🎉 Happy Friday, funds family!

Every hire a company makes should be documented with an offer letter and, in most cases, supporting agreements covering confidentiality, invention assignment, and equity. It’s an important topic for the companies and the investors who back them, because gaps in employment documentation create legal exposure, cloud 📄 IP ownership, and can derail a financing or acquisition when diligence reveals that key employees never signed the paperwork that protects the company’s core assets.

But first…

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/ SELF PROMOTION

We’re a tech-enabled modern law firm with expertise in investment funds, SPVs, corporate & commercial matters, venture capital financings, M&A, private credit, outside general counsel, regulatory, and tax.

This article is part of the corporate series we are running that covers topics relating to an investment fund's investments into portfolio companies and the key items that matter both to the investors & companies throughout their entire lifecycles.

Contact Our Law Firm

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Thanks for reading. Now, let’s jump into the article 😃

The short answer is that every employee and founder should sign an offer letter and a proprietary information and inventions assignment agreement (PIIA) before starting work, and the company should maintain signed copies of both for every person who has ever worked there.

For investors, confirming that this documentation exists, and that it actually assigns IP to the company, is one of the most consequential and most commonly overlooked diligence items in a financing.

➡️ What should an offer letter include?

A standard offer letter should cover:

• Title, reporting line, and start date.

• Compensation: base salary, target bonus (if any), and any 📄 equity grant (with the 📄 vesting schedule referenced, not necessarily detailed).

• At-will employment language, confirming that either party may terminate the relationship at any time, for any or no reason (subject to applicable state law).

• A contingency that the offer is conditioned on execution of the company’s standard PIIA and, where applicable, satisfactory background and reference checks.

• Exempt/non-exempt classification for wage and hour purposes.

• Benefits eligibility, at a high level (detailed terms typically live in the benefits plan documents, not the offer letter itself).

Offer letters should be short and administrative. Substantive terms, such as restrictive covenants, IP assignment, and dispute resolution, belong in the PIIA or similar separate agreements, not buried in the offer letter itself, where they are more likely to be overlooked or drafted inconsistently across hires.

➡️ What is a PIIA and why does it matter so much?

The proprietary information and inventions assignment agreement is the document that actually assigns intellectual property created by an employee to the company. Without a signed PIIA, an employee may retain personal ownership of code, designs, or other IP they create during their employment, even if it was created using company resources and for company purposes. This is one of the most common and most damaging gaps discovered in diligence: a founder or early engineer who never signed a PIIA, which creates a chain-of-title problem for the company’s core technology.

A well-drafted PIIA should include:

• A present-tense assignment of all inventions, work product, and intellectual property created during employment and relating to the company’s business.

• Confidentiality obligations protecting the company’s proprietary information, both during and after employment.

• Where permitted by applicable state law, reasonable non-solicitation of employees and customers.

• An acknowledgment and carve-out for any prior inventions the employee is bringing into the company, so there is no ambiguity about what is and is not covered.

Founders should sign a PIIA on the same terms as employees, even though it can feel unnecessary among co-founders at formation. It is far easier to obtain this signature at the outset than after a falling-out or departure.

➡️ What about restrictive covenants (e.g., non-competes and non-solicits)?

Restrictive covenant enforceability varies significantly by state, and this is an area where companies need to be especially careful:

• Several states, most notably California, broadly prohibit employee non-competes, and a growing number of other states and the FTC have moved to restrict or ban them, so a national employer cannot rely on a single template for all employees.

• Non-solicitation of employees and customers is generally more enforceable than a non-compete but is still subject to reasonableness limits on scope and duration under state law.

• Confidentiality obligations (as opposed to non-competes) are the most durable and broadly enforceable forms of protection and should always be included regardless of what other restrictive covenants are used.

Companies operating in multiple states should have counsel confirm that offer letter and PIIA templates are updated for the jurisdictions where employees actually work, not just where the company is headquartered.

➡️ What should be in place for executives and key employees specifically?

Senior executives typically warrant additional documentation beyond the standard offer letter and PIIA:

• Severance terms: what is paid if the executive is terminated without cause.

• Change-of-control or acceleration provisions: single-trigger or double-trigger vesting acceleration in the event of an acquisition (discussed further in the equity compensation context).

• Non-disparagement and cooperation clauses.

• For very senior hires, a more detailed employment agreement (rather than a simple offer letter) covering the above in a binding, negotiated form.

Investors should pay particular attention to founder and executive severance and acceleration terms, because overly generous packages can create liabilities that surface at exactly the wrong time: during a later financing, a restructuring, or an acquisition.

➡️ What should investors look for in diligence?

Before every investment, an investor (or its counsel) should request and review:

• Signed offer letters and PIIAs for all current employees, and ideally for former employees and founders as well.

• Confirmation that every founder signed a PIIA at or near formation, with no gap between when work began and when the assignment was executed.

• Any employment agreements for executives, with particular attention to severance and change-of-control provisions.

• Consultant and contractor agreements, which require their own IP assignment language distinct from the employee PIIA (a common gap, since contractors are often engaged informally).

A company that cannot produce a complete, signed set of PIIAs for its founding team and key technical hires raises a significant diligence flag, not a minor administrative one. It goes directly to who owns the company’s core technology.

➡️ The practical takeaway

For the company:

1. Require every employee, founder, and contractor to sign the appropriate IP assignment and confidentiality documentation before they start any work, not after.

2. Keep offer letters short and administrative; put substantive terms in the PIIA and any separate agreements.

3. Use jurisdiction-appropriate templates, particularly for restrictive covenants, and update them as employees are hired in new states.

4. Maintain a complete, organized file of signed agreements for every person who has ever worked at the company, including departed employees and founders.

For the investor:

1. Confirm that every founder and key employee has signed a PIIA, with particular attention to timing gaps around formation and early hires.

2. Review executive severance and change-of-control provisions for outsized liabilities that could surface at a future financing or exit.

