1.1 Key Entities
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A Venture Capital fund doesn't operate in isolation. It sits at the center of a complex ecosystem, orchestrating the flow of capital, expertise, and information between several distinct parties. Understanding the specific role, responsibilities, and motivations of each key entity is crucial to grasping how the VC world functions.​​
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Let's dive in and learn more about each major player below:
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01
The Fund - A Pool of Capital
Primary Role: The Fund is the central legal entity, typically established as a Limited Partnership (LP) under state law (like Delaware or Texas). Its sole purpose is to hold the assets – the pooled capital from investors and the equity stakes in portfolio companies.
Legal/Financial Implications: As a legal entity, the Fund can enter contracts, hold assets, and eventually distribute proceeds. It's governed by the Limited Partnership Agreement (LPA). Its financial lifeblood comes from capital contributions (calls) from Limited Partners and, eventually, proceeds from successful investments. It pays out management fees and distributions according to the LPA. It is the entity whose performance (IRR, Multiples) is ultimately measured.
Alignment/Incentives: The Fund itself has no independent incentives; its structure and operations are designed to serve the aligned (though sometimes competing) interests of the LPs and the GP.​​​​​
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02
Limited Partners (LPs) - The Money
Primary Role: LPs are the investors who provide the vast majority (typically 99%+) of the capital to the Fund. Common LPs include pension funds, endowments, foundations, insurance companies, family offices, funds-of-funds, and high-net-worth individuals. They are typically passive investors.
Legal/Financial Implications: LPs commit a specific amount of capital to the Fund, which they provide over time as requested by the GP ("capital calls"). Their liability is generally limited to their committed capital. They have contractual rights defined in the LPA, including rights to information (reporting) and distributions. Their financial goal is to achieve a high risk-adjusted return on their investment in the Fund.
Alignment/Incentives: LPs are incentivized by capital appreciation and distributions. They seek GPs who can generate top-quartile returns. Their interests are aligned with the GP's desire for success, but they also focus on ensuring fair terms, transparency, and responsible fund management, often negotiating terms in the LPA to protect their interests (e.g., fee structures, governance rights).
03
The General Partner (GP) - The Active Manager
Primary Role: The GP is the active manager and decision-maker for the Fund. This entity (often structured as an LLC or another partnership) has the authority and fiduciary responsibility to source, evaluate, select, manage, and exit investments on behalf of the Fund. The GP team comprises the investment professionals making these decisions.
Legal/Financial Implications: The GP typically has unlimited liability for the Fund's debts and obligations (a key reason for careful structuring, often involving other entities). The GP entity itself usually receives the Carried Interest ("Carry") – its share of the Fund's profits (typically 20%), which is the primary financial upside incentive. The GP makes capital calls from LPs and directs distributions according to the waterfall defined in the LPA.
Alignment/Incentives: The GP is primarily incentivized by Carried Interest. This powerful mechanism aligns the GP's financial success directly with the Fund's profitability after LPs have received their capital back plus a preferred return. This structure is designed to motivate the GP to maximize fund performance. GPs are also motivated by building a track record to raise future funds.
04
The Management Company - The Operations
This is the operational entity associated with the GP. It employs the investment professionals, support staff (finance, legal, operations), pays salaries, rent, and other overhead costs required to run the fund's day-to-day operations.
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​Alignment/Incentives: Incentivized by fees for service and maintaining a good reputation to secure future business. While not directly tied to fund performance like GPs or LPs, their competence is critical to the smooth and compliant operation of the Fund.
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05
Entrepreneurs & Portfolio Companies
Entrepreneurs are the founders and operators of the startups that the VC Fund invests in. The portfolio companies are the assets held by the Fund. Their role is to use the capital and strategic support provided by the Fund (via the GP) to build valuable businesses.
06
Service Providers
These are external specialists hired by the GP/Management Company to provide essential services necessary for establishing and operating the Fund.
Key examples include:
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Law Firms: Advise on fund formation, LPA negotiation, regulatory compliance, and investment transactions.
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Fund Administrators: Handle back-office operations like accounting, capital calls, distributions, LP reporting, and Net Asset Value calculations.
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Auditors: Provide independent annual audits of the Fund's financial statements.
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Banks: Provide custodial and banking services for the Fund's capital.(Optional)
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How They Work Together
​The success of a venture capital firm relies on the specific interactions between its core entities:
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Operational Support: The Management Company provides the essential operational framework (brand, office, support staff) enabling the firm to function. It is funded by management fees.
