Term Sheet/ week 1

Question 1

Term Sheet

Late Interest

Answer 1

The ammount payable by a new Limited Partner to true up ALL expenses with the investment as if they have been a part of the investment the whole time.

Question 2

Term Sheet- Distrobution

Waterfall Modeling

Answer 2

Carta European Style Waterfall.
the General Partner is not entitled to receive any portion of the carried interest tier until the Limited Partners have received all of their capital back, plus the preferred return.

Question 3

Operational Planning Model

Answer 3

The model for the fund for complete encompassment of the onboarding

Question 4

Cashless Capital

Answer 4

Standard in the LPA with a 80/20 split, GP puts down 20% of thier GP fee, using the managment fees to cover the rest.

Benefit: Taxed favorably as Long Term Capital Gains, rather than Compensation Income (which can be crushing to GPs since they are in a higher tax bracket).

Question 5

Managment Fees

Answer 5

The fees associated with maitnence and running the fund.

Typically a step down schedule.

Managment fees only last for 10 years, or what the fund was advertised as.

Question 6

Management Co Budget

Answer 6

Annual operating expenses for the firm to opporate

Question 7

Fund Budget

Answer 7

Investible Capital after annual expenses are accounted for

Question 8

Portfolio Modeling

Answer 8

Hypothetical IRR modeling, understand how to achieve liquidation targets

Question 9

venture capital fund structures

Blockers:
Purpose

Answer 9

Address tax concerns for certain investors, particularly tax-exempt organizations and foreign investors.

Question 10

venture capital fund structures

Blockers:
Function

Answer 10

Block the flow of unrelated business taxable income (UBTI) and effectively connected income (ECI) to investors who might otherwise face adverse tax consequences. Typically a corporation, is interposed between the investor and the venture capital fund to convert the UBTI/ECI into dividend income, which is generally not taxable for tax-exempt organizations and may have reduced or eliminated tax for foreign investors.

Question 11

venture capital fund structures

Feeders
Purpose

Answer 11

Simplify investment and tax reporting for certain investors, mainly foreign investors and smaller individual investors.

Question 12

venture capital fund structures

Feeders:
Function

Answer 12

Feeder entities can be used to pool investments from multiple smaller investors, allowing them to access funds with high minimum investment requirements. They also help foreign investors avoid direct investment in the main fund, which might create adverse tax or regulatory consequences. Feeder entities are often structured as limited partnerships or limited liability companies (LLCs).

Question 13

venture capital fund structures

Splitters:
Purpose

Answer 13

Address regulatory, tax, or investor-specific concerns by creating separate pools of investments within a fund.

Question 14

venture capital fund structures

Splitters:
Function

Answer 14

Split a single venture capital fund into multiple parallel funds or “sleeves” that invest in the same underlying portfolio but have different legal and economic terms for various groups of investors. This can be useful when dealing with investors subject to different tax, regulatory, or investment constraints, or when accommodating specific preferences of certain investors.

Question 15

3(c)(1) Fund

Answer 15

Limits the fund to no more than 100 investors.

it does not have to comply with the additional investor status limitations applicable to 3(c)(7) funds. Therefore, the prototypical private fund offers fund interests under Rule 506 and accepts investment from no more than 100 investors (or 99 investors, if the general partner’s interest is at risk of being considered a security).

Over $10m funds limit to 100 LPs
Under $10m Funds limit to 250LPs

Question 16

Investment Company Act of 1940

Answer 16

U.S. federal law that regulates investment companies to protect investors and maintain transparency in the securities industry.
Defines an “investment company” as an issuer that “holds itself out as being engaged primarily or proposes to engage primarily, in the business of investing, reinvesting or trading in securities.”

Question 17

3(c)(7) fund

Answer 17

limits the fund to “qualified purchasers” no acceptions.

The advantage of a 3(c)(7) fund is that the number of investors is not limited under the Act so a fund could take up to 1,999 investors before it is required to register with the SEC under the Securities and Exchange Act of 1934.