3. Check that contractors and consultants have their own IP assignment agreements, not just employees.

4. Include representations in financing documents confirming that all employees and founders have executed the company’s standard confidentiality and IP assignment agreements.

Thanks for reading, everyone!

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.

🎉 Happy Friday, funds family!

According to a 🔗 new study led by Ramp, the companies spending the most on AI adoption grew headcount ~10% more than comparable firms that had not yet adopted AI.

This flies in the face of the narrative that AI will kill all jobs. Let’s look under the hood at the specifics of the study.

But first…

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/ SELF PROMOTION

We’re a tech-enabled modern law firm with expertise in investment funds, SPVs, corporate & commercial matters, venture capital financings, M&A, private credit, outside general counsel, regulatory, and tax.

Contact Our Law Firm

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Thanks for reading. Now, let’s jump into the article 😃

➡️ Three Groups of AI Usage

The study breaks businesses into three categories of AI usage:

• Never used AI

• Low AI users ($2.78 spent per employee per month)

• High AI users ($33.67 spent per employee per month)

Table 1: Sample Summary by AI Intensity

As you can see from the table, the High AI users also tend to be smaller companies by headcount with higher mean salaries and higher technology focus.

➡️ AI Adoption by Sector

AI usage varies considerably based on sector. Note that “Finance and Insurance,” the group that would encompass most investment fund managers, is one of the fastest-adopting sectors. We can confirm, based on the number of Claude-generated documents we receive from clients. 😉

Figure 2: AI Adoption by Sector

➡️ Results of the Study

The study reached six primary conclusions:

• The Biggest AI Spenders Added ~10% More Humans: Firms making the largest AI investments grew employment by roughly 10.2% over the two years following adoption, while low-intensity adopters saw no statistically significant change.

• The Hiring Boost Builds Over Time: The employment gap between high-intensity adopters and their peers emerged roughly 6–12 months after adoption and continued widening, consistent with a learning curve as firms integrated AI into workflows.

• Junior Roles Grew Too: Entry-level headcount increased about 12% at high-intensity adopters, countering the view that AI adoption reduces demand for junior workers.

• Hiring Increased Across Departments: High-intensity adopters expanded headcount across multiple functions, including sales (~10%), administration (~8%), engineering (~7%), and customer service (~6%). The gains were not concentrated in a single department.

• Tech-Sector Companies Saw the Biggest Results: The clearest sector-level gains appeared in the Information sector (software, internet, and media firms), where high-intensity adopters grew headcount by about 13%, while other sectors showed smaller or statistically insignificant effects.

• The Gap Widens Further Against Companies That Never Adopted: When high-intensity adopters are compared with companies that never adopted AI at all, the employment growth gap widens further. However, the study cautions that adopters were already growing faster than never-adopters before AI entered the picture, so this comparison is less reliable than the headline results above.

➡️ Some Fun Charts

Figure 6: Total Headcount

Figure 7: Entry-Level Headcount

Figure 19: Bachelor’s Headcount

Figure 20: MBA Headcount

Figure 21: JD Headcount

➡️ Our Takeaway

Ultimately, the results aren’t overly surprising.

Firms enthusiastically deploying AI are likely more productive, which lets them grow revenue faster than their competitors and hire more people as a result.

TIL Partners is heavily investing in AI. We spend hundreds of dollars per employee per month, and it’s an obvious choice.

Shout out to Ramp for putting this study together.

Thanks for reading, everyone!

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.

🎉 Happy Friday, Funds Family!

Laws change! As a result, we just updated each of the four core regulatory articles.

1. ⚖️ The Securities Act of 1933 (2026 update)

2. ⚖️ The Investment Company Act of 1940 (2026 update)

3. ⚖️ The Investment Advisers Act of 1940 (2026 update)

4. ⚖️ State Investment Advisers Laws (2026 update)

Both investment managers and their lawyers often ignore this area of law.

🤔 What are state investment adviser laws?

Each state has laws and regulations governing investment advisers. They’re essentially state versions of the federal ⚖️Investment Advisers Act that we discussed last week. 

⏳️ When do fund managers need to comply with state investment adviser laws?

Pursuant to the National Securities Markets Improvements Act of 1996, federal investment adviser law “preempts” state law 🏦 once an investment adviser registers with the SEC as a Registered Investment Adviser.

In other words, once a fund manager is a full-blown RIA, the manager generally no longer needs to deal with state investment adviser laws.

Note: Despite this preemption, 🔗 15 U.S. Code § 80b–3a confirms that state authorities can still go after fund managers for fraud:

Therefore, we would advise not committing fraud. 😀 

In practice, this means fund managers are subject to state investment adviser laws unless and until they are registered investment advisers.

This includes fund managers relying on the ⚖️exemptions from registration we discussed last week, including the private fund exemption (less than $150 million in assets under management) and the exemption for venture capital fund managers.

If you’re an emerging fund manager (outside of certain asset classes like real estate 🏠️), you likely need to comply with state investment adviser laws.

⚖️ How to comply with state investment adviser laws

This is where things get a little tricky. 🫠 

As mentioned before, each state has its own laws. And the states vary wildly on how strict their rules are.

The NASAA Model Rule

Many states have adopted a 🔗 model investment advisers rule (or a variation thereof) provided by the North American Securities Administrators Association (NASAA…but not the one with rockets 🚀 ).

Let’s examine the key components of NASAA’s model rule exemptions for investment advisers.

General Requirements

First, to have a good exemption, there are some generally applicable requirements:

In short:

1. Bad Actor. The adviser cannot be subject to a “bad actor disqualification”, we discussed this in ⚖️this article on the Securities Act.

2. ERA Filing. The adviser must make an ERA filing with their home state, we discussed this in ⚖️this article on the Investment Advisers Act.

