the Fund must indemnify.  Please now refer to Cornerstone V3: https://govclab.com/2024/02/04/cornerstone-lpa-v3/

Markdowns are determined by the valuation policy that the fund adopts. 

Markdowns are determined by the valuation policy that the fund adopts. 

No. Managers should only call the amount of capital that they need for current investments, fund expenses, and management fees. Excess capital sitting in a bank account without being deployed reduces the IRR of the fund. As a rule, manag...

No. Managers should only call the amount of capital that they need for current investments, fund expenses, and management fees. Excess capital sitting in a bank account without being deployed reduces the IRR of the fund. As a rule, managers should keep fund bank account balances low and call capital as needed.

As a VC, you should do your best to ensure that you get preferred equity. The reason that preferred is more valuable is because of special rights, that this class of stock receives and that's why it's more valuable. It's sub-optimal for ...

As a VC, you should do your best to ensure that you get preferred equity. The reason that preferred is more valuable is because of special rights, that this class of stock receives and that's why it's more valuable. It's sub-optimal for you to value the delta between common and preferred by $$ because there are other more important factors such as where your fund will be in the preference stack at the time of exit that is the difference between a return or a total loss.   My advice is for you to do whatever you can to retain the preferred warrants in this situation. 

Startup valuations are typically set by the market of investors. If there is a high investor demand, the valuation of the startup is typically higher. If there is low investor demand, the valuation of the startup is lower. If there is no...

Startup valuations are typically set by the market of investors. If there is a high investor demand, the valuation of the startup is typically higher. If there is low investor demand, the valuation of the startup is lower. If there is no investor demand, the startup will not secure financing. 

Most VC firms set up the fund, the general partner and the management company in Delaware, including firms with foreign Managing Partners. This provides a clear structure with unified control and governance, and it helps to manage costs,...

Most VC firms set up the fund, the general partner and the management company in Delaware, including firms with foreign Managing Partners. This provides a clear structure with unified control and governance, and it helps to manage costs, which can escalate quickly when law firms in different jurisdictions need to coordinate. All of the Delaware companies are passthrough entities under US law, which means that profits and losses are passed directly to the owners of those entities without being taxed. The Managing Partners, who are the owners of the management company, traditionally take distributions to have passthrough treatment of management fees and other gains. They then pay taxes personally. With foreign Managing Partners, the tax treatment of passthrough gains distributed from the management company is governed by tax treaties. With some treaties, the ideal tax optimization strategy is to set up a blocker company or other entity in their local country or in an intermediary country. The best way to determine the tax strategy is to interview a few local tax specialists that are familiar with US venture and ask during the interview. With this said, aggressive tax optimization can be very expensive and time consuming, distracting Managing Partners from the core activities of fundraising and investing. Tax optimization can also be done closer to the time of an exit, when the proceeds and the details are clearer.

Hi Scott, unfortunately it is not ideal for you as a Canadian to domicile your entities in the US. The reason being is that Canada does not recognize US LLC's as an entity type. You end up getting hit at a much higher tax rate on both yo...

Hi Scott, unfortunately it is not ideal for you as a Canadian to domicile your entities in the US. The reason being is that Canada does not recognize US LLC's as an entity type. You end up getting hit at a much higher tax rate on both your management fee income and any carry as it would get hit at a corporate tax rate and again when you take a distribution.

Adeo: The Organizational Fees are for setup and have a cap, and there annual Fund Expenses that are not capped right now. I am speaking to the lawyers about a cap.

Adeo: The Organizational Fees are for setup and have a cap, and there annual Fund Expenses that are not capped right now. I am speaking to the lawyers about a cap.

This is driven by investment decisions, not by contractual language. I would not recommend including this unless explicitly asked.

This is driven by investment decisions, not by contractual language. I would not recommend including this unless explicitly asked.

Part of 1065 filing. Partner specific form which details distributive share of all income and expense items incurred by the partnership.

Part of 1065 filing. Partner specific form which details distributive share of all income and expense items incurred by the partnership.

A specific US federal tax exemption that allows investors in Qualified Small Business (defined as under $50M capitalization) for some capital gains tax exemption (up to 100%) based on how long the stock is held (minimum 5 years) up to $1...

A specific US federal tax exemption that allows investors in Qualified Small Business (defined as under $50M capitalization) for some capital gains tax exemption (up to 100%) based on how long the stock is held (minimum 5 years) up to $10mm. This provision is a frequent target of proposed tax law changes, though (as of January 2023) it is still in place.