A Checklist for Starting a Venture Capital Fund in Ohio – Part II

By Drew Stevens - March 29, 2020 - Startups + VC

In our last post in this series, our Columbus, Ohio venture capital firm provided a general overview for some of the key considerations in structuring a venture capital fund in Ohio. In this post, we’ll cover the workings and structure of the general partner in a venture capital fund.

What the General Partner Does

A venture capital fund is typically structured as a limited partnership, often filed in Delaware. The limited partnership is made up of at least one general partner and the limited partners who invest capital into the fund.

The general partner serves as the day-to-day manager of the fund. Central responsibilities of the general partner include raising money from limited partners, researching and deploying funding to startups, and overseeing and assisting with the acquisitions of the startups.

General Partner Compensation

The traditional venture capital fund compensation for the general partner is the typical “2 and 20”. The “2” refers to the annual 2% management fee that is charged by the general partner in the fund limited partnership agreement, to help cover the overhead costs of the general partner. This management fees helps cover costs like office space, travel, and salaries.

The “20” is where successful general partners make their money. The “20” refers to the 80/20 split in the profits generated by the fund for successful investments, with 80% going to the limited partners and 20% going to the general partner. The 20% is often referred to as the “carry” or the “carried interest”.

Structuring the General Partner

The general partner entity is often structured as a limited liability company and typically filed in the home state of the general partner or Delaware. Between the members that have equity in the general partner, there are a number of considerations in terms of structuring the entity.

General Partner Decision Making

In thinking of how the general partner itself will be ran, it can often be helpful to first consider how many people will have equity in the general partner. If there are only a handful of members, the general partner may benefit from being a traditional member managed LLC, with majority and supermajority consents needed for certain actions.

If there are a number of people that have equity in the general partner entity, a manager managed LLC structure may be better. Appointing a board of managers can streamline decision making and provide more centralized leadership.

The operating agreement for an LLC with a board of managers will usually specify some of the standard actions that the board of managers is authorized to take. In the general partner context, this might include abilities such as:

-raising additional capital

-making distributions to Members

-borrowing money

-purchasing real property

-including expenses or liabilities under or over a certain amount

The general partner operating agreement will also want to cover key board of managers considerations in terms of appointment and tenure. Certain members may have certain voting rights for appointing specific board members. You may also want to specify for how long a board member will serve and under what circumstances a board member can be removed.

Fundamental Changes to General Partner Membership

Though these conversation can be awkward and unenjoyable, the members of the general partner need to think through certain scenarios in the event a member needs to withdraw from the general partner.

For example, how will the general partner handle a member who passes away? Does the estate have a mandatory buyout right for the deceased’s interests? How quickly is the general partner obligated to buyout the deceased’s interests?

Other transfer scenarios might include involuntary and voluntary withdrawal. With voluntary withdrawal, how will the general partner handle a member who amicably wants to withdraw from the entity? With involuntary withdraw, the general partner LLC may want rights to protect itself in the event a member enters into bankruptcy.

Venture Capital Attorneys Columbus Ohio

If you need assistance in structuring your general partner entity or your venture capital fund, reach out to our Columbus venture capital lawyer today.