All Questions

When a venture capital fund takes in investors who are subject to ERISA, the fund may also become subject to the numerous and onerous ERISA regulations without an exemption. Such regulations would make operating the fund untenable. For e...

When a venture capital fund takes in investors who are subject to ERISA, the fund may also become subject to the numerous and onerous ERISA regulations without an exemption. Such regulations would make operating the fund untenable. For example, the fund may be prohibited from paying carried interest to the fund managers. There are two exemptions through which a venture capital fund can avoid being subject to ERISA:   1. 25% Test Exemption: Less than 25 percent of each class of equity interests of the venture capital fund is held by investors who are subject to ERISA.   2. Venture Capital Operating Company (VCOC) Exemption: At least 50% of the venture capital fund’s assets are invested in operating companies in which the fund has contractual management rights.     In order to secure the VCOC Exemption, it has become customary for venture capital funds to ask each of its portfolio companies to sign a management rights letter providing the fund with such management rights.   It is important to note that a fund relying on the VCOC exemption should ensure that its first portfolio investment includes contractual management rights in order to satisfy the exemption requirement, and that it does not take LP money subject to ERISA before that first investment is made; otherwise, the fund be disqualified from being eligible for the exemption.   In addition, if the fund managers or their affiliates “warehouse” portfolio investments for transfer to the fund, it is important that the transfer documents provide that management rights with regard to such investments be transferred to the fund to ensure that the venture capital fund has the necessary contractual management rights to satisfy the exemption.   As ERISA regulations are complex, fund managers should seek the advice of the relevant professionals to ensure compliance if they will be receiving investor funds subject to ERISA.

The Cornerstone has a defined term: “Material Adverse Effect” means any activity relating to a Limited Partner’s participation in the Fund, if the Limited Partner or General Partner determines: (A) that such activity is reasonably likely...

The Cornerstone has a defined term: “Material Adverse Effect” means any activity relating to a Limited Partner’s participation in the Fund, if the Limited Partner or General Partner determines: (A) that such activity is reasonably likely to (i) result in a violation of a law, rule or government order, (ii) subject a Portfolio Company, such Limited Partner, the Fund or any Affiliate of the foregoing to any material filing, regulatory requirement or tax, or (iii) result in any Securities or other assets owned by the Fund being deemed to be “plan assets” under ERISA; or (B) that a Limited Partner or any of its Affiliates becomes subject to sanctions regulations from any country, the European Union, the United Nations Security Council or any other such organization that would impact the ability of the Fund to continue transacting with such Limited Partner.

From a tax perspective any K-1 income received from the fund would be tax deferred (assuming regular IRA) until the money is withdrawn from the IRA at which time it would be taxed at ordinary income rates. In effect the original characte...

From a tax perspective any K-1 income received from the fund would be tax deferred (assuming regular IRA) until the money is withdrawn from the IRA at which time it would be taxed at ordinary income rates. In effect the original character of the income would be lost so no long term capital gains rates or QSBS treatment if applicable. This is on top of the restricted transactions mentioned by Hans. 

As a general matter, a Fund Manager should strictly NOT provide any advice, especially with respect to legal or tax matters. These are highly regulated professions (specifics will vary by country) with specific rules about who, how, an...

As a general matter, a Fund Manager should strictly NOT provide any advice, especially with respect to legal or tax matters. These are highly regulated professions (specifics will vary by country) with specific rules about who, how, and under what type of relationship any such advice may be provided, and crossing the lines opens the door to liability, lawsuits, potentially unauthorized practice of law and more. TL:DR - don't do it. Decile Partners' subject matter experts may provide generalized explanations and/or guidance. If working with Decile Launch, in particular, additional assistance is usually available. However if specific advice is required or requested, then the safest course of action (for the Fund Manager) is for the party in question to engage their own legal or tax experts. Decile Partners can provide referrals on request, of course, and even provide guidance about how best to work with such experts. 

Possibly - however it really depends on what kind of retirement funds/accounts are being contemplated, and where and how those funds/accounts are held. Country-specific regulations may also apply, as a general rule of thumb. For exampl...

Possibly - however it really depends on what kind of retirement funds/accounts are being contemplated, and where and how those funds/accounts are held. Country-specific regulations may also apply, as a general rule of thumb. For example, Delaware-domiciled funds working with Decile Partners may be able to accept certain retirement funds via a certain type of trust company vendor (such as Strata Trust Company, a partner) - however, doing so takes additional setup on the part of the Fund, as well as the limited partner in question. TL:DR - possible depending on jurisdiction and trust company (as applicable), but more complicated and may take longer process-wise. 

As a general rule, you should validate is the name or a substantially similar name is not being used anywhere for a business in a related field. So, you want to look for more than just a trademark in more locations than just BVI. To star...

As a general rule, you should validate is the name or a substantially similar name is not being used anywhere for a business in a related field. So, you want to look for more than just a trademark in more locations than just BVI. To start, you begin with extensive searching for your name or similar names on Google. If there is no competition in a similar space, then, the largest database of corporate names is in Delaware, so this is a good place to start to see if there is a business entity with a similar name. Lastly, if everything is clear, then you do a trademark search. The link to search in Delaware is: https://icis.corp.delaware.gov/Ecorp/NameReserv/NameReservation.aspx

*For informational purposes only **Fund managers should avoid any activities which may be construed as providing or interpreting legal tax, or other advice to prospective limited partners.  Question: Does a Canadian fund manager need t...

