This post is part of a series on structuring the team and legal infrastructure of a new VC fund.
In the prior essays, we covered Writing the Constitution for your New VC fund, the Legal Checklist for your New VC fund, and How to join a VC firm as a Partner.
To make this process easier, please see the template below, which can serve as a checklist for aspiring fund managers. We hope you will find it helpful!
Download the template HERE or read it below 👇
Executive Summary of Agreed-Upon Key Terms of Management Company Entity (“ Executive Summary ”)
The following information is presented as a summary of certain agreed-upon key terms of a to-be-formed legal entity to be called [Insert Name of Management Company Entity], a Delaware limited liability company (the “ ManCo Entity ”). The ManCo Entity will be retained by the general partner of [Insert Name of Fund], a Delaware Limited Partnership (the “ Limited Partnership ”), and one or more offshore feeder vehicles that may be formed from time to time to accommodate the tax and/or regulatory needs of one or more investors (such entities, together with the Limited Partnership, the “ Fund ”), to provide management services to the Fund and any successor funds.
Each person that is a party to this Executive Summary acknowledges and agrees that the rights and obligations summarized herein shall be incorporated into a limited liability company agreement of the ManCo Entity, to which each such person shall be a party, to be executed on or around the initial closing date of the Fund. Notwithstanding the foregoing, the anticipated terms set forth below are subject to modification and the eventual terms set forth in the operative agreements of the ManCo Entity will be reflected in such legal entity’s limited liability company agreement, which will be controlling.
| The Fund: | [Insert Name of Fund]. |
| Investment Strategy of the Fund: | Seek to generate significant yield and long-term capital appreciation through the Fund’s proposed direct equity investment rights in [early-stage] [high-growth technology companies organized and operating in the United States]. |
| Legal Structure of the Limited Partnership: | A Delaware Limited Partnership. |
| Legal Structure of Feeder Vehicles of the Fund: | [Cayman Islands], [British Virgin Islands], [Luxembourg]. |
| Target Fund Size: | The Fund will target aggregate capital commitments of US [$___] million. |
| Target Fund Closing Date: | The first closing of the Fund is expected to occur prior to [____________]. |
| Fund Investment Period; Fund Term: | The Fund will have a [__]-year investment period following the [initial] [final] closing date of the Fund (subject to a 1-year extension at the discretion of the GP Entity (as defined below) and another 1-year extension with the prior written consent of either a limited partner advisory committee, if any, (the “LPAC”) or a majority in interest of the limited partners) (the “Investment Period”); [__]-year term from the [initial] [final] closing date of the Fund (subject to a 1-year extension at the discretion of the GP Entity and another 1-year extension with the prior written consent of either the LPAC or a majority in interest of the limited partners). |
| GP Entity: | [Insert Name of GP Entity] (the “GP Entity”). (See Summary of Key Terms – General Partner for more details regarding the ownership, economics, management, etc., of the GP Entity.) |
| Initial Members of the ManCo Entity (collectively, the “Initial Members”): | [Insert Name of First Member of ManCo Entity (“Member 1”)], [Insert Name of Second Member of ManCo Entity (“Member 2”)], and [Insert Name of Third Member of ManCo Entity (“Member 3”)]. |
| Titles of Initial Members of the ManCo Entity: | Member 1: [Insert Title of Member 1]; Member 2: [Insert Title of Member 2]; and Member 3: [Insert Title of Member 3]. Only those Initial Members with the title of “Managing Member” shall have the power and authority to bind the ManCo Entity. |
| Funding of Initial Operations of the ManCo Entity: | The amount needed to finance the initial operations of the ManCo Entity shall be [$_______] and shall be funded by the Initial Members as follows on an “as needed” basis: [Member 1: [___%]; Member 2: [___%]; and Member 3: [___%]]. |
| Management: | The ManCo Entity shall be engaged by the GP Entity (who has the exclusive right and power to manage and operate the Fund) to assist with the management of the Fund. |
| Annual Management Fee: | "Standard Terms: Except as provided below, the ManCo Entity shall be paid an annual management fee by the limited partners of the Fund of [___%] of the aggregate capital commitments of the limited partners of the Fund during the Investment Period. After the Investment Period, the ManCo Entity shall be paid an annual management fee by the limited partners of the Fund of [____%] of the cost basis of all investments made by the Fund that are still held by the Fund as of the end of the immediately preceding fiscal quarter.