Question 18

Rule 506 of Regulation D

Answer 18

A safe harbor under the Securities Act of 1933 (“Securities Act”) that allows the fund to avoid the costly registration and disclosure requirements applicable to public issuers of securities.

Although the rule technically allows fund interests to be purchased by up to 35 non-accredited investors, most issuers avoid taking non-accredited investors because of the additional disclosure requirements and regulatory risk that come with it. Therefore, fund interests are generally offered and sold only to accredited investors.

Question 19

Rule 506 of Regulation D

506(b)

Answer 19

A GP can raise money as long as they do not publicly advertise or solicit investments for the fund. Permits GPs to raise money from accredited investors and as many as 35 non-accredited investors.

All investors are in their network.

Can talk about the firm in public, but the fund in private.

Question 20

Rule 506 of Regulation D

506(c)

Answer 20

A GP can perform general solicitation and advertising without any limitation on how much capital they can raise. But the fund’s GP must take “reasonable steps to verify” that the purchasers are accredited investors or hire a third party to perform the verification.

Can talk about both the firm and the fund in public

Can go from 506(b) to 506 (c), but not the other way

Question 21

Accredited Investor

Answer 21

An individual or a business entity that is allowed to trade securities that may not be registered with financial authorities. They are entitled to this privileged access by satisfying at least one requirement regarding their income, net worth, asset size, governance status, or professional experience.

Question 22

ADV Form

Answer 22

This Fund Level form specifies the investment style, assets under management (AUM), and key officers of an advisory firm. This form must be updated annually and it must be made available as a matter of public record for companies that manage funds in excess of $25 million.

Question 23

Commited Capital

Answer 23

the money that an investor has agreed to contribute to an investment fund.

Question 24

Target Captial Commitment

Answer 24

The target size of funds to be raised.

Question 25

Fund Strategy: Venture Capital

Answer 25

Investors (called venture capitalists) collect outside capital and combine it with their own money to invest in early-stage companies, often in the technology industry.

Question 26

Fund Strategy: Private Equity

Answer 26

capital invested in a company or other entity that is not publicly listed or traded.

Question 27

Fund Strategy: Fund of Funds

Answer 27

Aims to achieve broad diversification and asset allocation where investors can get broader exposure with reduced risks compared to investing directly in securities.

Question 28

Fund Strategy: Secondary

Answer 28

Making a secondary investment in an investment fund. Meaning, a fund is raised and partially or fully deployed (companies have received equity investment) and you look to invest in these funds and their current ownership interests.

Question 29

AML/KYC

Answer 29

Know Your Customer (KYC) is the process of obtaining information about a customer and verifying their identity. Anti-Money Laundering (AML) is a complex of measures carried out by financial institutions and other regulated entities to prevent financial crimes. KYC falls within AML measures.

Question 30

Blue Sky Filings

Answer 30

Protect investors against securities fraud. Most venture fund offerings are exempt from blue sky law registration requirements, but fund managers often need to make notice filings with the state.

Question 31

# Term Sheet Principals

Answer 31

Individual(s) that are primarily responsable for the Funds Investment. At Carta, ALL principals must come from the US.

Question 32

# Term Sheet The Fund

Answer 32

Delaware Limited Partnership (LP) The account from which investments can be made by the GPs and LPs.

Question 33

# Term Sheet Minimum Capital Commitment

Answer 33

Minimum commitment of capital for each of the Fund's Limited Partners. The GPs can accept larger or lesser ammounts.

Question 34

# Term Sheet General Partner Capital Commitment

Answer 34

minimum commitment of GPs towards the fund. Getting skin in the game.

Question 35

# Term Sheet Under Capital Calls, what is allowed if any LP has a commitment of LESS than the Minimum Capital Commitment?

Answer 35

The GP can request 100% of it upfront. However, this may effect their IRR

Question 36

# Term Sheet IRR

Answer 36

The primary stat that VCs track against. Idol cash negatively impacts the VC's metrics Measures the potential profitability or performance of an investment over time. It represents the annualized rate of return that an investor would earn on their VC investment, taking into account the timing and magnitude of cash flows, including both capital contributions and distributions, throughout the life of the investment. Reflects the compound annual growth rate that would make the present value of the cash flows equal to zero.