3. Fee. You gotta pay the toll troll.

Additional requirements for 3(c)(1) funds that are not venture capital funds

If the adviser has even one fund that relies on Section 3(c)(1) of the Investment Company Act and is not a venture capital fund, there are a few additional requirements. 📜 

Just to be clear, if all of the adviser’s funds are 3(c)(7) funds, all of the adviser’s funds are venture capital funds, or all of the adviser’s funds are outside of the Investment Company Act’s purview altogether, the adviser would not typically need to comply with these extra rules. Check out ⚖️this article on the Investment Company Act for more information.

Here are the extra requirements:

In short:

1. Qualified Clients. The adviser cannot accept investors in any non-venture capital 3(c)(1) fund unless the investors are ⚖️ qualified clients , generally people who (i) have a net worth of $2.7 million (excluding primary residence) or (ii) invest at least $1.4 million with the applicable adviser. Note: These thresholds were raised effective June 29, 2026 (SEC Release No. IA-6961, Apr. 28, 2026), up from $2.2 million and $1.1 million, respectively. The new thresholds apply to all new subscriptions and transfers on or after June 29, 2026; existing advisory contracts with investors are generally grandfathered. Because state exemptions that incorporate Rule 205-3 by reference automatically update when the federal thresholds change, advisers relying on NASAA-model-rule states should update subscription documents immediately if they have not done so already.

2. Information. The adviser must provide certain information to investors at the time of investment.

3. Audit. Each non-venture capital 3(c)(1) fund must have an annual audit, with the results presented to investors.

💲 Burdens for smaller managers

These requirements, especially the “qualified client” and the “audit” provisions, can be quite burdensome for small funds.

In fact, small managers seeking to raise a few million dollars may ultimately decline to raise a fund because (i) the audit requirement is too burdensome or (ii) their investor base wouldn’t all be qualified clients.

The bottom line is that the NASAA model rule isn’t that bad for VC managers or managers who can use 3(c)(7). However, for those non-VC managers who do need 3(c)(1), the model rule can be a serious roadblock.

🗺️ Summary of 50 State Investment Adviser Laws

Now that we understand the NASAA model rule, let’s categorize each of the 50 states into a few buckets. 🪣 

Ultimately, you are 100% going to want to work with a lawyer. This list is just a starting point. The laws may have changed since this article was posted.

For many states, we’ve linked to the applicable statute so you (and your lawyer!) can check it out for yourself. 🔎 

✅ Category 1: Permissive

These states are generally quite user-friendly for advisers. Much easier than the NASAA Model Rule. These states have easy exemptions so long as the total number of “clients” (typically, each fund or SPV is a client) stays below a certain threshold.

• Connecticut (Unlike the NASAA model rule, Connecticut has a “private fund” exemption for managers with less than $150 million in AUM)

• D.C. (Unlike the NASAA model rule, Washington D.C. has a “private fund” exemption for managers with less than $150 million in AUM)

• Florida (Exempt if the manager has less than 6 funds/SPVs within a 12-month period; they also recently added a new, separate private funds exemption)

• Georgia (Exempt if the manager has less than 6 funds/SPVs within a 12-month period)

• Illinois (Exempt if the manager has less than 5 funds/SPVs within a 12-month period)

• Indiana (Exempt if the manager has less than 5 funds/SPVs within a 12-month period, but with a few extra requirements)

• Kansas (Exempt if the manager has less than 15 funds/SPVs)

• Louisiana (Exempt if the manager has less than 15 funds/SPVs within a 12-month period)

• New Jersey (Exempt if the manager has less than 15 funds/SPVs within a 12-month period)

• New York (Exempt if the manager has less than 6 funds/SPVs within a 12-month period)

• North Carolina (Exempt if the manager has less than 15 funds/SPVs within a 12-month period)

• Ohio (Exempt if the manager has less than 15 funds/SPVs within a 12-month period)

• Pennsylvania (Exempt if the manager has less than 5 funds/SPVs within a 12-month period)

• South Dakota (Exemptions mirror the federal SEC exemptions)

• Tennessee (Exempt if the manager has less than 15 funds/SPVs within a 12-month period)

🟡 Category 2: NASAA Model Rule

These states follow the NASAA Model Rule.

• Alabama (recently enacted)

• Arkansas

• Colorado

• Iowa

• Massachusetts

• Minnesota

• Nevada

• New Hampshire

• New Mexico

• Rhode Island

• Virginia

• Wyoming

⚠️ Category 3: NASAA Model Rule With Modifications

These states started with the NASAA Model Rule but tweaked things a bit. You’ll definitely want to check the particulars with your attorney.

• Arizona (A few modifications making it slightly more permissive than the NASAA model rule)

• California (California has a broader venture capital exemption than the NASAA model rule)

• Maine (Only minor modifications)

• Maryland (Only minor modifications)

• Michigan (Audit not required if all investors are qualified clients)

• Missouri (Certain types of accredited investors can be admitted in non-venture capital 3(c)(1) funds, even if not qualified clients)

• Nebraska (A few modifications making it slightly more permissive than the NASAA model rule)

• Oklahoma (Added the $150 million private fund exemption but removed the venture capital exemption)

• South Carolina (Various modifications, some more restrictive and some less restrictive)

• Texas (A few modifications making it slightly more permissive than the NASAA model rule)

• Vermont (Only minor modifications)

• Wisconsin (In addition to the model rule, Wis. Stat. § 551.403(2)(a)(2m) provides another exemption for advisers whose only clients in Wisconsin are certain categories of accredited investors under federal Regulation D (including entities with total assets in excess of $5,000,000)

⚠️ California Update (FIPVCC, 2026): California’s Fair Investment Practices by Venture Capital Companies Act (FIPVCC), enacted as SB 54 (2023) and amended by SB 164 (2024), requires venture capital companies with a California nexus (including funds that merely solicit or receive capital from a single California-resident investor) to register with the California Department of Financial Protection & Innovation (DFPI) and file an annual Venture Capital Demographic Data Report covering the founding teams of their portfolio companies ($175 filing fee per report). However, on March 17, 2026, the DFPI suspended implementation and enforcement of the FIPVCC pending formal rulemaking; the original March 1 registration and April 1 reporting deadlines are no longer operative, and no new deadline has been set. VC managers with any California nexus should monitor the DFPI’s VCC Reporting Program webpage for rulemaking updates and confirm with counsel whether they qualify as a Covered Entity. This obligation is separate from, and in addition to, any investment adviser exemption under state law.

