How are VC/angel firms usually structured?
September 15, 2010 10:17 PM   Subscribe

How are venture capital/angel investor firms/funds usually structured?

You are not my lawyer or investment advisor. As someone sort of halfway considering getting into angel investing i've been doing a lot of research, but i'm lost on one particular point. How are these firms usually structured? I assume one starts an LLC, LP, GP, S-corp, etc, but are there special requirements in terms of the SEC to invest <$10M USD as a venture capitalist or angel investor using one of these companies as vehicles, and/or does your corporation have to be structured in any specific way? What about if you have multiple investors in your fund? I've done a lot of Googling but I haven't been able to find answers to these specific questions (probably because the answer is "well, it depends").
posted by arimathea to Work & Money (8 answers total) 3 users marked this as a favorite
The bare-est minimum would be to simply qualify as an "Accredited Investor". I think the next step would be to protect yourself with an LLC. Depending on how you do it, how involved you get, and the terms of each deal, it could end up being an LLC as a holding company that in turn owned the individual investment LLCs (so one investment's lawsuit can not claim anything against another investment).

That is the gist of it. Anything further would be specific legal advice that you should seek counsel to answer.

I can speak with you in more detail off-line if you wish.
posted by milqman at 1:21 AM on September 16, 2010

IANAL, of course, just making observations on what I've seen as a bystander. The structure I've always seen is a limited partnership, so I would suggest googling for "venture capital" and "limited partnership" or "LLC". The National Venture Capital Association has a set of model legal documents that you may find helpful as a starting point. For the SEC question, google for venture capital and "Form D" and/or "Rule 506".
posted by kovacs at 3:38 AM on September 16, 2010

There's some very basic information about this at Tuck's Center for Private Equity and Entrepreneurship.
posted by cheez-it at 6:10 AM on September 16, 2010

Lawyer. This stuff is confusing and non-intuitive. Already in this thread people have said things I believe to be incorrect.
posted by JPD at 6:10 AM on September 16, 2010

Also to answer one question directly the differences in requirements for a fund consisting of just your money vs a fund that takes outside capital are magnitudes different. Like to the point where I would question the viability of a fund <10mil purely from an accounting and legal costs perspective. You would be better of with a less formal relationship. But once again you need a lawyer to tell you what is an what is not legal
posted by JPD at 6:16 AM on September 16, 2010

I'm not totally clear what you're trying to do, either start an investment fund, or just start investing in private businesses.

If its the latter, then one process would be to become a limited partner (LP) in a venture capital company (which are typically limited partnerships). You simply give the VC your money, it becomes part of the fund they are managing and they take care of investing while you hopefully sit back and watch the profits roll in over the next 5 to 7 years. The wikipedia article on venture capital has a pretty good description of the structure.

I'm sure if you start inquiring with some VC funds (most have some kind of investor link on their web page), they will be delighted to tell you all the requirements for participating as a limited partner.
posted by Long Way To Go at 9:34 AM on September 16, 2010

Response by poster: I'm interested in both options. In the first scenario I have in mind I would create a company (funded by me) as a private investor, and use this company to invest in angel opportunities. In the second scenario I would work with other partners to fund opportunities.

I noticed the description of an accredited investor has $1M net worth + $200k/yr requirements, which I don't quite meet although i'm very interested in smaller opportunities. I'll have to dig in with a lawyer to handle that portion, of course, and I plan to. But before I started going down that path I wanted to get some rough ideas of how these things were structured.

The 'typically limited partnerships' is what I was looking for; what I was trying to determine was how the companies themselves (not the people you invest in, but the people who are doing the investing) were structured. I wondered how your average angel investor was organized from a corporate perspective. I'm not concerned about learning about term sheets or other items as those are pretty easy to research, but exactly what requirements and corporate structure VCs and angels have was a little harder to find (and still is). But so far we're more or less on the right track.
posted by arimathea at 12:26 PM on September 16, 2010

AFAIK the accredited investor designation matters only in the context of new LPs you take on for a fund. The GP does not need to be accredited.
posted by JPD at 1:30 PM on September 16, 2010

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