This installment of how VC funds work illustrates a basic
offshore venture capital fund structure for a fund that will
make investments predominantly outside of the US (for example,
China). Typically, we form these type of funds in the Cayman Islands due
to its similarity with Delaware law and for tax planning
Obviously, there's a few more boxes here than in a
typical domestic fund, but it's not all that complicated when you look at the
reason for each piece. You can compare the slightly more complicated structure
below against my
prior chart on a basic US VC fund structure.
This is the main venture capital fund entity that makes investments in other
companies. Not much different from a domestic fund in this
structure as Cayman Islands law is highly similar to that of Delaware and is
generally familiar to sophisticated fund investors.
In some circumstances, the fund may be setup as a couple of funds that invest
in parallel into portfolio companies. These may be created for Investment
Company Act purposes (such as to create side-by-side funds that qualify under
3(c)(1) and 3(c)(7) of the act, respectively) or to allow the fund manager's
principals and affiliates to invest in the fund on a no-load basis (i.e., with
the parallel fund being structured the same as the main fund and making the
same investments, but charging no management fee or carried interest).
These issues are also often relevant in a foreign fund context where the fund
has US investors.
This entity is the decision maker for the fund and also receives the carried
interest paid by the fund (i.e., 20% of profits in a typical
"2 and 20" fund). Usually, successor funds will have their own,
new general partner to faciliate potentially different carried interest
recipients/allocations. The Cayman Islands don't allow for limited
liability companies, so this is being formed as a limited partnership to allow
for the flow of carry and invested capital using the flexibility of a
flow-through partnership structure.
Partner: Because the GP entity is formed as a partnership
in this structure, we add a third tier general partner that is a corporate
entity to provide for limited liability to the fund managers of the fund,
providing substantially the same protection as what a limited liability company
allows a General Partner in Delaware (abeit using two entities instead of
This is the business of the fund. The management company receives the
management fee from the fund and uses it to pay the overhead related to
operating the venture firm, such as rent, salaries of employees, etc.
Depending on the jurisdiction, there may be subsidiaries of the management
company formed in foreign (local) jurisdictions and/or in the US.
Note that US branches may alter the fund manager's qualification for an
exemption from the Adviser's Act (see
prior post here).
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