4 ms·

I'm not a lawyer, but I've been involved in a fair bit of venture fund formation. A fund is not an incorporated entity, but rather a partnership of two persons

I'm not a lawyer, but I've been involved in a fair bit of venture fund formation. A fund is not an incorporated entity, but rather a partnership of two persons. In a limited partnership, one of those persons is the general partner and does all the work and assumes the related liability, and the rest are "limited partners" who just commit capital. Banks and tax authorities only open accounts for actually-formed partnerships, not hypothetical partnerships that might happen in the future. But, you need a bank account for the LP investors to send their money to. So, in my experience it is super common to have a temporary Initial LP, which is usually a related person (one of the founders of the firm acting in their personal capacity, for example), to allow the Initial LP and the GP to form the fund and open the accounts. Then the Initial LP withdraws in the actual closing event where the investors sign onto the partnership agreement and commit their money. I have never seen an "initial GP" though. I believe the explanation, but can't really figure out why one would be necessary. Maybe they wanted to incorporate a GP Co, but didn't get around to it? Love to hear any theories why this might be useful..?

ameister14 3y ago
Rewriting this to just say it could be simply to shift liability for your initial GP to the new one; not sure why you would choose this structure in that case but it's possible? It could also be that the initial GP had individual contractual or ethical obligations that were counter to the best interest of other investors so could not continue acting in control of the investment vehicle, that'd be a reason to change But no, no idea why you would plan to have an initial GP
yieldcrv 3y ago
None of this makes sense in a Master-Feeder model, as the master fund is a partnership between the feeder funds, one US, one offshore for foreign investors The general partner is not an owner they are a manager. The general partner doesnt have to be a human either it can be another entity or multiple entities all of this can be hotswapped Even in a mini-master models or single US entity model, LPs are the owners, GP is just a managing member. “ownership” in the context of this article is ambiguous, but the SEC filings would add the clarity necessary for this discussion, probably “manager” or “controlling person”
- lgregg 3y ago
  Where can you go to learn more about these entity / LP / LLP setups that finance orgs use?
  - yieldcrv 3y ago
    be rich enough to be a limited partner, means you're rich enough to have your own specialized lawyer to review the contract (instead of "I know a guy" "my cousin" "prepaid legal" "general counsel"), rich enough to afford an MBA, rich enough to do a dry run in setting up your own hedge/vc/pe fund otherwise, I don't know exactly. but I've personally been reading wiki pages on fund structures since I was 18 and not eligible for anything, just dissecting the quiet class systems I noticed. scouring SEC documents, and validating my assumptions with hedge fund lawyers and being an LP when I could afford it later
  - ameister14 3y ago
    I went to law school to do that, but without that you can start by focusing on an area of law called "business associations/corporations." There are resources online to assist law students studying for exams in that class so you can use those to get a grounding in the concepts of agency law and partnerships. From there you can start to specialize in more specific structures by examining the filings of public companies or scouring the web to figure out how a particular fund you are interested in is structured. To let you know, it is further complicated in US law by each state having different corporate rules. If you go with Delaware or New York it's probably your best bet for public, but closely held or private companies could be anywhere. As a starting place, most states adopt the Revised Uniform Partnership Act, or RUPA - that is available online through law.cornell.edu
- IG_Semmelweiss 3y ago
  I suppose you caveated your statement well , by starting your writeup with "master-feeder" setups. However in a vanilla fund, your description does not apply. In a vanilla fund, the GP is another partner and has "ownership" just like LPs do. Its just traditionally very insignificant. The GP is simply a special partner as outlined in the LPA. They vote etc just like other LPs in major matters. They make minor decisions for the partnership. This is why usually that means the GP is the managing member. Ive described the traditional VC fund. No need to make it more complex with a master-feeder structure. Or a secondary, etc
llm_nerd 3y ago
You might be simplifying, but just to clarify an LP can have many general partners and many limited partners.

ameister14 3y ago

Rewriting this to just say it could be simply to shift liability for your initial GP to the new one; not sure why you would choose this structure in that case but it's possible? It could also be that the initial GP had individual contractual or ethical obligations that were counter to the best interest of other investors so could not continue acting in control of the investment vehicle, that'd be a reason to change But no, no idea why you would plan to have an initial GP

yieldcrv 3y ago

None of this makes sense in a Master-Feeder model, as the master fund is a partnership between the feeder funds, one US, one offshore for foreign investors The general partner is not an owner they are a manager. The general partner doesnt have to be a human either it can be another entity or multiple entities all of this can be hotswapped Even in a mini-master models or single US entity model, LPs are the owners, GP is just a managing member. “ownership” in the context of this article is ambiguous, but the SEC filings would add the clarity necessary for this discussion, probably “manager” or “controlling person”

lgregg 3y ago
Where can you go to learn more about these entity / LP / LLP setups that finance orgs use?
- yieldcrv 3y ago
  be rich enough to be a limited partner, means you're rich enough to have your own specialized lawyer to review the contract (instead of "I know a guy" "my cousin" "prepaid legal" "general counsel"), rich enough to afford an MBA, rich enough to do a dry run in setting up your own hedge/vc/pe fund otherwise, I don't know exactly. but I've personally been reading wiki pages on fund structures since I was 18 and not eligible for anything, just dissecting the quiet class systems I noticed. scouring SEC documents, and validating my assumptions with hedge fund lawyers and being an LP when I could afford it later
- ameister14 3y ago
  I went to law school to do that, but without that you can start by focusing on an area of law called "business associations/corporations." There are resources online to assist law students studying for exams in that class so you can use those to get a grounding in the concepts of agency law and partnerships. From there you can start to specialize in more specific structures by examining the filings of public companies or scouring the web to figure out how a particular fund you are interested in is structured. To let you know, it is further complicated in US law by each state having different corporate rules. If you go with Delaware or New York it's probably your best bet for public, but closely held or private companies could be anywhere. As a starting place, most states adopt the Revised Uniform Partnership Act, or RUPA - that is available online through law.cornell.edu
IG_Semmelweiss 3y ago
I suppose you caveated your statement well , by starting your writeup with "master-feeder" setups. However in a vanilla fund, your description does not apply. In a vanilla fund, the GP is another partner and has "ownership" just like LPs do. Its just traditionally very insignificant. The GP is simply a special partner as outlined in the LPA. They vote etc just like other LPs in major matters. They make minor decisions for the partnership. This is why usually that means the GP is the managing member. Ive described the traditional VC fund. No need to make it more complex with a master-feeder structure. Or a secondary, etc

llm_nerd 3y ago

You might be simplifying, but just to clarify an LP can have many general partners and many limited partners.