Term Sheet/ week 1 Flashcards
Term Sheet
Late Interest
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.
Term Sheet- Distrobution
Waterfall Modeling
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.
Operational Planning Model
The model for the fund for complete encompassment of the onboarding
Cashless Capital
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).
Managment Fees
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.
Management Co Budget
Annual operating expenses for the firm to opporate
Fund Budget
Investible Capital after annual expenses are accounted for
Portfolio Modeling
Hypothetical IRR modeling, understand how to achieve liquidation targets
venture capital fund structures
Blockers:
Purpose
Address tax concerns for certain investors, particularly tax-exempt organizations and foreign investors.
venture capital fund structures
Blockers:
Function
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.
venture capital fund structures
Feeders
Purpose
Simplify investment and tax reporting for certain investors, mainly foreign investors and smaller individual investors.
venture capital fund structures
Feeders:
Function
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).
venture capital fund structures
Splitters:
Purpose
Address regulatory, tax, or investor-specific concerns by creating separate pools of investments within a fund.
venture capital fund structures
Splitters:
Function
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.
3(c)(1) Fund
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
Investment Company Act of 1940
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.”
3(c)(7) fund
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.
Rule 506 of Regulation D
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.
Rule 506 of Regulation D
506(b)
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.
Rule 506 of Regulation D
506(c)
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
Accredited Investor
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.
ADV Form
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.
Commited Capital
the money that an investor has agreed to contribute to an investment fund.
Target Captial Commitment
The target size of funds to be raised.
Fund Strategy:
Venture Capital
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.
Fund Strategy:
Private Equity
capital invested in a company or other entity that is not publicly listed or traded.
Fund Strategy:
Fund of Funds
Aims to achieve broad diversification and asset allocation where investors can get broader exposure with reduced risks compared to investing directly in securities.
Fund Strategy:
Secondary
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.
AML/KYC
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.
Blue Sky Filings
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.
Term Sheet
Principals
Individual(s) that are primarily responsable for the Funds Investment.
At Carta, ALL principals must come from the US.
Term Sheet
The Fund
Delaware Limited Partnership (LP)
The account from which investments can be made by the GPs and LPs.
Term Sheet
Minimum Capital Commitment
Minimum commitment of capital for each of the Fund’s Limited Partners.
The GPs can accept larger or lesser ammounts.
Term Sheet
General Partner Capital Commitment
minimum commitment of GPs towards the fund.
Getting skin in the game.
Term Sheet
Under Capital Calls, what is allowed if any LP has a commitment of LESS than the Minimum Capital Commitment?
The GP can request 100% of it upfront. However, this may effect their IRR
Term Sheet
IRR
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.
Term Sheet
Inital Closing
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
Term Sheet
Capital Account
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
Term Sheet
Investment Period
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.
Term Sheet
Follow-On Investments
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)
Term Sheet
Investment Restricitons
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.
Term Sheet
Concentration Risk
metric kept refrencing the diversity in a funds portfolio
Term Sheet
Fund Expenses
Caps the budget that encompasses all Organization Company:
* Legal Fees
* Marketing
* Filling Fees
* Traveling
Term Sheet
Management Company and General Partner Expenses
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.
Term Sheet
Management Fee
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
Term Sheet
Management Fee Offsets
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.
Term Sheet
Distributions
When there is a liquidation of an asset, distrobutable proceeds across the partners.
LPs MUST get their contributions back first before
Term Sheet
Carry
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.
Term Sheet
Tax Distribution
GPs can take out funds from the fund to pay tax liabilities. Fund Admins typically take out the tax liability or something above it.
Term Sheet
Reinvestment/ Recycling
GPs reinvest returns from early exits back into the portfolio—increases investable capital and can potentially increase fund returns.
Term Sheet
Return of Distrobutions
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.
Term Sheet
General Partner Clawback
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.
Term Sheet
Key Person Event
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.
Term Sheet
Parallel Fund
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.
Term Sheet
Alternative Investment Vehicles
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.
Term Sheet
Co-Investment
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.
Term Sheet
Successor Fund
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.
Term Sheet
Defult Provisions
Provisions on what happens with an LP does not fufil required Capital Commitment. Defulting Partners may be subject to significant penalties.
Term Sheet
Transferability of Interests
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.
Term Sheet
Advisory Committee
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.
Term Sheet
Indemnification
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.
Term Sheet
Term
Almost always at 10 years with the language to extend if needed.
Term Sheet
Side Letter
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.
Term Sheet
Tax Aspects
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.
Term Sheet
Securities Law Matters
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
Term Sheet
ERISA Considerations
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.
Venture Capital Exemption
80% of investments are deployed to tru VC portfolio companies
20% can be other investments
Private Fund Exemption
GPs can invest in whereever they would like to.
Lookthrough Event
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.
Qualified Purchasers
Entities with $5 Mil in investable capital
Accredited Purchasers
$250k in salary AND $1mil in investestible capital
Qualified Client
$2.5 Mil in investible capital
PPM Private Placement Memorandum
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”
GP Affiliate
Advisor or venture partner, compensated with carry
GP Vesting Schedule
Typically for GPs affiliates that are Advisors or Venture Partnership
Exhibited in the LPA