*For informational purposes only **Fund managers should avoid any activities which may be construed as providing or interpreting legal tax, or other advice to prospective limited partners.  Question: Does a Canadian fund manager need to register as an investment fund manager, a portfolio manager, or an exempt market dealer with the Ontario Securities Commission?  Answer: Generally speaking, if the fund being managed is considered a venture or private equity fund (and not a hedge fund), the fund manager does not need to register.    A venture or private equity fund must make primarily “active investments” (as opposed to “passive” investments made by hedge funds), typically for purposes including: • Exercising or seeking to exercise control of an issuer in which it invests; or • Being actively involved in the management of an issuer in which it invests.   Indicators of “active investments” can include but are not limited to the following: • Holding securities representing more than 10% of the outstanding equity or voting securities of portfolio company; • Having the right to appoint board or board observer seats for a portfolio company; • Having the ability to impose restrictions on the management, or approval or veto rights over decisions made by the management of a portfolio company; • Providing advice or mentorship to a portfolio company.   Should these criteria ever be put to the test, it will come down to a factual analysis of the circumstances – there is no “check the box” type of exercise done.    Please refer to the Ontario Securities Commission’s website for general guidance on this topic, or consult an experienced, qualified fund/securities attorney in Ontario for assistance with a specific situation. 

Generally speaking, an SPV should not be used for deal warehousing. While there are ways in which it may be technically possible, it complicates matters (for the Fund) and is sub-optimal. Fund managers commonly make initial investments...

Generally speaking, an SPV should not be used for deal warehousing. While there are ways in which it may be technically possible, it complicates matters (for the Fund) and is sub-optimal. Fund managers commonly make initial investments either as individuals, or via wholly-owned entities such as LLCs (in the US). There are no particular issues or concerns with investing via an LLC versus investing as an individual. However, it is important to note that the initial investment paperwork issued to the LLC (or the individual for that matter) should be issued cleanly/completely and reflect the LLC's correct name, to ensure there are no additional complications when it comes time to transfer the warehoused deals into the Fund. 

It's possible for you to transfer your founder shares into the fund, however there are a number of issues with this approach. The shares are typically transferred at cost, and founders usually buy their shares at the onset of the company...

It's possible for you to transfer your founder shares into the fund, however there are a number of issues with this approach. The shares are typically transferred at cost, and founders usually buy their shares at the onset of the company at nominal price. The shares are typically common stock instead of preferred which means that they are lower in the preference stock. Finally, the company many not want to replace a founder with a fund on their cap-table because it may introduce diligence risk in future financings. 

Extending the fundraising period can provide additional room to fundraise in case a fund does not expect to achieve its stated fundraising target within the originally scheduled fundraising period. This measure should not be taken light...

Extending the fundraising period can provide additional room to fundraise in case a fund does not expect to achieve its stated fundraising target within the originally scheduled fundraising period. This measure should not be taken lightly, though, and it would be advisable to discuss such decisions with an LPAC or a majority of LPs. It’s important to note that extending the fundraising period may warrant examining the management fee schedule (should additional work be required upfront).  LPs may push back if they perceive that LPs admitted outside of the original fundraising period will receive preferential treatment. They may also believe that extending the fundraising period signals an inability of the fund manager to raise money.

It's generally important for a fund manager to sign investment agreements with the correct signature block - it's especially important for the signature block to reference the correct Fund name, as well as it's General Partner and Manage...

It's generally important for a fund manager to sign investment agreements with the correct signature block - it's especially important for the signature block to reference the correct Fund name, as well as it's General Partner and Management Company, in most cases. This will avoid annoying cleanup later, as these types of errors will be caught at the latest when/if the startup gets to a priced round and is working with counsel, or is undergoing due diligence or an audit.  For Funds working with Decile Partners, the signature should appear as the following (for Delaware domiciled funds, as an example): Full Fund Name, LP By: Full General Partner Name, LLC, its General Partner By: Full Management Company Name, LLC, its Manager By: _____________________________ Name: Fund Manager Name Title: Managing Partner Refer to your Fund's legal agreements for more details - fund managers often have the correct signature block on a Word or PDF document and simply send it to startups during the signing process to ensure that it is correct. Counsel will typically insist that the signature block is correct or they will not approve for signing. It is also just a good habit to get into.  

Yes. We strongly advise you not to pitch people who do no meet the accredited investor requirements in general. 

Yes. We strongly advise you not to pitch people who do no meet the accredited investor requirements in general. 

Hi Francisco, unfortunately the ‘download all at once’ option for files in a Data Room currently doesn’t exist, so you will have to download them one by one for now.  We do have this feature on our product roadmap, so we hope it will be...

Hi Francisco, unfortunately the ‘download all at once’ option for files in a Data Room currently doesn’t exist, so you will have to download them one by one for now.  We do have this feature on our product roadmap, so we hope it will be in place at some point in the near future.

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.