🚨 Category 4: Bad News

These states are more restrictive than the NASAA model rule. In many cases, there are no exemptions whatsoever, meaning that an investment adviser must formally register with the state (similar to registering with the SEC as a Registered Investment Adviser).

• Alaska (No exemption)

• Delaware (Exemption only applies to 3(c)(7) funds)

• Hawaii (No exemption)

• Idaho (No exemption)

• Kentucky (Exemption only applies to 3(c)(7) funds)

• Montana (No exemption)

• North Dakota (Exemption only applies to venture capital funds)

• Utah (Complex provision that is more restrictive than the model rule)

• Washington (Exemption only applies to 3(c)(7) funds and venture capital funds, not other 3(c)(1) funds).

• West Virginia (No exemption)

🤷‍♂️ Category 5: Oregon

Oregon exempts “any person who conducts no public advertising or general solicitation in this state and whose only clients in this state are accredited investors.”

The question is whether using 506(c) (discussed in this ⚖️ article on the Securities Act) would blow this exemption. We haven’t seen any guidance on this yet. ⚖️ 506(b) appears to be safe.

Stay weird, my friends.

📳 Note: NASAA Marketing Rule Updates

On July 29, 2025, NASAA issued proposed amendments to its advertising and marketing model rules for investment advisers, designed to align state standards more closely with the SEC’s Marketing Rule (Rule 206(4)-1). On May 4, 2026, NASAA’s membership voted to formally adopt the amendments. The adopted changes apply to four model rules: (i) Unethical Business Practices (Rule 102(a)(4)-1); (ii) Prohibited Conduct (Model Rule USA 2002 502(b)); (iii) Recordkeeping Requirements (Model Rule 203(a)-2); and (iv) Recordkeeping Requirements USA 2002 (Model Rule 411(c)-1). Under the adopted framework, states may, for the first time under many state frameworks, permit testimonials, endorsements, and third-party ratings under strict disclosure conditions, and the definition of “advertisement” is expanded to include social media. Importantly, NASAA’s adoption does not automatically change individual state regulations. Each state must adopt its own implementing rules before the new framework takes effect locally. Alabama moved in this direction, updating its marketing rules in December 2025 to allow testimonials by state-registered advisers. Advisers operating in Category 2 and Category 3 states should closely monitor whether their home state adopts these NASAA amendments, as adoption would meaningfully expand permissible marketing practices. Until a state enacts its own implementing rules, existing state-level restrictions remain in force.

📆 Reminder: ERA Filings

As a reminder, when you hit $25 million in assets under management, you generally need to make an Exempt Reporting Adviser (ERA) filing with the SEC. For more on this, review this ⚖️article on the Investment Advisers Act at the federal level.

As mentioned above, this ERA filing with the SEC does not preempt state law! State law is only preempted once you are a full-blown Registered Investment Adviser.

Thanks for reading, everyone.

Have a great weekend! 🙌 

/ JURY TRIAL

Have you enjoyed this newsletter? Don’t forget to share it with your GP, Co-GP, LPs, or anyone else you think might find it valuable!

You can also propose a topic that you would like us to cover! Just reply to this email or submit your suggestions 🔗 here.

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.

🎉 Happy Friday, Funds Family!

Laws change! As a result, we’re going to update each of the four core regulatory articles.

1. ⚖️The Securities Act of 1933 (2026 update)

2. ⚖️The Investment Company Act of 1940 (2026 update)

3. ⚖️The Investment Advisers Act of 1940 (2026 update)

4. ⚖️ State Investment Adviser laws (2025 version, update to come)

This one (as the subtitle suggests) is an updated version of the Investment Advisers Act of 1940.

⚖️ Who does the Investment Advisers Act apply to?

The Investment Advisers Act applies to investment advisers. The 🔗 definition of an investment adviser is:

✅ In short, an investment adviser is a person engaged in the business of advising others as to the value of securities for compensation.

Let’s parse the definition a bit.

1. “Engaged in the business”

The SEC interprets this broadly. You're likely considered “engaged in the business” if you:

• Hold yourself out as an investment adviser, financial planner, or similar.

• Charge a fee for investment advice.

• Provide advice regularly.

2. “Advising others…as to the value of securities”

Examples of “advice” include recommendations regarding:

• Stocks, bonds, mutual funds, and limited partnerships.

• Market trends and asset allocation.

• Investment manager selection.

• Market valuations and security lists.

🗺️ Side Quest: What is a “Security”?

If you’re not advising clients on “securities” then you may not be an investment adviser.

In the context of investment fund managers, the following asset classes are generally considered to be subject to the Investment Advisers Act:

• Private Equity

• Venture Capital

• Hedge Funds

• Funds of Funds

• Debt Funds

🏠️ What about real estate?

Real estate isn’t a security, so if you’re investing in pure real estate (dirt and buildings), you typically would not be subject to the Investment Advisers Act.

For further discussion, please see ⚖️last week’s notes on real estate funds and debt funds.

3. “For compensation”

Compensation includes any economic benefit from giving advice, such as:

• Advisory fees.

• Commissions.

• Fees for total services rendered.

Statutory Exclusions

Please note that there are several 🔗 statutory exclusions to the definition of investment adviser, including:

1. Banks: Regulated banks.

2. Professionals: Any lawyer, accountant, engineer, or teacher whose advice regarding securities is solely incidental to the practice of their profession.

3. Brokers: Any broker or dealer whose advice regarding securities is solely incidental to the conduct of its business as a broker or dealer and who receives no special compensation for the advice.