Question 37

# Term Sheet Inital Closing

Answer 37

When a Fund first accepts Capital Commitments from Investors, typically after the Fund manager has raised the minimum amount of capital needed to execute the Fund's investment program. Starts the clock on the 12 month initial closing timeline until when the final closing is completed. May extend up to 6 months

Question 38

# Term Sheet Capital Account

Answer 38

Responsability Carta sets up an account for every Limited Partner and prepairs a statement each quarter. Shows $ coming in from LP, less expenses and losses, plus gains. Quarterly statement on Carta

Question 39

# Term Sheet Investment Period

Answer 39

the time period (typically 5 years) that you can make your initial investments. If a second fund is set up, it will shut down the investment period of the first fund's investment period immediately.

Question 40

# Term Sheet Follow-On Investments

Answer 40

Investments related to or Intended to preserve or enhance the value of investments in an existing portfolio after the Investment Period has closed (typically after 5 year anniversery of Initial Closing)

Question 41

# Term Sheet Investment Restricitons

Answer 41

Consentration of risk for the protfolio. States how much the GPs may invest into a single asset (portfolio investment or underlying funds), preventing investing too much and mitigating the risk by ensuring a diverse portfolio.

Question 42

# Term Sheet Concentration Risk

Answer 42

metric kept refrencing the diversity in a funds portfolio

Question 43

# Term Sheet Fund Expenses

Answer 43

Caps the budget that encompasses all Organization Company: * Legal Fees * Marketing * Filling Fees * Traveling

Question 44

# Term Sheet Management Company and General Partner Expenses

Answer 44

The Management Company and the General Partner will each bear its own ordinary administrative and overhead expenses, including without limitation, salaries, rent, office costs and utilities.

Question 45

# Term Sheet Management Fee

Answer 45

The largest expense associated with the fund. Typically reduced in an even cadence (step down) after the investment period ends. Averages out to 2.5% or 2% Due annually, paid quarterly

Question 46

# Term Sheet Management Fee Offsets

Answer 46

The extent to which monitoring, transaction, and other portfolio company related expenses, paid to the General Partner are offset against management fees. Bypassable if disclosed.

Question 47

# Term Sheet Distributions

Answer 47

When there is a liquidation of an asset, distrobutable proceeds across the partners. LPs MUST get their contributions back first before

Question 48

# Term Sheet Carry

Answer 48

a form of performance-based compensation that aligns with investor interest so that general partners find outperforming deals. The share of profits from an investment that is paid out to general partners at a VC firm.

Question 49

# Term Sheet Tax Distribution

Answer 49

GPs can take out funds from the fund to pay tax liabilities. Fund Admins typically take out the tax liability or something above it.

Question 50

# Term Sheet Reinvestment/ Recycling

Answer 50

GPs reinvest returns from early exits back into the portfolio—increases investable capital and can potentially increase fund returns.

Question 51

# Term Sheet Return of Distrobutions

Answer 51

If GPs sent too much money back to the LPs, the Terms Reserve the right to claw back up to 25% of the Partner's capital commitment.

Question 52

# Term Sheet General Partner Clawback

Answer 52

To the extent that the general partner receives more than its fair share of profits, as determined by the carried interest, the general partner clawback holds the individual partners responsible for paying back the limited partners what they are owed. Normalizing the distrobutions.

Question 53

# Term Sheet Key Person Event

Answer 53

When one of the Principles sells their interests in the GP, Dies or is uninvovled with the day to day of the fund for 180 consecutive days. the General Partner will give prompt written notice thereof to the Limited Partners and the Investment Period shall be suspended. Upon a Suspension, the Fund may not make any new investments, other than Follow-On Investments that are approved by the Advisory Committee (as defined below) or a majority in interest of the Limited Partners.

Question 54

# Term Sheet Parallel Fund

Answer 54

Funds which co-invest and divest alongside the main fund. They co-invest and divest at the same time and on similar terms. This is on a pro-rata basis per their commitments, so a manager has two funds side by side which invest and divest at the same time in a common portfolio of assets.

