Thread by @paigefinnn

alrighty folks....who wants to learn about minimum viable *legal* venture fund formation? i've had a lot of aspiring managers reach out about what actually goes into fund formation & i wanted to dig in...[a thread]

1/ first off, hi! it's been a while. i'm sorry for my absence from ✨thread land✨ for a bit, it'll all make sense soon. with that - let's dive in!

2/ very important disclaimer - this is not legal advice. i'm not an attorney. this is my *lived* experience as a fund manager. if you have additional thoughts, happy to have a discourse here!

3/ step 1: gather the details of your fund. there’s no boilerplate limited partner agreement (or LPA) yet, so that’s why you submit the fund details in the beginning. your legal counsel will use these details as the basic building blocks of your LPA

3/ the details of your fund should include:
- estimated fund size
- management fee structure & carried interest
- investment period
- 506b vs 506c
- general partner info
-geo areas of investing
great piece on 506c here by @minal_hasan minal.substack.com/p/will-rolling…

4/ legally form limited partnership, general partnership, and management company entitities with Cogency Global.

side note: a management company is optional for a Fund 1, but we created one bc horror stories we’d heard from other GPs who had issues spinning them up after fund 1

5/ what is a ✨ limited partnership✨ or LP?

TLDR? this is the fund itself. it'll be an LP (trad fund) or series LLC (rolling fund). The LP is the entity that your Limited Partners will invest in and it is the entity that invests in startups. you'll see them on the cap table.

6/ what is a ✨ general partnership✨ or GP?

the GP is the management’s [partners] stake in the fund. general partners receive their distributions here, and it will be listed as an investor in the LP. you'll hear about a GP commit or stake, traditionally 1% of a total fund.

7/ side note on GP commits: it's SUPER exclusionary for folks who don't come from generational wealth. there are loopholes, such as:
1) not having a GP stake or having a lower one
2) cashless contributions (take it out of the management fee)
3) raising the GP stake individually

8/ what is a ✨management company ✨?

your management company is the overarching owner of the LP & GP for *each* fund. it gets paid the mgmt fee, you pay expenses (legal / travel / software / mgmt fee) out of it. it often owns the brand assets of your firm as well.

9/ fun fact: selling mgmt co stakes as a GP is roughly equivalant to selling secondary as a founder. some more sophisticated LPs will ask for it - it is NOT the same as investing in your fund, they're investing in your firm. further reading from @roybahat: github.com/Bloomberg-Beta…

10/ get the EIN numbers for each of these entities. you'll need them for future filings!

11/ next up is creating a ✨term sheet✨ for your lawyers (yes, funds have these too). this will detail what terms your investors will invest at. avg:
trad VCs? 2% mgmt fee annually, 20% carry [cut of the profits]
nano funds? frontload fee over 2-4 yrs so you can pay yourself!

12/ now fundraising starts. you can do the above after some commits, but it honestly takes a while [read: hundreds of emails with your legal counsel] to get the above sorted. not to mention most LPAs are upwards of one hundred pages.

13/ ✨DOUBLE CHECK YOUR LPA to make sure it matches with your notes✨ i cannot tell you what a pain in the butt it is to change it after you have official LPs. it's also extra legal fees💰💰💰 print. highlight. ask questions.

14/ add in the ✨spice✨ to your LPA. because they're long and not boilerplate, make sure it covers the following, if you've chosen to add addtnl clauses:
- cashless contributions
- distribution rights
- recycling: Aim for up to 120%
- LP checks under min size

15/ next up! your ✨subscription agreement ✨ carta or your fund admin provides their own subscription agreement, which is boilerplate, but you should get one from the lawyers as well. it's basically the form your LPs sign that says: hey i can invest & i know this is risky

16/ after your first close, you need to submit a ✨GP agreement✨ you'll fill out a GP questionnaire (not legally binding) to run through everything you want to cover, things like vesting / voting ownership etc, and form the legally binding doc: the GP agreement.

17/ okay, now some nitty-gritty. this is optional, but helpful. hand-sign Form ID POA. this form essentially gives your legal counsel the ability to complete, execute, and file EDGAR filing codes with the SEC. bit more $$, but worth it to us. sec.gov/info/edgar/edg…

18/ now, your legal counsel can handle the ✨EDGAR codes✨! EDGAR stands for Electronic Data Gathering Analysis and Retrieval, and your EDGAR codes are the SEC’s way of tracking you. You can think of EDGAR codes like a barcode or school id.

19/ okay the timing on this next piece 🚨filing your Form D 🚨is very important, needs to be filed within the first 15 days of first close.

if you file a form D BEFORE your first close, no information about the securities being offered will be publicly disclosed.

20/ if your counsel accidentally file a form D AFTER first close? all the info about the amount of $ you've raised, number of investors, check size, etc is public information in the SEC db. this is usually a BIG problem, but ended up being a happy accident sandiegouniontribune.com/business/story…

21/ file Form ADV and setup account with FINRA to receive ERA status: exempt reporting advising status, and venture capital advisor exemption (can invest in qualified company securities). if you have over 150m in AUM, you'll have to register as an RIA investor.gov/introduction-i….

22/ that's all for this thread ✨ i'm one of the founding partners at @behind_genius & wrote seed to harvest (good for adults!). if you enjoy reading about the legal aspects of forming a venture fund on a friday night, you'd probably like following me :,)
amazon.com/Seed-Harvest-E…