By Ellie Pigott
1. Limited Partner (LP)
Limited Partner (otherwise referred to as an LP), is the term for an investor who is a member of the fund. This means they have agreed to the terms of the fund, and thus are investing their money but do not have control over the management of the fund.
2. General Partner (GP)
The General Partner is in charge of managing the money in the fund. This person is both an investor and a full-time employee of the fund. They oversee raising the capital and make the decisions where to allocate it. Although the GP does have the most say or control in a fund, in most cases they are still governed by a board which helps to approve the highest cost decisions or commitments made above a certain threshold.
Like many terms in VC, portco is an abbreviation. Portco, otherwise known as a portfolio company, is a company that the fund has invested into. Many VCs have a portfolio page on their website where you can gain more info on the success of their portcos. If you can’t find a public portfolio of a VC you’re looking to invest in, ask if they can provide you with a few examples.
4. Cap Call (Capital Call)
When someone agrees to be a limited partner in the fund, they agree to contribute a certain amount of money. However, this money is usually not taken all at once, but instead in (often) pre-determined increments over the life of the fund. A cap call is the term used for the announcement and collection of that predetermined amount. Because LP’s sign contracts agreeing to the terms of the fund, these cap calls can be enforced by law.
5. Committed Capital
As mentioned in the definition of cap call, the committed capital is the amount an LP signs on to contribute to the fund. Committed Capital is the total amount the LP is contributing, and funds will almost always have a minimum amount of committed capital required to participate in the fund.
6. IRR (Internal Rate of Return)
Projected IRR or Internal Rate of Return is an equation used to calculate how profitable an investment may be. This equation tracks both time and cash flow to determine annual growth for the investment. Since Committed Capital is called over time and not paid in all at once, IRR is typically higher with Capital Calls than if Committed Capital is paid all up front.
7. Sidecar (SPV)
A sidecar or otherwise referred to as a special purpose vehicle, is used to raise additional capital for a PortCo with a small pool of investors. SPV’s are run by the same lead investor as the existing capital. Investors who have already invested in the existing capital through the VC fund are also eligible to contribute additional capital in the sidecar. These types of SPV’s are typically raised because the Portco has a growth need arise or because the lead investor is not covering the entirety of the raise.
Carry is the term for the percentage of the profits the General Partner receives, in addition to a small management fee. The profits help the GP to cover overhead costs to help run the fund. For example, paying their team who helps identify new portcos and manage existing ones. Carry also helps incentivize good performance for the GP. Carry is typically not paid to the GP until all principal investments have been returned to the LP.
9. Accredited Investor
To become an accredited investor, you need special designation achieved by meeting certain financial regulation criteria. There are different requirements depending on the investment, and to qualify, they may take into account your gross income, net worth, asset size, and professional experience. Being accredited means you need less protection by the SEC and it allows you to engage in investment activities not registered with financial agencies.
10. Management Fee
A management fee is a fee charged to LPs to manage their investment in the fund. This fee is annual but is typically taken out during the cap calls. Each fund can determine their individual management rate but most charge between 2-3%. This fee helps account for operational cost and the diligence that goes into each of the investments.
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