Navigating fund structuring, documentation, and ongoing legal requirements
Legal considerations permeate every aspect of venture capital fund operations, from initial formation through investment activity to eventual wind-down. The complexity of fund structures, regulatory requirements, and investment documentation requires experienced legal counsel who understands both the business and legal dimensions of venture capital. Building appropriate legal infrastructure supports effective operations and reduces risk throughout the fund lifecycle.
Establishing a venture capital fund involves creating multiple related entities and documenting their relationships. The typical structure includes:
Delaware dominates as the formation jurisdiction for U.S. venture funds due to its well-developed partnership law, flexible LLC statute, and specialized court system. However, specific circumstances may favor other jurisdictions.
Several documents establish the fund's legal framework and govern relationships among the parties.
The Limited Partnership Agreement serves as the fund's constitution, establishing:
The Private Placement Memorandum provides detailed fund information and risk disclosures required for securities law compliance. While formats vary, PPMs typically cover strategy, terms, risks, tax considerations, and regulatory matters.
Subscription Agreements document each LP's commitment and include representations, warranties, and investor qualifications necessary for securities law exemptions.
VC investment activity generates substantial documentation that requires legal attention. Common transaction documents include:
Standardized documents from organizations like the NVCA provide templates that can reduce negotiation time and legal costs, though customization for specific situations remains common.
Fund operations generate continuing legal needs beyond formation and investment closings. Side letter compliance requires tracking and honoring individualized LP commitments. Annual and periodic filings must be made with the SEC and state authorities. Partnership agreement amendments may be needed as circumstances change.
Portfolio company matters often require GP involvement. Board representation brings fiduciary duties to portfolio companies alongside fund duties. Follow-on investments, M&A transactions, and portfolio company governance issues all create legal workstreams.
Legal counsel typically advises on regulatory compliance matters covered elsewhere in this guide. Securities law exemptions for fund offerings require proper structuring and documentation. Investment Advisers Act considerations—whether registered, exempt, or state-registered—affect operational requirements. Marketing regulations constrain how funds can present themselves to prospective investors.
Most VC funds work with law firms specializing in fund formation and investment transactions. These firms understand industry norms, can draft efficiently using established forms, and provide valuable market perspective on terms and practices.
Considerations in counsel selection include:
Emerging managers often benefit from firms with programs offering favorable terms to first-time fund managers, recognizing the long-term relationship potential.
Legal expenses represent a significant fund formation cost. Strategies for managing these costs include:
Legal infrastructure established during fund formation shapes operations throughout the fund's life. Investing appropriate attention and resources in legal matters from the outset prevents problems that can be costly and disruptive to address later.