So if you’re thinking about starting a VC fund, there’s a bunch of foundational details about what guns are and how they work that you’re going to want to know from the very beginning.

My name’s Rita and I’m the head of the venture Capital business development team here at CADA, and I also teach Venture Capital Funds at UC Berkeley School of Law, and this first lesson, we’re gonna start laying that foundation with some of the most important basics.

Over the next few minutes, we’ll talk about :

• What a VC fund actually is

• Then we’ll learn how VC funds differs from other types of funds

• And we’ll do a quick preview of the structure that organizes how a VC fund operates

So to kick it off, let’s go ahead and zoom right in on that first one. What exactly is a venture capital fund? We’ll start with a simple definition. A fund is a legal entity that pools money in order to invest in assets. The fund then owns those assets until it sells them, and that’s it. Real Basic Fund is just a legal entity that collects a bunch of money to invest that money in a bunch of stuff. Pretty easy, right? Longer journey. You’re going to hear people say different words like venture capital fund and venture capital firm. And it’s important to know upfront those two things are not the same. A VC fund is different from a VC firm. These two entities work in tandem with each other, but they’re not the same entity.

So what’s the difference? Well, the VC firm is the management company that rents office space, employs a bunch of analysts, subscribes to financial publications and so on. It’s basically like when you hear the brand name of a famous VC, you’re talking about the management company or the VC firm. And here’s the thing: a successful firm may operate several different funds at one time. Like fund one, fund two and so on. Making sense so far?

Okay, so we touched on the firm. Now let’s go back to the fund. We know what a fund is, right? It’s a pooled investment vehicle. But who’s money is actually getting put into that pool of funds? Money comes from third party investors. They put their money into the fund with the expectation that the fund’s investments are going to generate a profit by the time the fund sells them.

So we’re going to do this a lot. Let’s recap real quick:

You’ve got two entities so far, the firm, a.k.a. the management company and the fund. The firm is the company. That’s over the top. And the fund is a legal entity that pulls money from third party investors. Now, looking again at that fund to wrap your head around all this stuff, it’s good to know what type of legal entity the fund, usually as a VC fund is typically formed as a legal entity called a limited partnership and there’s a reason for that. All these third party investors are going to join the fund and contribute capital to it, right? Well, when they do that, they’re going to become what we call limited partners of the fund or LPs for short. So if you ever hear someone talk about the LPs of a fund, that’s what they’re talking about. The investors are limited partners contributing to a limited partnership. Make sense?

Okay, so now let’s add another layer to it. The fund is a limited partnership, and this limited partnership has to be managed by someone, not someone called a general partner or GP for short.

Now, there’s a common misconception. When people hear the word GP in general, they usually think it’s referring to a person like the person that’s running the fund. But the GP typically isn’t a person, it’s a separate legal entity, and that legal entity is set up to manage the fund.

So again, let’s recap. You are the VC firm that sits over the top and the VC firm sets up a legal entity called the general partner or GP. This GP is created to manage the fund and the fund is a limited partnership that pulls together money from a bunch of investors who are also known as limited partners or LP’s. It’s worth noting sometimes when people are being casual, they may refer to the investors that are managing the fund as the GP’s of that fund. That’s just kind of a casual language thing. We’ll talk about it a little later.

What’s important for you to know right now is the legal structure of all this stuff. So when you hear GP, just remember the GP is the legal entity that manages the fund. Still making sense? Okay, let’s keep going. Typically, VC firms are going to set up a new, totally separate for each one of their funds. So basically it helps legally separate all the different funds from each other. The separation is actually pretty important for one key reason. By legally separating each fund, you’re limiting the liabilities of that fund to one specific place, the entity. Which probably sounds like gibberish, right?

So let me break it down. Let’s pretend one of our funds gets saddled with a bunch of legal liabilities. Luckily for us, that fund is legally isolated from all the others, meaning those liabilities generally won’t run up the chain to impact the firm or any of the firm’s other funds.

The liability is limited to just that entity right there. Let’s now look back at our definition and zoom in on two special words: venture capital. And the next lesson, we’re going to dive into venture capital as an industry and learn a little bit about how it works. So when you’re ready, click the button down below and let’s keep learning.