Unlike most hedge funds, the investment holdings of private equity and venture capital funds typically are not liquid. Consequently, private equity and venture capital funds usually do not have any redemption rights and are organized to have a limited life cycle, often in the range of 7 to 15 years. During this life cycle, the fund manager will raise the capital for the fund, deploy that capital into investments, hold those investments, and then sell those investments and return the capital to the fund’s investors. This activity occurs over several distinct phases – the marketing period, the commitment period, and the post-commitment period. [Read more…]
When it comes to raising capital to get your new business off the ground, there’s a range of investment structures available, from common stock to exchangeable shares. One of the newer and most popular forms of financing for startups is convertible equity.
Since the Securities and Exchange Commission has recently taken an increasingly closer look at the activities of private equity and venture capital fund managers, it is more important than ever for fund managers to understand when conflicts of interest are likely to arise and how to manage them properly. The SEC has expressed concern about conflicts of interest inherent in the private equity business model and has brought several enforcement actions against private equity fund managers in the last couple of years that mostly focus on direct and indirect compensation to managers or advisers that were not properly disclosed to the fund’s investors. Since the SEC takes the position that fund managers and advisers owe a fiduciary duty of loyalty to act in the fund’s best interest, fund managers must keep a close eye on potential conflicts of interest and employ best practices like consulting advisory committees whenever possible conflicts arise.
The concept of pre-money valuation vs. post-money valuation can be a confusing one at first for many startup founders. Pre-money valuation refers to the valuation of the company prior to the investment whereas post-money valuation refers to the value after an investment has been made.
A convertible note is a hybrid of debt and equity, and it’s a popular form of financing for two main reasons. First, convertible notes are generally easy and cost-effective, because they require little negotiation and paperwork. Second, they allow the parties to put off valuation until a later time, which is useful, because accurately valuing a new company from the outset can be difficult.
