As a follow-up to Fund81’s previous podcast episode “Venture Fund Terms 101”, this episode tackles some of the more advanced venture fund legal terms. As an emerging venture fund manager, I’ve found that gaining an understanding of fund document terms has been a bit like learning a foreign language. In this episode, my guest, Mark Weakley, helps us navigate some of the more complicated terms.
Mark is a partner at the international law firm, Bryan Cave. Mark leads the firm’s Technology, Entrepreneurial, and Commercial Practice and is the co-leader of the firm’s Private Fund Group. I have worked with Mark for more than six years. He represented me as an angel investor and has been our attorney at MergeLane since the very beginning. Mark and his team have drafted the documents for all of our funds.
For those of you who are new to venture investing, I suggest reading these definitions before listening to the episode.
General Partner (GP): GPs are the managers of the fund. They raise the fund capital from LPs and serve as the managers of the funds, conducting due diligence and providing support for each of the fund’s investments.
Limited Partner (LP): LPs are investors in venture capital funds. Common examples of LPs include fund of funds, accredited investors, endowments, and pension funds.
Venture Partners: Venture Partners provide supplemental support to the GPs. They are typically experienced professionals who are engaged to add specific expertise or part-time assistance. Common examples include technology experts, retired CEOs or entrepreneurs, and experienced angel investors (investors who invest as individuals rather than through a fund).
Carry: Carried Interest, or carry, is a share of the fund’s profit paid to the fund managers if a specific threshold return (hurdle rate) is exceeded. This performance-based compensation is meant to align the Fund Managers with their capital providers (LPs).
*Context: In exchange for investing capital on behalf of the investors and managing the fund, VC firms typically charge management fees and carried interest on a percentage of the profits made on fund investments. This typically takes the form of a 2 and 20 model, meaning the firm will charge 2% of the total fund size per year for management fees (operations, legal, salary) and 20% of the fund carry.
Preferred Return: Preferred return refers to the threshold return that the limited partners of a fund must receive prior to the fund managers receiving their carry.
Vesting: Vesting gives rights to assets over time. For startups, this usually takes the form of earning common stock or access to an employee stock option plan over time. For venture funds, it is typically applied to earning carry over time. Vesting offers an incentive to perform well and remain within the company.
Organizational Expenses: Organizational expenses are related to establishing and organizing the fund and its infrastructure. This includes things like accounting, legal, fundraising-related travel, and other expenses.
Fractional Shares: A fractional share is a share of equity that is less than one full share. In the case of a merger or acquisition, the combined new common stock shares often are calculated by using a predetermined ratio. Shareholders will usually receive a fractional share of the new common stock or cash in lieu of the fractional shares.
Reinvestment Cap: A reinvestment cap limits the amount of proceeds from a sale or other disposition of investments a GP may reinvest into the fund during the specified investment period.
Clawback: A clawback provision is an adjustment payment made by a GP to the fund for receiving more than the GP’s pre-agreed share of fund proceeds. This means that the GP is not entitled to keep distributions representing more than a specified percentage of the fund's cumulative profits. Clawbacks are typically utilized when unexpected expenses arise after the GP has received a carry distribution.
Carried Interest Clawback: A carried interest clawback allows LPs to recoup carry paid to GPs during the life of the fund in order to normalize the final carry to the originally agreed upon percentage. The clawback provision protects the LPs if carry paid on one investment does not exceed subsequent investment losses.
Waterfall: The waterfall is a pre-agreed upon economic arrangement that dictates how distributions are prioritized between a fund’s GPs and LPs. Waterfall provisions typically dictate that GPs receive carried interest only once capital contributions (the amount the LPs invest in the fund) and preferred return on realized investments are returned to investors.
ILPA: In the interview, Mark mentions the Institutional Limited Partners Association (ILPA). This organization offers several resources for both GPs and LPs.
In this latest Fund81 podcast episode, I share my 2020 plans for the Fund81 forum and podcast, and a few reflections from my short bout of holiday depression.
I’ve now read over a thousand startup investor updates. The most effective updates — the ones that immediately grab my attention and heighten my interest — have similar characteristics. My advice is below, along with a comprehensive template for startup investor updates.
At MergeLane, we’ve been thinking about how changing market conditions may affect our fund in the future. I know many of our listeners are asking themselves that question as well. Our guest, Liza Benson, thrived as a VC through both the dot-com crash in 2000 and the 2008 financial crisis.
Beezer Clarkson invests in early-stage venture funds at Sapphire Partners (the division within Sapphire Ventures that invests in venture funds). In this episode, Beezer shares her perspective on venture capital trends, VC firm differentiation, and nonobvious mistakes for VC fund managers to avoid.
As an entrepreneur and startup investor, I have had many moments of feeling like I am pushing water uphill with a rake. Sometimes, I have kept pushing and have succeeded out of sheer grit. Sometimes, it was time to admit defeat. Two years ago, I had one of those moments.
Elizabeth Yin, co-founder and general partner at the Hustle Fund, shared her thoughts on how to assess a startup’s ability to “hustle”. Her thoughts are applicable to venture capitalists, startups and anyone who wants to work with hustlers.
Nearly every email I receive starts with “Sorry for the delay.” Our always-on culture has set an unwritten expectation that an email should be responded to within 24 hours. To prevent the perpetuation of this cultural expectation, I would like to make my thoughts clear.
We asked our Fund81 forum for venture capitalists to nominate portfolio companies to participate in a startup showcase. We received over 50 nominations. Four of those startups are featured in this episode.
Jocelyn Goldfein from Zetta Venture Partners joined the Fund81 podcast to share her approach to investing in artificial intelligence (AI). With the cost of creating software continuing to decline, Zetta believes the companies of the future will need to build more than just great software to thrive.
I love being active, but I also have high professional aspirations. I’ve spent the last 16 years trying to find a productive balance between the two. In this episode, Nicole DeBoom, pro triathlete turned CEO of Skirt Sports, and I share our thoughts on how to fit fitness into a startup schedule.