4. Publications: News publications with a general and regular circulation.

5. Treasuries: Advice regarding securities of the US government.

6. Credit Rating Agencies: Moody’s, Fitch, S&P, etc.

7. Family offices: Family offices (as defined by the SEC).

⚖️ Three key exemptions for investment fund managers

To avoid registering as a Registered Investment Adviser (discussed below), investment fund managers typically seek an exemption from registration.

Here, we’ll hit on the three main exemptions available to fund managers:

1. Private Fund Exemption (🔗 Rule 203(m)-1).

2. Venture Capital Exemption (🔗 Rule 203(l)-1).

3. Foreign Private Adviser Exemption (🔗 Rule 202(a)(30)-1).

1️⃣ Private Fund Exemption

The 🔗 private fund exemption exempts investment fund managers with less than $150 million of regulatory assets under management.

🧮 Calculating “Regulatory Assets Under Management”

Regulatory assets under management (RAUM) is calculated on a gross, fair market value basis across all of your securities portfolios, including:

1. Investment portfolios where at least 50% of the portfolio consists of securities

2. All private funds (funds exempt under ⚖️ 3(c)(1) or 3(c)(7))

3. Family and proprietary accounts

4. Accounts for which you receive no compensation for your services

🔗 Form ADV has a helpful section on calculating regulatory assets under management, beginning on page 7. Below is a partial snippet.

Note that regulatory assets under management (RAUM) is your aggregate RAUM across all of these portfolios, not the RAUM of any particular fund. Time to break out your calculator.

2️⃣ Venture Capital Exemption

I suppose the VC lobby was doing its duty, because there’s a specific exemption for venture capital funds. 👀 

To be an exempt 🔗 venture capital fund, the fund must (among other conditions) comply with the following requirements:

Let’s dive in 🏊️ 

(1) Venture capital strategy

To satisfy this requirement, VC funds typically include a sentence saying they are pursuing a venture capital strategy in the 📄 PPM, LPA, and other governing documents. This is the easy part.

(2) No more than 20% non-qualifying investments

No more than 20% of the fund’s assets can be invested in assets that are not “qualifying investments.”

“Qualifying Investments” means an equity security acquired directly from a qualifying portfolio company, which is a company that:

1. No public companies: At the time of the fund’s investment, is a private company;

2. No leveraged buyouts: Does not borrow or issue debt in connection with the fund’s investment and distribute the borrowing proceeds to the fund; and

3. No fund investments: Is not an investment company, private fund, or commodity pool.

✅ In short, “qualifying investments” are directly acquired equity securities of operating businesses.

🤔 What about secondaries?

Secondaries are not “acquired directly” from a qualifying portfolio company, and therefore are not qualifying investments.

Therefore, for a fund to fall under the VC exemption, secondaries can sometimes be a risky business. The fund can invest in secondaries, but must ensure at least 80% of the fund’s assets are non-secondary qualifying investments.

🏦 The INVEST Act (H.R. 3383), which passed the U.S. House of Representatives on December 11, 2025 by a bipartisan vote of 302–123 and is currently pending in the Senate, would, if enacted, direct the SEC to revise the definition of “qualifying investment” under Rule 203(l)-1 within 180 days to include: (i) equity securities of qualifying portfolio companies acquired in secondary transactions; and (ii) investments in other venture capital funds, subject to a combined cap of 49% of the fund’s aggregate capital contributions and uncalled committed capital. No such law has been enacted yet.

(3) 15% leverage limitation

The fund cannot have debt in excess of 15% of the total fund size. In addition, the debt cannot have a term of more than 120 days (subject to some exceptions).

In practice, the only debt VC funds incur is a “📄 subscription line,” which enables the fund to bridge short-term funding needs without calling capital from investors.

The fund may want to use a subscription line to (i) make an investment quickly, (ii) avoid annoying LPs with too many 📄 capital calls, or (iii) less virtuously, juice IRR.

💡 Note on VC fund managers who manage funds in other asset classes

Per the applicable 🔗 SEC release, “an adviser is eligible to rely on the venture capital exemption only if it solely advises venture capital funds.”

In other words, you can’t use the VC exemption if you manage VC funds alongside private equity funds, hedge funds, or secondaries funds.

More than once, I’ve seen a manager who thought they were exempt, but they actually had some secondaries funds, which blows their entire VC exemption. 💣️ This is bad news. To regain the exemption, managers sometimes divest their secondaries investments.

3️⃣ Foreign Private Adviser Exemption

A non-US adviser may be exempt if they satisfy the following criteria:

1. Limited US Nexus: No place of business in the United States and does not hold itself out to the US public as an investment adviser;

2. Limited US Clients: Has fewer than 15 clients and private fund investors in the United States; and

3. Limited US AUM: Has less than $25 million of regulatory assets under management attributable to such U.S. clients and investors (see “Calculating Regulatory Assets Under Management” above).

For #2 above, “counting” US private fund investors is similar to counting under Section 3(c)(1) of the Investment Company Act (here’s a link to ⚖️last week’s article where we discuss counting).

📚️Selecting Exemptions

📄 Emerging managers often rely on the private fund exemption (less than $150 million in RAUM) at first. However, GPs should always look to the future to determine what exemptions (if any) they can use once they cross the $150 million threshold. In some cases, managers might alter their investment strategy to avoid registration.

📜 Note: The INVEST Act (H.R. 3383, passed House December 11, 2025, pending Senate) would also raise the private fund exemption threshold from $150 million to $175 million and require inflation adjustment every five years. This is not yet law but we’ll keep you updated!

Here are a couple of examples:

• A venture capital fund could decline to purchase secondaries so it can stay within the VC exemption

• A real estate fund might avoid investing in other real estate funds or syndications to avoid subjecting itself to the Investment Advisers Act altogether.

🏦 Becoming a Registered Investment Adviser

If you cross the $150 million RAUM threshold and you can’t find another exemption, you must register with the SEC as a Registered Investment Adviser (RIA).

