How is a venture capital fund structured?

The structure, walked from the investor down

Read in this order, each element sits below the one before it. This is the shape most first funds start from before anything is added.

• The limited partners. Investors who commit capital, take no part in management, and receive their return through the fund's distributions.
• The fund. Usually a limited partnership, occasionally another vehicle depending on domicile. It is what investors subscribe to, what holds the portfolio, and what the fund documents govern.
• The general partner entity. Controls the fund, is legally responsible for it, and is the vehicle through which carried interest is received. Cooley's practitioner commentary describes the general partner as formed per vintage: a manager raising Fund I forms a Fund I general partner, and forms a separate one when it raises Fund II.
• The carry vehicle. Sometimes the general partner itself, sometimes a separate entity below or beside it, holding and allocating carried interest among the people entitled to it. Blueprint's page on the three entities covers why the split exists.
• The management company. The durable operating business, described in that same commentary as the entity that persists across vintages and, in most structures, the only one with employees. It receives the management fee, pays rent and salaries, and owns the brand.
• The portfolio companies. What the fund actually holds, usually directly, sometimes through an intermediate vehicle where tax or regulation requires it.

The additions, and what each one is for

None of these is standard. Each appears when a specific problem appears, and a first fund with a homogeneous investor base may need none of them.

• Feeder funds. A separate vehicle that pools one category of investor and invests into the main fund. Cooley's domicile commentary describes a common pairing, a Delaware main fund with a Cayman feeder for tax-sensitive investors, and notes that some non-United States investors do not want to receive a United States Schedule K-1.
• Blockers. An entity inserted between the fund and an investment so that a particular tax characteristic does not flow through to particular investors. Whether one is needed, and where, is a tax question with no general answer.
• Parallel funds. Two or more funds investing side by side. Ogier's published description is that a parallel fund co-invests and divests alongside the main fund, usually pro rata to commitments, on terms similar to the main fund, with differences driven by regulatory or operational reasons.
• Alternative investment vehicles. Formed for a specific investment where holding it in the main fund would create a problem for some investors, which Cooley's commentary connects to concerns such as unrelated business taxable income or effectively connected income.
• Co-investment vehicles and special purpose vehicles. Used to hold a single deal beside the fund. Blueprint's page on special purpose vehicles covers when they help and when they fragment the operating model.
• Management company subsidiaries. Sometimes formed where a team operates across jurisdictions and local presence or licensing is required.

What actually drives the shape

Seven inputs decide which of the elements above you need. They are the questions counsel will ask, and having answers ready shortens the conversation considerably.

• Investor jurisdiction. Where your limited partners are established, which drives reporting, withholding, and in some cases whether they can invest at all.
• Investor tax status. Taxable, tax-exempt, sovereign, or non-resident investors have different sensitivities, and the same structure is not neutral across them.
• Strategy. What you buy, in what form, and whether any of it is characterised in a way that creates a problem for one investor category.
• Manager location. Where the team sits, which drives adviser registration or exemption analysis, employment, and substance questions independently of where the fund is formed.
• Portfolio geography. Where the companies are, which brings in local rules, treaty questions, and in some cases national security review. Cooley's domicile commentary notes that sensitive technology investments can require review regardless of domicile.
• Regulatory pathway. How you intend to offer the fund and to whom, which is the subject of Blueprint's page on marketing rules and which can constrain the structure rather than follow it.
• Limited partner type. Institutions, funds of funds, development finance institutions, family offices, and public pension investors each bring requirements that show up as structure rather than as preference.

What the structure does not do

Structure allocates economics, control, and liability, and it determines who reports what to whom. It does not make a strategy work and it does not make a fund marketable. A clean structure with no distinctive strategy behind it raises nothing.

Nor does the presence of a common structure mean anything is approved, registered, exempt, or compliant. Cooley's securities commentary is direct that a manager will generally want to be exempt from registration under three separate United States statutes, and that exemption is the result of an analysis rather than of adopting a shape somebody else uses.

This page is educational and general. It is not legal, tax, accounting, or securities advice, and it makes no promise about tax treatment or legal separation. Structure should be settled with fund counsel and a tax adviser who know your investors, your strategy, and your jurisdictions.

What limited partners are testing

Structure questions in diligence are rarely about the diagram. They are about whether the manager understands what they signed.

• Can the manager explain their own structure without reading from the documents?
• Does the structure match what the questionnaire and the materials say it is?
• Are the feeders, blockers, and parallel vehicles there for a reason the manager can name?
• Who bears the cost of the structure, and is that disclosed?
• Does the manager know which questions are theirs and which belong to counsel?