All Questions

There are many Chinese investors all around the world who are not citizens of China and who are excellent limited partners. Chinese citizens have various restrictions from China and from other governments, including currency controls and...

There are many Chinese investors all around the world who are not citizens of China and who are excellent limited partners. Chinese citizens have various restrictions from China and from other governments, including currency controls and restrictions on access to information, such as CFIUS, that make it difficult to accept them as limited partners in funds outside of China. As a result, Chinese citizens should be carefully vetted before being admitted as a limited partner in funds outside of China, examining the exact regulatory and currency regulations. Due to the increased complexity, Chinese citizens do not make ideal limited partners for funds outside of China when less cumbersome alternatives are present.

"Rockstar" companies at the angel or pre seed stage are identified by their ability to quickly raise a subsequent round of funding. Since companies at this stage may not have any business or product traction, the ability to raise subsequ...

"Rockstar" companies at the angel or pre seed stage are identified by their ability to quickly raise a subsequent round of funding. Since companies at this stage may not have any business or product traction, the ability to raise subsequent rounds can be evaluated by (1) the pedigree of the Founder or founding team, (2) the quality of the accelerator or program that the startup has been through, (3) the popularity of the market that the startup is addressing, (4) the demand by other investors to participate in the current round, and (5) pre selling the next round to later stage investors and having initial signs of interest.

The exact response and penalties by a fund to a limited partner that does not fund a capital call is governed by the Limited Partner Agreement (LPA). Most LPAs have very strict penalties for when a limited partner misses a capital call. ...

The exact response and penalties by a fund to a limited partner that does not fund a capital call is governed by the Limited Partner Agreement (LPA). Most LPAs have very strict penalties for when a limited partner misses a capital call. However, there are many reasons that a limited partner may miss a capital call, including reasons outside of their control, such as bank delays. The Cornerstone LPA provides general partners with wide discretion on how to handle missed capital calls, including penalties, forfeiture, or leniency. The exact language from the Cornerstone LPA is below for reference: 2.3 Default. If a Limited Partner fails to make all or any portion of any Capital Contribution or any other amount required to be paid by such Limited Partner pursuant to this Agreement or applicable law, and such failure is not cured after a period of ten (10) Business Days after the delivery of General Partner’s written notice regarding such failure, then, unless waived by General Partner in its sole discretion, the defaulting Limited Partner will owe interest with respect to such unpaid amount calculated at a rate equal to 12% per annum unless waived in whole or part by General Partner in its sole discretion, and General Partner shall have the right to take one or more of the following actions in its sole discretion: (a) if the Limited Partner has not made any Capital Contributions, deem the Limited Partner’s Interest in the Fund to be forfeited; (b) if the Limited Partner has made a Capital Contribution, General Partner may sell the defaulting Limited Partner’s Interest for a purchase price equal to 50% of the lesser of (i) the defaulting Limited Partner’s aggregate Capital Contributions, or (ii) the Fair Value of the defaulting Limited Partner’s Interest at the time of default; (c) use any distributions that might otherwise be made to such defaulting Limited Partner to offset any amounts owed by the defaulting Limited Partner; or (d) pursue and enforce all rights and remedies it may have against the defaulting Limited Partner. Each Limited Partner hereby consents to the remedies provided for in this section.

As a venture capitalist, you should not use any lockups or other exclusivity agreements with potential investments. These are one-sided arrangements that only favor the venture capitalist and can be harmful to the potential portfolio com...

As a venture capitalist, you should not use any lockups or other exclusivity agreements with potential investments. These are one-sided arrangements that only favor the venture capitalist and can be harmful to the potential portfolio company. Top accelerators, such as YC, have warned portfolio companies against entering into these arrangements as a result, and this can be harmful to your reputation as a VC is you using such agreements. The best alternate is to build a strong relationship with the portfolio CEO, encouraging them to save you position in the round based on the strength of your relationship and the assistance that you have provided.

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.

The frequency of capital calls is determined by the terms of the LPA, the needs of the fund, and the discretion of the management in that order. Most funds will call 20% or 25% of committed capital upon the first close, and then it norma...

The frequency of capital calls is determined by the terms of the LPA, the needs of the fund, and the discretion of the management in that order. Most funds will call 20% or 25% of committed capital upon the first close, and then it normally takes 12 to 18 months to close the remainder of the fund. During the closing period, most funds do not call additional capital. When the fund is closed and in the active investment period, managers make capital calls as needed, usually once per quarter or once per half. Capital calls become less frequent after the active investment period. Most funds do not call the total fund size because the investments and expenses come out to less than the committed capital.

Generally - no, the Fund should not appoint new LPs to the LPAC, unless it is someone the Fund Manager trusts implicitly and has worked with over a long period of time. It is important to be cautious about giving unfamiliar LPs a seat on...

Generally - no, the Fund should not appoint new LPs to the LPAC, unless it is someone the Fund Manager trusts implicitly and has worked with over a long period of time. It is important to be cautious about giving unfamiliar LPs a seat on your LPAC as it can lead to complications for the Fund and limit the Fund Manager's ability to make decisions on behalf of the Fund. Regardless of their financial contribution, prioritize placing individuals you trust on the LPAC. 