📄 Form ADV

To register as an RIA, you’ll need to file 🔗 Form ADV electronically via the 🔗 Investment Adviser Registration Depository (IARD).

Form ADV, Part 1 contains basic information about the investment adviser, such as:

• Identifying information

• Number of employees

• Information about clients

• Regulatory assets under management

• Information on managed funds

• Information on key personnel (including criminal/disciplinary history)

Form ADV, Part 2 contains more specific disclosure about the investment adviser’s business, such as:

• Information on key personnel

• Fees and compensation arrangements

• Methods of analysis, strategy, and risks

• Code of ethics

• Financial industry affiliations

• Brokerage/custody arrangements

• Financial information

✍️ How do you prepare Form ADV?

You will want help from a lawyer or a compliance consultant to file your Form ADV. You’ll need input from your team to prepare the Form ADV. It’s a relatively large undertaking that should be taken seriously.

📆 Annual Form ADV Updates

Registered investment advisers must file an updated Form ADV within 90 days of the end of their fiscal year. There’s often a mad dash in early spring to get ADVs filed. I would suggest preparing early. Your lawyer or compliance consultant will be grateful. 🙏

💼 Additional requirements applicable to RIAs

In addition to filing and maintaining Form ADV, RIAs are subject to various additional compliance measures, including:

• 🔗 Custody Rule: RIAs must maintain client funds with a qualified custodian, provide various statements to clients, and submit to unannounced audits. Note: On June 12, 2025, the SEC formally withdrew its proposed “Safeguarding Rule” (SEC Release No. IA-6885), which would have significantly expanded the scope and requirements of the existing Custody Rule. The existing Custody Rule (Rule 206(4)-2) remains in effect. Any future custody modernization will require a new rulemaking.

• 🔗 Marketing Rule: RIAs are subject to stricter rules regarding advertising and marketing, including disclosing performance results, testimonials, and endorsements.

• 🔗 Chief Compliance Officer: RIAs must appoint a Chief Compliance Officer responsible for the RIA’s compliance with regulations, including an annual review, training, education, monitoring, testing, and reporting.

• 🔗 Form PF: Form PF is a confidential regulatory reporting form filed by certain investment advisers to private funds, providing the SEC, CFTC, and the Financial Stability Oversight Council (FSOC) with data used to monitor systemic risk in private fund markets. Particularly, RIAs with at least $150 million in private fund assets under management must also file confidential reports on Form PF pursuant to Advisers Act Rule 204(b)-1. On April 20, 2026, the SEC and CFTC jointly proposed significant amendments (SEC Release No. IA-6959; 91 Fed. Reg. 22232 (Apr. 24, 2026)) that would raise the Form PF filing threshold from $150 million to $1 billion, which would relieve nearly half of current filers of their reporting obligations. These amendments are proposed only and have not been finalized; the existing $150 million threshold remains in effect.

• 🔗 AML/CFT Program: On September 4, 2024, FinCEN finalized a rule requiring both RIAs and ERAs to establish written anti-money laundering/countering the financing of terrorism (AML/CFT) programs, file Suspicious Activity Reports (SARs) with FinCEN, and comply with related recordkeeping and reporting obligations under the Bank Secrecy Act (89 Fed. Reg. 72156 (Sept. 4, 2024)). The original January 1, 2026 compliance date was formally extended by FinCEN final rule issued December 31, 2025 to January 1, 2028, pending a broader review of the rule’s scope and requirements. Advisers should continue monitoring for updates, as the final shape of the rule may change before the extended compliance date.

Do investment managers want to become RIAs?

Due to the increased regulatory burden, most investment fund managers avoid registration for as long as possible.

However, a minority of managers submit to registration voluntarily. Their goal is to increase credibility with sophisticated investors and they are willing to juggle the increased compliance requirements. Separately, an adviser becomes eligible to register with the SEC once it has $100 million in regulatory assets under management (or once it would be required to register with 15 or more states), which is what makes voluntary registration possible below the $150 million mark.

⚠️ Exempt Reporting Adviser (ERA) Filing

Investment fund managers with at least $25 million in assets under management, but who are exempt from registering as RIAs, are called Exempt Reporting Advisers (ERAs).

While ERAs aren’t subject to nearly the same regulatory burden as RIAs, ERAs still must file Part 1A of Form ADV with the SEC within 60 days of crossing the $25 million threshold. Like RIAs, ERAs must update their Form ADV each year.

💰️ Performance Fees and the Qualified Client Requirement

One more key Advisers Act obligation that every fund manager needs to know: Section 205(a)(1) of the Advisers Act generally prohibits a registered investment adviser from charging performance-based compensation, including 📄 carried interest and incentive allocations, unless the client qualifies as a “qualified client” under Rule 205-3.

For private funds, the qualified client requirement is applied on a look-through basis for funds relying on the Section 3(c)(1) exemption: each investor in the fund must individually qualify. By contrast, funds relying on Section 3(c)(7) are generally exempt from this requirement, because their investors are qualified purchasers, who are automatically deemed qualified clients. The performance fee prohibition therefore does not apply at the fund level.

A client qualifies as a “qualified client” if they satisfy one of the following:

• Assets-under-management test: At least the specified dollar amount in assets managed by the adviser immediately after entering into the advisory arrangement.

• Net worth test: Net worth exceeding the specified dollar amount (including joint spousal assets, but excluding primary residence and related debt) at the time of entering into the arrangement.

• Qualified purchaser or knowledgeable employee status: Automatically qualifies, regardless of the dollar thresholds above.

📆 2026 Update: The SEC raised these thresholds effective June 29, 2026 (SEC Release No. IA-6961, issued April 28, 2026). The new thresholds are:

• AUM test: $1.4 million (increased from $1.1 million).

• Net worth test: $2.7 million (increased from $2.2 million).