Anchor Investor Terms: Limited partners that subscribe to the Fund at the initial closing shall be considered “Anchor Investors”. The ManCo Entity shall be paid an annual management fee by the Anchor Investors of [___%] of the aggregate capital commitments during the Investment Period. After the Investment Period, the ManCo Entity shall be paid an annual management fee by the Anchor Investors of [____%] of the cost basis of all investments made by the Fund that are still held by the Fund as of the end of the immediately preceding fiscal quarter. The management fee shall be payable in advance on a quarterly basis." |
| ManCo Entity Ownership: | The ManCo Entity shall be owned by each of the Initial Members as follows: Member 1: [___%]; Member 2: [___%]; and Member 3: [___%]. |
| ManCo Entity Employees: | Each party to this Executive Summary will also be an employee of the ManCo Entity and have an initial annual salary as follows: Member 1: [$________]; Member 2: [$________]; and Member 3: [$________]. Such initial salary may be increased or decreased as determined by [all] [a majority in interest] of the Managing Members. |
| ManCo Entity Excess Income: | Excess Income of the ManCo Entity shall be allocated based on ManCo Entity ownership and shall be distributed at such times and in such amounts as determined by [all] [a majority in interest] of the Managing Members. |
| Ability of One or More Managing Members to Remove another Managing Member From the ManCo Entity: | For Cause, with “Cause” defined as the occurrence of any of the following events [(as determined by a court or arbitral body having appropriate jurisdiction)]: (i) willful or intentional infliction of substantial injury upon the ManCo Entity or any of its direct or indirect affiliates (collectively, the “Entity Parties”) by such Managing Member; (ii) such Managing Member’s embezzlement, fraud, or other acts of a criminal nature in connection with the Managing Member’s rights and obligations to the Entity Parties; (iii) the Managing Member intentionally or recklessly engaging in an act that materially and adversely affected the reputation, goodwill, or business interests of the Entity Parties; or (iv) the Managing Member’s conviction of or no contest plea to any crime involving moral turpitude. |
| ManCo Entity Operational Decisions: | "In addition to what is already provided herein, the following operational decisions of Fund and/or the ManCo Entity (as applicable) shall be made as follows:
(A) Day-to-day and other decisions regarding the management of the Fund and/or the ManCo Entity: [_______________________________________]. (B) Selection of service providers and professional advisors: [__________________________________]. (C) Designation of (i) securities firms, banks, or depositories, and (ii) signatories authorized to make withdrawals and/or issue withdrawal instructions: [_______________________________________]. (D) Delegating to an entity or entities the power to manage the Fund (including any sub-advisors): [_______________________________________]. (E) Location of offices: [____________________]. (F) Changes in the ManCo Entity’s name: [_______________________________________]. (G) Timing and amount of distributions from the ManCo Entity (including, without limitation, tax distributions): [______________________________________]. (H) Withdrawal of amounts from the ManCo Entity: [_______________________________________]. (I) Valuation of ManCo Entity assets: [_______________________________________]. (J) Incurring indebtedness or entering into material contracts for the ManCo Entity: [_______________________________________]. (K) Guaranteeing indebtedness of others on behalf of the ManCo Entity: [___________________________]. (L) Amending the ManCo Entity Operating Agreement: [_________________________________]. (M) Budgeting decisions at the ManCo Entity (including, without limitation, who may authorize expenditures and in what amounts) and the portfolio companies: [________________________________]." |
| Restrictive Covenants With Respect to Managing Members: | The ManCo Entity employment agreements shall contain the following restrictive covenants: noncompete; limitations on outside activities (including investment opportunities and other business activities); non-solicitation; restrictions on activities post termination of the Fund and/or the ManCo Entity; ongoing compliance with standard internal policies and compliance manuals and handbooks (including, without limitation, conflicts of interest); mutual nondisclosure and non-disparagement requirements to be triggered upon departure from the ManCo Entity; ownership of investment track record; dispute resolution; etc. |
| Succession Plan: | The succession plan for the ManCo Entity is as follows: [_______________________________________]. |
| Ownership of Name: | The parties acknowledge and agree that Member [__] owns exclusively all right, title, and interest in and to the name of the ManCo Entity and related trademarks (collectively, the “Venture Mark”). Member [__] hereby grants to the ManCo Entity an irrevocable, perpetual, royalty-free, exclusive license, to the extent necessary, to use the name of the ManCo Entity and the rest of the Venture Mark as part of its name (as applicable) and in connection with its activities. |
| Transfers: | A Managing Member’s interest in the ManCo Entity (other than a portion of the economic right to receive excess management fees not to exceed 50% in connection with a divorce) will not be assignable or transferable without the prior written consent of the other Managing Members. |
| Tax Aspect of the ManCo Entity: | For U.S. Federal Income Tax purposes, the ManCo Entity shall be treated as a [partnership and not as an association taxable as a corporation] [corporation.] |
| Governing Law and Jurisdiction: | The rights, obligations, and relationships of the Managing Members will be governed by Delaware law. |
About the authors
Dolph Hellman, a leading fund formation and commercial finance lawyer in the San Francisco office, is the Co-Chair of Orrick’s Private Investment Funds Group and a member of the firm's Corporate Department. Dolph concentrates his sophisticated practice on private equity investor representation and fund formation as well as representing financial institutions and corporations in privately negotiated debt transactions. In addition, Dolph has a broad range of experience in commercial lending transactions, including secured financings, unsecured and asset-based financings, vendor and customer financings, subscription credit facilities, project financing, venture debt financings, letters of credit, receivables purchase financings and leasing.
David Teten is the founder of Versatile VC, which backs “investment tech” companies which help investors generate alpha. He is a Venture Partner with Orange Collective, a fund of 150+ Y Combinator alumni backing Y Combinator founders. David is Chair of AltsTech, a community of investors in private companies using AI, technology and analytics to generate alpha, and Founders’ Next Move, for tech founders exploring new ideas. He was formerly a Partner with Coolwater Capital, which invests in emerging fund managers as a limited partner, into general partnerships, and into fund management companies. He was also formerly a Managing Partner with HOF Capital; Partner with ff Venture Capital; and Founder of Harvard Business School Alumni Angels of NY. He started his career as a strategy consultant, Bear Stearns investment banker, and serial founder with 2 exits as CEO.
