How VC works | Limited partnerships & management companies | VC 101

foreign [Music] so before we dive in let's do a little recap so far we know a few important things first we know our VC firm is the company that sits over the top of everything this firm is also called the management company and we know the firm sets up a legal entity called the general partner or GP this entity is typically an LLC some of the people who work at the firm up here are going to manage this GP down here in technical lingo they're the members of the GP from there we know this GP

manages the fund and the fund is a limited partnership that pulls together money from a bunch of investors who are also known as limited partners or LPS [Music] I'm actually being serious I had to hear this stuff 10 or 20 times over multiple years to actually get it so if it's taking a minute to settle don't worry it's super normal and you're totally gonna get it just keep making your way through so all right let's now Zoom back in on that fun if you remember the fund is a thing called a limited partnership and all

of the investors who give money to the fund are called limited partners so let's talk a little bit about how a limited partnership is run a limited partnership is basically just another type of legal entity that's governed by a whole bunch of rules these rules are laid out in a legal agreement that governs everything the partnership does and this document is called a limited partnership agreement or LPA the LPA basically describes a bunch of specifics about how the fund is going to do business including the scope of each partner's investment activities the rights partners are

going to have under the agreement how the proceeds are going to be distributed and how Partners can be removed from the partnership if you boil it all down the LPA is just a super detailed legal document that contains a bunch of fine print about how the fund is going to be run okay so now that you've got the limited partnership in your brain let's make our way back up the chain and talk about the last piece of our VC puzzle the management company remember when people talk about the big famous VC firms sitting over the

top of everything what they're really talking about is the management company so at this point we already know the fund and the GP are different from the management company the management company is the one that's actually launching the fund and forming the GP entity so the management company is the one that employs all these people that are going to run the strategy of the fund and some of these people are going to have roles in the GP they're going to be members of the GP the way it looks from a legal perspective is this the

GP entity this company right here is going to sign a contract with the management company right here in this contract the management company agrees to provide investment advice in exchange for a fee which is going to be paid to the GP by the fund's limited partners right if all of this feels Like A Rat's Nest that's because it is which makes it extra important that you talk to your lawyer about every step in this process now you might have already guessed this one but for the same reasons we've been talking about this whole time most

of the time the management company is going to be structured as an LLC and typically not always but pretty often all of these different VC entities that we've been talking about are going to be formed in one specific U.S state Delaware so why Delaware well it turns out a lot of companies dealing with financial services are formed in Delaware regardless of where their physical office is there are a bunch of reasons for that namely the Delaware has this kind of unique court that specializes in cases with corporations and other kinds of business entities and because

so many entities incorporate in Delaware the state also has a pretty streamlined process to form legal entities like limited Partnerships and llc's you know VC stuff another way of saying this is if you're dealing in financial services especially if you're in Venture Capital Delaware is a pretty great place for starting all your stuff now obviously there's a whole bunch of other ways to set up and structure a fund but the limited partnership structure that we just ran through is by far the most common one especially for first-time fund managers that said before you go and

form any of these legal entities we just talked about you gotta go talk to your legal counsel to make sure it's the right structure for you funds with a large number of foreign investors or those with a lot of investors that are tax sensitive could be better off using a different fund structure at the end of the day just trust me talk to your lawyer it's always worth the time and money to get yourself set up the right way from the very beginning all right by this point you've got a pretty good idea of how

Venture Capital funds are formed structured and governed now it's time to switch gears and talk about another important part of managing a VC fund regulation so take a breather grab some water and when you're ready hit the button down below and let's keep learning [Music]