Option 1

Let’s say you have a loan from the fund to the studio and the studio can draw down on that loan to finance its operation. 

Here’s an example: Say you spent a million dollars on the studio. The deal is that when you spin out a company you can fix the number in the loan agreement so that a certain percentage of the founder equity will be used to repay the loan.

If the studio does two ventures, for example, and they cost $500,000 each then the studio would borrow one million. Upon exit, the studio repays the loan of a million and it’s gone.

Option 2

The other way to do it is an equity way where you’d have the fund owning a part of the studio.

With this option, you’ll need to have an OpCo. You need to do OpCo 1, OpCo 2, OpCo 3 etc. The loan agreement lets you cancel the loan once you’ve paid it back and then do a new fund and doesn’t have to assign everyone’s employment contracts to a new company. 

Why use an Opco? Why not just have the loan go to the GP? 

One reason is the liability protection that comes from forming a company. An OpCo structure is such that it will strip all the value out of it. You can take all the equity value, and put it in either of these two partnerships; the investor partnership or the team partnership. 

The reason the partnerships are valuable is because they’re flow-through entities. If you have a company owned by a corp and the company sells, you’ll be taxed in the corp for that. If however it’s owned by a partnership, it just gets taxed in everyone’s hands individually, so you’re reducing a layer of tax. That’s why funds are structured as partnerships. For your GP, or let’s say the team partnership, you’ll create a new version of that for every fund. 

Insurance is another thing. A venture capital fund is structured in a way where you’ll have something like the GP, you’ll have a fund partnership and then you’ll have a Management Co where everyone’s employed. This is a standard model.

Option 3

The other way is to give the GP to your studio and have all the stakeholders benefit from it, not just the partners. In some cases your LPs will want you to have a separate GP entity, the reason being that they may want you to be more incentivized. You could have a portion of your GP (e.g., 20%) carved out to give to venture partners, advisors, and key team members. The great thing about this is that it creates time-based flexibility per fund that allows you to decide how you want to incentivize people. If you have people coming in and out of a studio over the course of 10/20/30 years, you’ll find it’s much more complex to incentivize. 

Consider as well that not everybody can raise a fund from day one. They might be able to raise enough money for the HQ, and build a portfolio. This causes the studio to become expensive. Newcomers will only get a small share of the studio and as result will need a lot of forward-looking incentives. That’s why it can be useful to have a separate GP entity with a different carry versus equity distribution in the HQ.