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.
