In this structure, economics refers to the return the investors receive in the event of a liquidity event and control refers to the mechanisms an investor has to either affirmatively exercise control over the business or veto certain decisions a financed company makes. These venture capital equity financing documents offer the deal structure, the economics, and the control offered to investors and founders of the start-up. When entering into a financing agreement with a venture capital firm, the VC firm and the company receiving financing will enter into an agreement dictated and described in several documents. Venture capital equity financing documents Many funds have a minimum investment amount, with some rolling funds having as low of a minimum investment as USD $1000 whereas a traditional fund will typically have a larger capital commitment, with some suggesting the average minimum ranging from USD $25,000 to $100,000. The fund then may have its own requirements, which may be dependent on the structure of the fund, the investment thesis of the fund, how much it hopes to raise, and other considerations. In the United States, these requirements include that the prospective investor must have an individual or joint net worth in excess of $1 million (which cannot include the value of their primary residence) the prospective investor has to have an income in excess of USD $200,000 or joint income in excess of USD $300,000, often for the two most recent years and with a reasonable expectation of reaching the same level in the current year or the prospective individual investor can be holding a Series 7, 62, or 65 license. These are specific to the country or region the individual is operating. Those interested in investing in a venture capital firm have to meet specific requirements. Once the venture capital fund exits the investment and the fund is dissolved, those who invested in the fund receive their return, which they hope is significantly more than their initial investment. The average fund and its investments will run from five to ten years, meaning the general partners and other technical experts work with invested companies for that period of time, while investors in the fund wait for their investment to be repaid. The relationship between those who invest in a venture capital fund and the fund itself depends on the fund's structure, but it is not a short-term relationship. Those who invest in the venture capital fund are known as limited partners, as opposed to general partners. Investments into these funds generally come from high net-worth individuals but can also come from private and public pension funds, endowment funds, foundations, and corporations. This can lead to challenges in the relationship between investors and entrepreneurs, especially when questions arise regarding how the company should be run. For example, an investor may be focused on the return an investment offers, whereas the entrepreneur is focused on the process. ![]() Similarly, the founders of a company and the VC investors may lack information about the market they wish to enter, which comes with high risk as such, VC investors and the company founders will typically work in relative darkness to keep their work a secret.Īnother characteristic of VC can be the mismatch between an entrepreneur and their investors. This means there is no way for individual investors to determine the value of an investment, while the fund may not understand how the market will value the company, which can lead to large discrepancies and widespread speculation from the buy-side and sell-side in the case of an IPO. Similarly, unlike other standard investments that are traded on public exchanges, VC investments are held in private funds. Often the time between the initial investment and the final payout has a time horizon of ten years, which increases the liquidity risk, but in return for this increased risk, VC usually compensates its investors with higher prospective returns. Venture capital tends to be illiquid, as the investments are made with long-term windows that do not offer the opportunity or option of a short-term payout, unlike publicly traded securities, while the success and failure of a VC firm depend on the success of the firm's portfolio companies. Due to the nature of venture capital, it has many characteristics that make it unique compared to other market-traded instruments or forms of private equity.
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