For emerging managers, generally - no, the carry structure should be as follows: First, return 100% to each Partner until the amount distributed equals the Capital Contribution Value for each Partner for the exited investment, Fund Expe...

For emerging managers, generally - no, the carry structure should be as follows: First, return 100% to each Partner until the amount distributed equals the Capital Contribution Value for each Partner for the exited investment, Fund Expenses, and Realized Investments. Then, Carried Interest % to GP and LP % to LPs for the exited investment. This is used as it can be unfair for smaller funds to wait until the entire fund is returned before they are in the carry, and the existing carry structure creates maximum alignment around the Fund providing top decile performance.  A hurdle rate is uncommon in VC in the US, especially at smaller funds, as the main form of compensation is carry and it doesn’t significantly de-risk the fund.

Generally, no - an emerging, smaller Fund should not support a yearly audit request.  Since the goal is to maximize the returns for LPs, it is preferred to use as much of LP's capital as possible to make investments rather than on fund ...

Generally, no - an emerging, smaller Fund should not support a yearly audit request.  Since the goal is to maximize the returns for LPs, it is preferred to use as much of LP's capital as possible to make investments rather than on fund expenses. However, our tax partner, Spicer Jeffries, can do an audit every year. It is not very common for smaller funds to have audits and we strongly recommend against an audit due to the expense and extra lift required for reporting.

Please reference: Venture Capital Management Fee Model. If you are working with Decile Partners, and you would like to adjust your management fee schedule per this article, please contact your Venture Associate. 

Please reference: Venture Capital Management Fee Model. If you are working with Decile Partners, and you would like to adjust your management fee schedule per this article, please contact your Venture Associate. 

With pre-seed funds, exits can take up to 10+ years, making extensions potentially necessary.  Decile Group's Cornerstone LPA includes two optional one-year extensions on top of a standard 10-year Fund Life. 

With pre-seed funds, exits can take up to 10+ years, making extensions potentially necessary.  Decile Group's Cornerstone LPA includes two optional one-year extensions on top of a standard 10-year Fund Life. 

You can use a standard template like the SAFE. We recommend that you do not modify template. 

You can use a standard template like the SAFE. We recommend that you do not modify template. 

We recommend that you do not attempt to draft a term sheet without a lawyer. However, you can use standard templates like the SAFE as long as you don't modify them. 

We recommend that you do not attempt to draft a term sheet without a lawyer. However, you can use standard templates like the SAFE as long as you don't modify them. 

New and emerging managers are strongly discouraged from signing side letters. They are complicated to administer, and changing regulations require that you share them with all other limited partners in the US. This creates challenging si...

New and emerging managers are strongly discouraged from signing side letters. They are complicated to administer, and changing regulations require that you share them with all other limited partners in the US. This creates challenging situations where all limited partners will request the same "perks." The best solution is to encourage limited partners to invest is to raise the minimum between closings. Then, you can informally offer first look at co-investment and follow-on opportunities. Do not put anything specific in writing. 

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.

For distributed teams, pick the country or region where most of the active team members are located and where most of the deals are being done. If one team member is likely to be the most active in the team, then you can also pick the ci...

For distributed teams, pick the country or region where most of the active team members are located and where most of the deals are being done. If one team member is likely to be the most active in the team, then you can also pick the city where that team member is based.  It should be noted that distributed teams in venture face a harder operating environment that may negatively affect returns. For example, deal decisions for the top opportunities need to be made quickly, and time zone differences can slow decisions down. In addition, partners may have different tax and regulatory burdens based on where they live, which will impact the fund operating costs and overhead. Lastly, since venture teams normally last 16 years or more, the required cammaraderie can be hard to build and develop when people live far away from one another. 

In a recent survey of limited partners, only 17% were interested in generalist VC funds. 83% of limited partners prefer specialist VC funds. The specialization is normally in an industry, such as healthcare, and also potentially a sector...

In a recent survey of limited partners, only 17% were interested in generalist VC funds. 83% of limited partners prefer specialist VC funds. The specialization is normally in an industry, such as healthcare, and also potentially a sector, such as precision medicine. The industry and the sector chosen by a manger to focus on has to (1) have enough dealflow to find top companies and (2) have enough potential to generate venture returns, which means that any one investment can have a 20x+ return on investment. Media is not considered an industry with venture returns by both GPs and LPs. 

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. 

A fund cannot deploy capital to any portfolio company until it has done a first closing. The minimum in PACTS are as follows: • $10m+ fund: 10% or $1m+ in PACTs are the minimum necessary to complete a first closing. • $5m fund: 20% or $1...

A fund cannot deploy capital to any portfolio company until it has done a first closing. The minimum in PACTS are as follows: • $10m+ fund: 10% or $1m+ in PACTs are the minimum necessary to complete a first closing. • $5m fund: 20% or $1m+ in PACTs are the minimum necessary to complete a first closing. Once a fund completes the 1st closing, it will do a capital call from its LPs for ~25% of committed capital. The fund will use the capital received from the capital call to pay for organizational expenses and to invest in its first portfolio companies. During this time, the fund manager must continue to fundraise until reaching the target fund size - it is critical to keep the pedal to the metal on fundraising.