VC Fund Formation & GP/LP Structuring
“Starting a fund is like starting a company—except your product is capital allocation and your customers are your LPs. The legal structure has to serve both the investment thesis and the relationship with the people who trusted you with their money.” — John Montague
Forming a venture capital fund is one of the most complex transactions in the startup ecosystem. It sits at the intersection of securities law, partnership tax, investment adviser regulation, and the practical realities of raising institutional capital. I’ve worked with fund managers—from first-time emerging managers launching a $5 million micro-fund to established firms structuring subsequent vehicles—advising on the legal architecture that governs how the fund raises, deploys, and returns capital.
My work with technology companies and institutional investors spans over 15 years, beginning at Locke Lord LLP (now Troutman Pepper Locke), a national AM Law 200 firm, where I gained deep exposure to private equity and venture fund structures. That big-law foundation, combined with my own experience founding and running a firm, gives me a practical perspective that pure transactional lawyers often lack. I understand the GP’s challenges because I’ve lived the entrepreneurial side of building something from scratch.
What Fund Formation Involves
Entity structuring (GP/LP architecture). The standard venture fund structure involves a limited partnership (the fund itself), a general partner entity (typically an LLC) that manages the fund, and a management company that employs the investment team and handles operations. I structure these entities to optimize for tax efficiency, liability protection, and regulatory compliance. Delaware remains the dominant jurisdiction for fund formation, and I draft the limited partnership agreement (LPA), the GP operating agreement, and the management company agreement as an integrated suite.
Limited Partnership Agreement (LPA) drafting and negotiation. The LPA is the governing document of the fund—it defines the economic deal between the GP and the LPs. Key terms include management fees (typically 2% of committed capital), carried interest (typically 20% of profits above a preferred return), the preferred return or hurdle rate, GP commitment, investment period, fund term and extensions, key person provisions, and LP advisory committee composition. I draft LPAs that are institutional-quality and can withstand scrutiny from sophisticated LP counsel—including endowments, foundations, fund-of-funds, and family offices.
Carried interest structuring. Carry is the GP’s share of fund profits and is the primary economic incentive for the investment team. How carry is structured—whole-fund vs. deal-by-deal, with or without a preferred return, clawback provisions, vesting schedules among partners—has significant economic and tax implications. Following the Tax Cuts and Jobs Act of 2017, the three-year holding period requirement under Section 1061 of the Internal Revenue Code affects how carried interest is taxed at long-term capital gains rates. I structure carry arrangements that comply with current tax law while aligning incentives among the GP team.
Securities law compliance and PPM preparation. Fund interests are securities, and their offer and sale must comply with federal and state securities laws. Most venture funds rely on the private placement exemptions under Regulation D (Rules 506(b) or 506(c)) and may also rely on Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act of 1940 to avoid investment company registration. I prepare or review the Private Placement Memorandum (PPM), subscription agreements, and investor questionnaires that constitute the fund’s offering documents.
Investment Advisers Act compliance. Fund managers must determine whether they are required to register as investment advisers with the SEC or a state regulator, or whether they qualify for an exemption—such as the venture capital fund adviser exemption under Section 203(l) of the Investment Advisers Act, or the private fund adviser exemption under Section 203(m). The classification affects compliance obligations, including Form ADV filing, custody rules, and recordkeeping. I advise managers on which exemption applies and what ongoing compliance is required.
Side letter negotiation. Larger or strategic LPs often negotiate side letters that grant them preferential terms—fee discounts, co-investment rights, enhanced reporting, or most-favored-nation (MFN) clauses. I draft and negotiate side letters that accommodate LP requests without undermining the fund’s standard terms or creating conflicts with other investors.
The Emerging Manager Landscape
The venture capital ecosystem has seen significant growth in emerging managers—first-time and second-time fund managers raising smaller, often thesis-driven funds. These managers face unique challenges: limited track record, smaller fund sizes that make institutional LP fundraising difficult, and the need to build operational infrastructure from scratch while simultaneously sourcing and closing deals.
