foreign [Music] lawyer I always found myself repeating these same lessons over and over again to emerging managers so if you're sticking with us great job this stuff can feel so complicated so we covered the basic definition of what a venture capital fund is and we understand at a high level how Venture Capital works now let's get into some of the harder stuff and take a look at how a VC fund is set up high level BC funds are just big business Partnerships with a whole bunch of interlocking parts in this lesson we're going to break
down what those parts are and how they work you ready let's go [Music] first up let's talk about something we touched on a little earlier the limited partnership if you remember most BC funds are set up as limited Partnerships it's a core component of how they work so what is a limited partnership high level it's just a type of legal entity that's used for a whole bunch of different business purposes in the US and in Venture Capital funds are usually structured as limited Partnerships so let's draw that out real quick and see what it looks
like up top we got our Venture for aka the management company we're going to go ahead and call this entity Krakatoa Adventures this VC firm is now going to set up their first fund we'll call that Krakatoa Adventures fund one this fund is a legal entity called a limited partnership you still with me all right let's keep going a limited partnership is going to be made up of at least one General partner or GP and at least one limited partner or LP who agree to do business together now if you remember from earlier this GP
manages the fund and these LPS contribute money to it the GPS and LPS of a limited partnership can be people or they can be legal entities for example LPS can be high net worth individuals or they could be family trusts College endowments Pension funds or other institutional investors now the words General and limited refer to the roles that each partner has in this partnership here's what I mean by that the general partner is responsible for managing the business operations of the partnership because of this they have full liability for the fund's business affairs the limited
partners usually just contribute Capital AKA money and do not participate in managing the fund so LPS have what's called limited liability basically this all just means that when the fund has debts or legal liabilities the amount that LPS are responsible for is typically limited to their individual investment stake in the partnership or in other words their liability does not extend to any of their other assets outside the fund they're safe but General partners General Partners have it a little different General Partners have what's called unlimited liability let's dive into that real quick and explain it
because it's important so remember from earlier the GP of a venture capital fund is a legal entity that's established and run by people who work at the VC firm usually this GP has a limited liability company or LLC and there's a reason for that let's draw it out take a look back at this GPU right here you know this GP is what manages the fund right and this GP has a person or a few people who manage it but those people aren't going to want to be personally on the hook for all of the gp's
dots and liabilities right that would be pretty scary so for that reason the GP itself is set up as an LLC entity and those business partners who manage it they're members of that GP LLC this is a key thing to understand about llc's an LLC gives all of its members the safety of limited liability even though these members can still manage the actual entity itself and that's why this GP right here is usually set up as an LLC because now we've got the GP entity assuming all that scary legal liability and not the members who
manage it and if you remember it also protects the VC firm up top from those same legal liabilities okay that was a lot you staying with me so one more thing like we talked about before there's kind of this casual industry lingo people used to talk about this stuff so even though the GP is technically a legal entity there are all these people who work at the firm krakato Avengers right up here and these people have a whole career finding and investing in startups for the fund and typically these people have roles in that GP
entity right there so remember how the GP entity is an LLC and the people who manage it are quote unquote members of the LLC these people right here are those members so for that reason in the VC industry you're probably going to hear these people be referred to as GPS basically because saying the words members of the LLC that is the GP is a mouthful and it's annoying and GP is easier to put on your LinkedIn this phrase also conveys that these people have investment making authority meaning they can actually write checks for the VC
firm and if all that sounds confusing to you you You Are Not Alone the whole financial sector including venture has its own specialized language that makes it really hard for beginners to get their sea legs with this stuff and this confusing jargon creates barriers and that's why we want to break it down step by step so that you can understand it and make your way through that door okay so in the next lesson we're going to go a little deeper into limited Partnerships in management companies AKA The Firm in order to understand how they function
so take a break get some air and when you're ready jump on over to the next lesson and we'll get started [Music]
