IVCA Feature: Highlights from the First 2020 IVCA Education Luncheon ‘Terms, Trends & Launch Considerations for Venture Capital and Growth Equity Funds’February 19, 2020 Two partners from the legal firm of Gunderson Dettmer - Boston shared their views on “Terms, Trends & Launch Considerations for Venture Capital and Growth Equity Funds”.
HIGHLIGHTS: FUND TERMS AND TRENDS TOPICS: Management Fees, Carried Interest, Distribution Waterfall, GP Capital Commitment, Importance of Competitive Economic Terms Compared to Peers, LP Protections/Key Person/Cause Considerations, Clawback, Fund Term and Extensions, Fund Size … Maximum and/or Minimum, Subsequent Closings, Successor Fund Formation Requirements, Size and Function on LP Advisory Committees, Investment Opportunities Requirements, Indemnification, Side Letter Approaches and Placement Agents. Management Fees … Venture funds have higher management fees starting out, Ranging from 2% to 2.5%. Added mechanics in fund fees can reduce tax responsibilities. Carried Interest: 20% base is standard, some Venture funds will have performance-based premiums fee, which ups carry to 25-30%. Guttilla and Nicholls were recommending a clause to amend the fund agreement if a carried interest tax change occurs. Distribution Waterfall: In “American” -style waterfalls prevail for West Coast funds, while Midwest and East coast tend to employ “European” style waterfall. In Growth Equity Funds, it works like a modified American waterfall, and there is more likely to have a preferred return built in. GP Capital Commitment: Historically one percent, but LPs are pushing for more “skin in the game,” so two percent plus is becoming more common. GPs contribution will generally be paid upfront rather than called later. LP Protections/Key Person/Cause Considerations: This keep tabs on triggers and key persons and include: failure to devote sufficient time/attention to fund; “cause” acts (like fraud), and “no fault divorce” votes where LPs s can act for any reason. Remedies include fund dissolution, suspension of new investments, and GP removal. Clawback: Tax effected (net of taxes paid); several liability only. Fund Terms and Extensions: Tends to be ten year to extend for 2-3 one year periods with, or without LPAC consent. Fund Size: Basically the number that is desired, should it be up front? For example, desiring 100, but getting 50, does this create a reputation issue? Advice … put the most reasonable amount on the book but show maximum and minimum. Subsequent Closings: The fundraising duration limits are calculated from initial investment dates or initial closing dates, and usually done in 12-18 month increments. Venture Funds tend not to charge interest on LPs coming in later Successor Fund Formation Requirement: Try to have a limitation apply to “calling down capital” on a successor fund. LP Advisory Committees (LPACs): Most funds have one for expediency sake. Roles include consents and waivers of provisions in LP agreements. Investment Opportunities Requirements: Create flexibility to share opportunities, cover fiduciary considerations and side letter rights. Indemnification: Look for coverage from Portfolio companies, Fund, GP and Management Company. Should include advancement of expenses and priority of indemnification. Side Letter Approaches: Assume all will have “Most Favored Nation” and wrap all the side letter requirements in one “master” LPA. Minimizing these side letters reduces the cost of fund formation, and increases efficiencies. Placement Agents: Any fees to Placement Agents (PA) should be paid for by the funds for tax optimization. PA agreements should be reviewed by counsel, as the agreements are always advantageous for the PAs in first draft. GENERAL PARTNER AGREEMENT TERMS TOPICS: Role, Participants, Control, Economics, Vesting PERSPECTIVES: The two things that really matter in your GP Agreement Are Economics and Governance (Role, Participants, Control, Vesting). Governance is the much trickier piece… key decisions, number of GPs, etc. The advice to new firms is to keep it simple. When they flip to next generations, there are many ways to compensate founders for risk, without offering perpetual interest allocations. MARKETING TOPICS: General Solicitation PERSPECTIVES: After you solicit a Private Offering (506 b), there is a new securities rule 506c Offering that allows marketing/advertising solicitation for investors, but before they invest the Fund must have proof of “Accredited Investor” status and getting that documentation is difficult and costly). LAUNCH CONSIDERATIONS TOPICS: Investors, Fundraising Timeline PERSPECTIVES: If providing special economic terms for Anchor Investors, make sure all is transparent, and also make sure what the hot button issues for LPs will be. On the Fundraising Timeline, the main advice was determining when you want to close, and working backwards from there. Build more time for comments toward the end, to hit that closing date. Tech apps and sites have reduced timelines for agreements. This helps in the ABF rule … Always Be Fundraising. For information about and inquiries to Gunderson Dettmer, click www.Gunder.com |