Investors FAQ
Frequently Asked Questions
How are Venture Funds different from Angel Investments?
Both these types of investments focus on purchasing shares in very young companies with potential to become very large. An Angel investment is one that you decide to make directly as an individual (or with a consortium of individuals) into the company; the locus of decision-making is you. Fund investments are those in which you join a partnership and submit capital to fund managers, who will make the specific investment decisions on your behalf.
Who can invest in venture?
Most venture funds and angel investing vehicles require you to meet U.S. Securities and Exchange Commission (SEC) guidelines to be an Accredited Investor. Full details are available at the SEC website but a rule of thumb is that you must have:
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Earned income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years, and reasonably expects the same for the current year, OR
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Has a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of the person’s primary residence), OR
What are management fees, and how much are they?
Management fees are amounts (usually around 2% of your total commitment per year) taken from your capital contributions by venture fund managers to cover costs and expenses of managing the fund. These may include staff salaries, legal expenses, payments to other vendors such as accountants, tax professionals, and electronic platform services, and anything else that is needed to maintain operations.
Can I invest in something other than cash?
VC investments can be made from a variety of sources, for example:
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Cash, Savings or Retirement accounts
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Self-Directed IRA - Certain specialty IRA companies allow the account holder to choose each specific investment, including alternative assets such as venture funds.
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Donor Advised Fund - A donor makes a tax-deductible contribution to a special managed account, and both the initial capital and any accrued returns are used as charitable donations over time.
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Personal Trust - Many individual investors who hold their financial assets in a personal revocable trust include a venture fund in the mix.
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LLC - This type of business, popular among self-employed individuals or family groups, allows liability protection for personal holdings, write-offs of certain costs, and possible flexibility with federal taxes.
Who makes the decisions in a venture firm?
Managing partner, investment committee, your role.
What is the process?
You’ll want to learn about the firm’s leadership, staff, investment thesis, track record, terms, and any special considerations that set them apart from other VCs. Many firms use pitch decks and group informational sessions to share this information, and all should provide their legal agreement documents for you to review before committing to an investment. You may want to consult your tax or estate planning professional to explore all your options regarding how much to invest and from what source.. Making it official often takes no more than 30 minutes: you’ll fill out a set of documents providing relevant personal information and attesting to your eligibility to invest, and you may be asked for financial records to support your application.
How long will my funds be invested before I get a return?
Venture fund investments are not usually re-sellable for the duration (“term”) of the partnership. A typical venture fund term is 10 years; at the end of the term, the partnership is ended according to the terms in the partnership agreement. Some funds do allow re-assignment of partnership interests in certain circumstances, say, from one personal Trust to another; however, the legal fees involved may be hundreds of dollars and are usually the responsibility of the investor.
How much do I need to invest at once?
Ultimately, it's up to you and what your risk tolerance is. An important thing to remember is that no matter how much you invest in venture, firms do not usually ask for this amount all at once.
Financial advisors often recommend investing between 5-10% of funds into alternative investments such as a venture fund.
Venture firms have different minimum investment requirements and varying capital call schedules. For example, one firm might have a minimum investment of $25,000 called over four years. That means you would invest $6250 per year on your $25,000 commitment. Other firms may call their capital on an as-needed basis whenever a deal is ready, rather than on a set schedule.
When researching venture firms, ask about their capital call schedule (and the other items on this list of sample questions).
What if a portfolio company goes out of business?
The Fund, as an investor, may be able to recoup some of its capital when a company ceases operations before it can be sold or go public; however, any loss on the investment is reflected pro-rata on the capital account statements of all Limited Partners.
When will my share of the profits be sent to me?
The timing and methods for distributing profits are spelled out in the Limited Partnership Agreement of each Fund. Some distributions may be credited against remaining capital that you would otherwise have to send to the Fund; others may be re-used for new investments. The full accounting of the Fund occurs at the end of the full term when all investments have been reconciled.
When do I send in my investment money?
Most venture Funds don’t collect your entire commitment at once. They “call” it in installments as it is needed to invest in specific companies. Your Fund manager will establish a method of communicating with you about when an installment is due. Investors are expected to respond promptly to all requests for capital installments, so you will want to have the money you’ve committed to the Fund readily accessible.
What is an “exit?”
An exit refers to the sale or initial public offering of a company in which your fund has invested. This is the juncture at which the Fund is repaid for their initial investment at a new, preferably higher, valuation than when the shares were first purchased. Some funds will distribute profits from exits as they occur; others will use those profits to continue making new investments through the life of the Fund.
How are venture fund profits taxed?
The vast majority of fund profits are realized when shares in a company are sold at the time of an acquisition or IPO. These profits are general taxed as either short- or long-term capital gains. The fund’s partnership agreement establishes the allocation of taxable income or loss among general and limited partners. The amount of tax you ultimately pay will depend on your individual income level and bracket.
