How to be a fund manager

Form ADV is the standard disclosure document investment advisers must file with the SEC and state regulators. But for venture capital fund advisers—which generally qualify as Exempt Reporting Advisers—the requirements can differ.

Portfolio construction is the process of designing a quantitative investing strategy for your fund, while portfolio management refers to tracking how your actual investments are pacing against that strategy.

Rule 506 under Regulation D allows fund managers to offer fund interests (i.e., raise capital for their fund) without registering the offering with the SEC.

Blue sky laws protect investors against securities fraud. Most venture fund offerings are exempt from blue sky law registration requirements, but fund managers often need to make notice filings with the state.

Bridge rounds help startups “bridge” the gap between larger funding rounds. While not always ideal, they can be necessary to keep the company afloat.

Venture capital fund recycling—when GPs reinvest returns from early exits back into the portfolio—increases investable capital and can potentially increase fund returns.

A venture fund of funds is a fund that invests in other venture funds. Investing in a fund of funds offers portfolio diversification.

Management company structure has an important impact on a venture capital fund’s activities.

Qualifying venture capital fund advisers are exempt from registering with the SEC and from many provisions of the Advisers Act via Exempt Reporting Adviser (ERA) status.

Liquidity events can be viewed as the “end game” for venture investors, giving them the opportunity to convert their illiquid stake in a startup into liquid assets.

Venture investors typically negotiate for preferred shares because preferred shares grant certain rights, privileges, and preferences that common shareholders do not receive.

The venture capital equity financing documents dictate the economics and control offered to investors and founders of a startup.

The general partner of a venture fund raises and allocates investor capital and supports the founders of the companies they invest in.

Venture capital funds are pooled investment vehicles that provide capital to startups in exchange for equity.

Side letters are used in venture capital deals to grant certain investors specific rights or privileges that are outside the parameters of the standard investment documents’ terms.

Capital calls give fund managers the legal right to demand capital from the fund’s investors.

The accredited investor and qualified purchaser standards determine which investment opportunities an investor can participate in.

A distribution is the process by which a fund returns capital to its investors.

Venture differs from other major asset classes in several key ways, including access, return profile, and risk profile.

LPs provide the capital for funds to invest. In return, they hope for profits and, in some cases, access to information and future deals.

Internal rate of return is a common metric used in venture to compare a fund’s performance across vintage years.

ASC 820 sets out how venture funds should determine and report the fair values of their portfolio companies.

Investors use TVPI to analyze the return on their investment in a venture fund.

Carried interest is the primary way general partners get paid for managing a venture fund.

A post-money valuation is what a company is deemed to be worth after having raised a new round of financing.

A pre-money valuation is what a startup is believed to be worth prior to raising a round of funding.

Venture is a service industry. And just like any service, it costs money. Here are the fees you can expect when investing in venture.

Pay-to-play provisions incentivize investors to participate in a new fundraising round either by negatively impacting investors who opt not to participate or rewarding investors who choose to participate.

Advisory shares refer to equity compensation offered to a startup’s advisors.

A down round is when a startup raises money at a pre-money valuation that is lower than the post-money valuation of its previous round.

A right of first refusal gives its holders “first dibs” on any share sale in a startup.

Drag along rights give the majority shareholder(s) the power to compel minority shareholders to participate in an acquisition.

Protective provisions give preferred shareholders the right to veto specific corporate actions that could impact their investment.

Anti-dilution provisions help protect investors’ shares from losing value in a ‘down round.’

Pro rata rights can help investors maintain their ownership stake in a startup as it grows.

Liquidation preferences dictate the order and amount investors get paid when there's an exit.

Convertible notes are a type of loan that gives investors the right to convert their debt into equity at a predetermined event.

SAFEs give an investor the right to convert their SAFE into equity at the company’s next equity financing round or liquidation event.

SPVs allow investors to pool their money together to invest in a single company.

The use of qualified small business stock in venture investing can save investors millions in capital gains taxes.

Employee stock options give their holder the right to purchase company equity and thus share in the company’s upside.

The Schedule K-1 helps an investor in a venture fund understand their share of taxable earnings for the given year.

C-Corporations are the preferred legal entity structure of many new technology startups.

Companies can reprice stock options to lower the exercise price of existing employee options when the company's share value drops.

Cap tables present a detailed breakdown of a startup’s ownership.

Employee option pools are shares of a startup specifically reserved for the company’s employees.

A 409A valuation is an independent third-party valuation of a startup's common stock that informs the price of employee stock options.

Understand the impact of CTA and how to file Beneficial Ownership Info