From a legal standpoint, emerging managers need the same institutional-quality documents as established firms, but they also need a lawyer who understands the resource constraints of a lean operation. As someone who built my own firm from the ground up in North Florida, I understand firsthand the tension between doing things right and keeping costs manageable. I structure emerging manager engagements to prioritize what’s essential from day one and what can be built out as the fund scales.
Regulatory considerations for emerging managers include determining whether to rely on the venture capital fund adviser exemption (which requires that the fund qualify as a “venture capital fund” under Rule 203(l)-1—meaning at least 80% of assets must be in qualifying investments in qualifying portfolio companies), state registration requirements for managers below the federal threshold, and compliance with any applicable pay-to-play rules if raising from public pension plans.
John’s Tip: If you’re forming your first fund, resist the temptation to use a template LPA you found online or borrowed from another manager. Your LPA is the contract between you and your investors. Institutional LPs—and their lawyers—will read every word. A poorly drafted LPA signals to prospective LPs that you may not be ready to manage their capital. Invest in getting the documents right the first time. It’s the cheapest credibility you’ll ever buy.
Frequently Asked Questions
How much does it cost to form a venture capital fund?
Legal costs for fund formation vary based on the fund’s complexity, investor base, and regulatory requirements. A straightforward single-GP micro-fund with a small number of LPs is less complex than a multi-GP fund with institutional investors, side letters, and co-investment vehicles. I provide transparent fee estimates tailored to the specific fund structure. For emerging managers working within tight budgets, I’m direct about which legal work is essential for launch and which can be deferred.
Do I need to register with the SEC to manage a venture capital fund?
Not necessarily. Many venture fund managers qualify for the venture capital fund adviser exemption under Section 203(l) of the Investment Advisers Act, which exempts managers who solely advise qualifying venture capital funds from SEC registration. However, “exempt” does not mean “unregulated”—exempt advisers must still file Form ADV with the SEC and comply with the antifraud provisions of the Advisers Act. Managers who do not qualify for this exemption may need to register with the SEC or their state securities regulator, depending on the amount of assets under management.
What is the typical GP commitment to a venture fund?
Institutional LPs generally expect the GP to commit 1-3% of the fund’s total committed capital. This GP commitment serves as alignment of interest—it ensures the fund managers have meaningful personal capital at risk alongside their LPs. For emerging managers, the GP commitment can be a significant personal financial obligation. Some fund structures allow the GP commitment to be satisfied in part through management fee offsets or other mechanisms, though institutional LPs may view this less favorably.
What is the difference between Section 3(c)(1) and Section 3(c)(7) funds?
These are exemptions from registration under the Investment Company Act of 1940. A 3(c)(1) fund can have no more than 100 beneficial owners (and all investors must be accredited investors if the fund relies on Regulation D). A 3(c)(7) fund has no numerical limit on investors but requires that all investors be “qualified purchasers”—generally individuals with at least $5 million in investments or entities with at least $25 million. Most emerging manager funds use 3(c)(1) because the LP base is small enough to stay within the 100-investor limit. Larger funds typically use 3(c)(7) to accommodate more investors.
About John Montague
John Montague advises venture capital fund managers on fund formation, GP/LP structuring, and regulatory compliance. With over 15 years of experience working with technology companies and investors, John brings institutional deal-structuring capability developed at Locke Lord LLP (now Troutman Pepper Locke), an AM Law 200 firm, combined with the entrepreneurial perspective of having built his own practice. He holds a J.D. from the University of Florida’s Fredric G. Levin College of Law and an accounting degree from Stetson University, and teaches Entrepreneurial Law at UF’s College of Business. Montague Law serves clients from offices in Fernandina Beach and Coral Gables (Miami), Florida.
Contact: 904-234-5653 | Schedule a Consultation