Question 55

# Term Sheet Alternative Investment Vehicles

Answer 55

An entity created in accordance with the Operative Documents of a Borrower to make Investments, including, but not limited to, any parallel fund. Similar to SPV.

Question 56

# Term Sheet Co-Investment

Answer 56

GPs have the right to provide opportunties to other investors to participate in potentially highly profitable investments without paying the usual high fees charged by a private equity fund.

Question 57

# Term Sheet Successor Fund

Answer 57

The next fund that the GPs can start up must come after a threshhold, such as 75%, of the fund commited/allocated before starting the next fund.

Question 58

# Term Sheet Defult Provisions

Answer 58

Provisions on what happens with an LP does not fufil required Capital Commitment. Defulting Partners may be subject to significant penalties.

Question 59

# Term Sheet Transferability of Interests

Answer 59

A Limited Partner's Interest may not be sold, assigned, transferred or pledged, except under certain limited circumstances and then only with the prior written consent of the General Partner.

Question 60

# Term Sheet Advisory Committee

Answer 60

Made up of at least three and not more than five representatives of the Limited Partners approved by the General Partner to help the GPs make decisions.

Question 61

# Term Sheet Indemnification

Answer 61

Protects GPs and Advisory Committee from liabilities from legal proceedings if they are found to have been acting legally in the best interest of the fund.

Question 62

# Term Sheet Term

Answer 62

Almost always at 10 years with the language to extend if needed.

Question 63

# Term Sheet Side Letter

Answer 63

Any LP may have a seperate agreement on the side that gives them unique managment fees, deal structure, carry, reportings, ect. The sky is the limit for Side Letters.

Question 64

# Term Sheet Tax Aspects

Answer 64

The Fund intends to operate as a partnership and, accordingly, should not be subject to federal income tax. Each Limited Partner will be required to report on its own annual tax return such Limited Partner's distributive share of the Fund's taxable income or loss.

Question 65

# Term Sheet Securities Law Matters

Answer 65

The Fund will not be registered under the U.S. Investment Company Act of 1940, as amended, pursuant to Section 3(c)(1) or 3(c)(7). Investors must be "accredited investors" within the meaning of Regulation D of the Securities Act of 1933

Question 66

# Term Sheet ERISA Considerations

Answer 66

A fund cannot accept more than 25% of the fund's capital commitments in the form of a retirement vehicle, such as an IRA. MUST BE COMPLIANT AT **EVERY CLOSE. The Fund will use commercially reasonable efforts to conduct the affairs and operations of the Fund in such a manner so that the assets of the Fund will not be treated as "plan assets". The Employee Retirement Income Security Act of 1974, a federal program that was designed by Congress to help protect funds that have been set aside to pay for employee benefits that typically include long-term disability and retirement benefits.

Question 67

Venture Capital Exemption

Answer 67

80% of investments are deployed to tru VC portfolio companies 20% can be other investments

Question 68

Private Fund Exemption

Answer 68

GPs can invest in whereever they would like to.

Question 69

Lookthrough Event

Answer 69

take the current period earnings of a company (as reported in a quarterly or annual report) and add to that figure all sources of earnings expected in the long run.

Question 70

Qualified Purchasers

Answer 70

Entities with $5 Mil in investable capital

Question 71

Accredited Purchasers

Answer 71

$250k in salary AND $1mil in investestible capital

Question 72

Qualified Client

Answer 72

$2.5 Mil in investible capital

Question 73

PPM Private Placement Memorandum

Answer 73

A legal document used by companies to provide detailed information about their business and investment opportunity to potential investors in a private placement offering. It discloses financials, risks, and terms of the investment to ensure transparency and compliance with securities regulations. "Super juiced up term sheet"

Question 74

GP Affiliate

Answer 74

Advisor or venture partner, compensated with carry

Question 75

GP Vesting Schedule

Answer 75

Typically for GPs affiliates that are Advisors or Venture Partnership Exhibited in the LPA