The new thresholds apply only to subscriptions, new advisory contracts, and certain transfers entered into on or after June 29, 2026. Existing advisory contracts with investors who qualified at their original subscription date are generally grandfathered. Advisers to 3(c)(1) funds must update subscription documents, investor questionnaires, and transfer documentation if they have not done so already.

Check with your lawyer!

🚨 State regulation of investment advisers

This whole article has been about federal regulation of investment advisers.

However, many managers (especially emerging managers) are also subject to ⚖️ state investment advisory laws (old post). We’ll publish an updated version of that article next week.

Thanks for reading, everyone.

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.

🎉 Happy Friday, Funds Family!

Laws change! As a result, we’re going to update each of the four core regulatory articles.

1. ⚖️The Securities Act of 1933 (2026 update)

2. ⚖️ The Investment Company Act of 1940 (2026 update)

3. ⚖️The Investment Advisers Act of 1940 (2025 version, update to come)

4. ⚖️ State Investment Adviser laws (2025 version, update to come)

This one (as the subtitle suggests) is an updated version of the Investment Company Act of 1940.

⚖️ Who does the Investment Company Act apply to?

The Investment Company Act applies to investment companies. The 🔗 definition of “Investment Company” is shown below.

In short, the two main ways to be an investment company are:

1. Primarily investing in securities. The business is primarily engaged in investing in securities (or holds itself out as being primarily engaged in investing in securities).

2. 40% test. Even if the business isn’t “primarily” investing in securities, it’s partially engaged in securities investment, with at least 40% of the business’s assets being securities (excluding government securities).

Private equity funds, venture capital funds, and hedge funds are typical examples of investment companies.

🏠️ Note on real estate funds/syndications

Real estate (buildings, land, etc.) is not a security. As a result, pure real estate funds and syndications are typically not considered investment companies and often do not need to find a specific exemption from the Investment Company Act.

However, a real estate fund of funds does invest in securities (i.e., the securities of the underlying fund) and would typically be an investment company. A fund formed to invest in passive JV interests or preferred equity may also be an investment company.

Check with your lawyer!

💳️ Note on debt funds

Under the ⚖️Securities Act (discussed last week), some debt instruments are not securities. However, it’s generally understood that many debt instruments are securities for the purposes of the Investment Company Act and the ⚖️ Investment Advisers Act.

As a result, debt funds are typically considered investment companies.

Check with your lawyer!

🏦 What happens if you’re an investment company?

Investment companies are subject to significant SEC regulation (similar to mutual funds and ETFs). These are called “40 Act” funds.

Lots of lawyer time and legal bills are required for 40 Act funds. Small and medium investment funds and syndications can’t support the weight of these regulations. 😩 

Luckily…there are several exemptions. The most common for private funds and syndications are:

1. 3(c)(1) - The “100 Investor” exemption

2. 3(c)(7) - The “Qualified Purchaser” exemption

3. 3(c)(5)(C) - The “Real Estate” exemption

Let’s dive in 🏊‍♂️ 

1️⃣ 3(c)(1) - The “100 Investor” exemption

One way to be exempt from the onerous 40 Act requirements is to limit your fund to 100 investors.

Simple enough, right?

But wait…there’s more. Counting is harder than you thought! Some investors count as more than one investor. 🧮 

The rules are complicated enough that we don’t need to get into them all here, but here are some examples:

• If people form an LLC just to invest in your fund, you may need to count all of the owners of that LLC.

• If a fund of funds is more than 10% of your fund’s equity, you may need to count all the fund of funds’ investors.

• If more than 40% of an entity’s assets are invested in your fund, you may need to count all of the entity’s investors.

Questions regarding 3(c)(1) “investor counting” should be in your investment fund’s subscription documents. Your lawyer will help you review the investors’ answers to ensure you have a good exemption from the Investment Company Act. This is one of the few times you want your lawyer doing math for you. 😉 

2️⃣ 3(c)(7) - The “Qualified Purchaser” exemption

An investment company can also be exempt if 100% of its investors (other than members of the GP team) are Qualified Purchasers.

The bar to be a Qualified Purchaser is much higher than the accredited investor threshold. Generally:

• Individuals must have investment assets of at least $5 million.

• Entities must have investment assets of at least $25 million.

I would post the 🔗 definition of “Qualified Purchaser” here, but it’s too ugly. Click the link if you dare. 👻

🗺️ Side Quest: Knowledgeable Employees

You may have noticed that “other than members of the GP team” language up there. What is that?

Well, the GP and its core team (called “knowledgeable employees”) can invest even if they aren’t qualified purchasers. 🔗 See below.

However, only high-level personnel count. Staff not involved in the investment decision-making process are not considered knowledgeable employees. Note that, if relying on (ii) below, the employee must have at least 12 months of experience before they count as a knowledgeable employee.

By the way, knowledgeable employees are also excluded from the 100-investor limit in 3(c)(1). ✅

🪞Parallel Funds🪞 

Does a cap of 100 investors seem too restrictive? Upset that you have some investors who are not qualified purchasers? There’s gotta be a better way! 🤷 

Well, there’s a solution: Parallel Funds.

Parallel funds are side-by-side 3(c)(1) and 3(c)(7) funds. You fill one fund with no more than 100 investors 🫲 and fill the other fund with only qualified purchasers 🫱. Then, when you invest in underlying assets, each fund contributes a portion of the capital required.

In some cases, you may form an “aggregator” entity, jointly owned by the 3(c)(1) fund and the 3(c)(7) fund. The aggregator is a single investor on the investment’s cap table. In addition, ownership between the two parallel funds can be adjusted at the aggregator level (in the event you admit more investors into one or both parallel funds) without bothering the investment.

It goes without saying that you should work with a lawyer if you want parallel funds (but I said it anyway).

📜 Pending Legislation: INVEST Act (2025–2026)

On December 11, 2025, the U.S. House of Representatives passed H.R. 3383, the Incentivizing New Ventures and Economic Strength Through Capital Formation Act (the “INVEST Act”). The bill has been referred to the Senate Committee on Banking, Housing, and Urban Affairs and is not yet law.