Investment Direction & Capital: The General Partner (GP) acts as the investment brain trust, making crucial decisions on where to invest. It raises the capital that forms the Fund.
Financial Engine: The Fund is the financial vehicle. It receives LP capital, pays management fees to the Management Company, provides investment capital based on the GP's decisions, and holds the investments.
Profit Realization: When the GP successfully guides investments (held by the Fund) to an exit, the proceeds return to the Fund.
Reward Distribution: The Fund distributes proceeds to LPs. Then, the GP receives its share of the profits (carried interest) from the Fund.
This interplay ensures dedicated entities focus on operations (Management Co.), investment strategy (GP), and capital management (Fund), working synergistically towards profitable investments.
Further Reading:
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What Are the Most Common Fund Structures and Entity Types?
This article explains the typical three-vehicle structure (Fund, General Partner entity, Management Company) and how they interact regarding capital flow, carried interest, and management fees.
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The Basics of Venture Capital
VC Lab: While covering VC basics, this page distinguishes between the venture fund and the venture firm, outlining the roles of Limited Partners (LPs), General Partners (GPs), and the Management Company within the overall structure.
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https://govclab.com/2023/11/29/the-basics-of-vc-funds/
​What is a Venture Capital Fund?
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AngelList provides a breakdown of the typical VC fund structure, defining the key players: the Management Company (handling operations and fees), the General Partner (managing the fund, often an LLC), the Limited Partners (passive investors), and the Portfolio Companies. It also lists essential legal documents like the Limited Partnership Agreement (LPA).
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https://www.angellist.com/learn/venture-capital-fund
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Fund Structures: LPs, GPs, & LLCs
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Carta delves into the common legal entities used in VC. It explains why Limited Partnerships are standard for funds (including tax benefits) and details the distinct roles and liability levels of General Partners (GPs) and Limited Partners (LPs). It also discusses why the VC firm itself (the management entity) is often structured as an LLC.
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https://carta.com/learn/private-funds/structures/
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The Basics of Venture Capital Management Companies
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This AngelList article focuses specifically on the Management Company entity within a VC structure. It outlines its responsibilities, including collecting fees, handling operational expenses and employment matters, owning the firm's brand, managing regulatory filings, and limiting liability. It also touches upon single-member vs. multi-member structures.
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https://www.angellist.com/learn/venture-capital-management-company
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General Partner (GP): Responsibilities & Role in Private Funds
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Carta explains the role of the General Partner (GP) entity in a fund structure. It details the GP's active management role, unlimited liability (and why it's often structured as an LLC to mitigate personal risk), how it differs from Limited Partners, and its relationship with the Management Company regarding management fees and carried interest.
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https://carta.com/learn/private-funds/structures/general-partner/
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Private Equity Fund Structure: GP and Management Company
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While focused on Private Equity, this article from A Simple Model clearly explains the common separation between the General Partner (GP) entity (which assumes legal liability for the fund and makes investment decisions) and the Management Company (which employs the team, pays operating expenses via management fees, owns the brand, and can service multiple funds). This structure is highly relevant to VC as well.
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https://www.asimplemodel.com/insights/private-equity-fund-structure-gp-and-management-company
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Why is there both a Management Company and a General Partner entity?
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Decile Hub directly addresses the rationale behind separating the Management Company and the GP entity. It highlights how this structure facilitates scalability (adding new funds under one firm brand/Management Co.), flexibility, proper allocation of economics (management fees vs. carry), and clarifies ownership of brand/IP versus fund-specific management.
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Understanding Private Equity and Venture Capital Fund Formation
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Avisen Legal provides an overview of the fund formation process, including the critical step of choosing the legal structure. It discusses common options like Limited Partnerships (most common for the fund itself), Limited Liability Companies (often used for the GP and Management Company), and C-Corporations, outlining the typical uses for each in a fund context.
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https://www.avisenlegal.com/understanding-private-equity-and-venture-capital-fund-formation/
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Fund Formation Structures
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This article from Buzko Krasnov outlines various fund formation structures beyond the standard model, including Series LLCs and Master-Feeder structures, explaining how different entities (Fund, Investors/LPs, Investment Adviser/Management Company) interact within each. It clarifies the typical roles and economic arrangements (management fees, carried interest).
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https://www.buzko.legal/content-eng/fund-formation-structures