If enacted, the INVEST Act would expand Section 3(c)(1)(C) regarding qualifying venture capital funds. The current 3(c)(1)(C) carve-out allows certain qualifying VC funds to admit up to 250 beneficial owners (rather than the standard 100) so long as aggregate capital contributions and uncalled committed capital do not exceed $12 million (inflation-adjusted). The INVEST Act would expand this to 500 beneficial owners and increase the capital limit to $50 million. We’ll keep you updated on the status of this legislation!

3️⃣ 3(c)(5)(C) - The “Real Estate” exemption

One last exemption to discuss!

We learned above that pure real estate funds are often outside the Investment Company Act’s reach.

But…

• What if you’re a real estate debt fund?

• What if some of your assets are real estate equity and some are real estate debt?

• What if your fund invests in preferred equity?

• What if some of your assets are passive interests in other funds, syndications, or JVs?

Then, you need 🔗 3(c)(5)(C), which exempts funds “purchasing or otherwise acquiring mortgages and other liens on and interests in real estate.”

To rely on 3(c)(5)(C), the fund/syndication must meet the following test (legal nerds can see this 🔗 SEC no-action letter):

1. At least 55% of the fund’s assets must consist of “qualifying investments.” A qualifying investment is an actual interest in real estate or a loan or lien fully secured by real estate.

2. At least 80% of the fund’s assets must consist of qualifying assets and “real estate-type interests.”

3. No more than 20% of the fund’s total assets may consist of assets that have no relationship to real estate.

♻️ Note on open-ended real estate funds

3(c)(5)(C) is not available to funds “in the business of issuing redeemable securities.”

🔗 Redeemable securities are defined as follows:

Financial products like mutual funds and ETFs are typically redeemable securities. It’s very easy to sell shares in an ETF. Interests in typical hedge funds are also likely redeemable securities.

However, there’s some gray area around whether open-ended real estate-related funds issue redeemable securities. (In fact, two of the biglaw firms I’ve worked at have disagreed on this question.)

In general, the more restrictions on withdrawals/redemptions, the less likely the fund will be deemed to have redeemable securities. If you need to rely on 3(c)(5)(C), you may want to make LP redemptions at the GP’s discretion (or require several conditions for withdrawal to be satisfied before redeeming).

Thanks for reading, everyone.

Have a great weekend! 🙌 

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.

🎉 Happy Friday, Funds Family!

Laws change! As a result, we’re going to update each of the four core regulatory articles.

1. ⚖️The Securities Act of 1933 (2026 update)

2. ⚖️The Investment Company Act of 1940 (2025 version, update to come)

3. ⚖️The Investment Advisers Act of 1940 (2025 version, update to come)

4. ⚖️ State Investment Adviser laws (2025 version, update to come)

This one (as the subtitle suggests) is an updated version of the Securities Act of 1933. We’re going to update the other three articles in the coming weeks.

⚖️ Who does the Securities Act apply to?

The Securities Act applies to anyone selling securities. Big surprise.

But what is a security really?

Well, the Securities Act defines “Security” as follows:

To help refine the statutory definition, there are a couple of common tests.

Howey Test

The famous 🔗 Howey Test lays out the four main factors of an “investment contract” (which is a common type of security):

1. An investment of money. There must be a financial investment or commitment.

2. In a common enterprise. The investor’s fortunes are tied to those of the promoter or other investors.

3. With the expectation of profit. The investor is led to expect a return or profit from the investment.

4. To be derived from the efforts of others. The profits come primarily from the efforts of the promoter or a third party, not the investor. If the investor does a lot of work and has management control, their interest may not be considered a security. This is fact-dependent analysis.

We’re not going to get into the weeds of Howey test here. The main idea is that if you’re offering economic interests (shares, LLC interests, LP interests) to multiple passive investors, you’re likely selling securities. 📈 

There are other tests for other types of securities.

Reves Test

For example, the 🔗 Reves Test includes a test to determine whether a promissory note counts as a security. The upshot is that some types of debt count as securities and some don’t.

The factors, according to the court, include:

1. The motivations of the buyer and seller. If the seller’s purpose is to raise money for general use and the buyer’s purpose is to earn a profit, it's more likely a security. If it's for consumer or commercial purposes (e.g., buying a house, a car), it's less likely to be a security.

2. The plan of distribution of the instrument. If it’s offered and sold to a broad segment of the public, it’s more likely a security. If it's a private or limited transaction, it’s less likely.

3. The reasonable expectations of the investing public. If people reasonably believe they are investing in a security, the courts will likely treat it as one.

4. Whether there is a regulatory scheme that reduces the risk of the instrument. If there's another regulatory regime (e.g., banking laws) that protects investors, the note may not be considered a security.

A public bond offering is obviously a security. A single home mortgage secured by real estate is unlikely to be a security. There’s a messy middle where you might want to work with a lawyer to determine whether a debt instrument is or is not a security.

🤔 What do you need to do if you’re selling securities?

As a general rule, if you are selling securities, you must either:

1. Register: Register the securities with the Securities and Exchange Commission (SEC)

   or

2. Find an exemption: Sell the securities pursuant to an exemption from SEC registration.

Registering the securities means doing an IPO (or another take-public transaction) for your fund or SPV. You would need to file an S-1, S-3, or similar offering documents.

⛔️ Unless you are raising a massive investment vehicle (multiple billions of dollars), you do not want to go public. Way too burdensome and expensive. Too much lawyer time for your own good.

You want an exemption.

🏦 What exemptions from securities registration are there?

Common exemptions to SEC registration include:

• Regulation A: A public/private hybrid that has two tiers (Tier 1 for simpler raises of up to $20 million in a 12-month period and Tier 2 for more complex raises of up to $75 million in a 12-month period. This requires significant disclosure.

• Regulation S: An exemption for sales of securities outside the US.

• Regulation CF: The “crowdfunding” exemption that allows you to raise up to $5 million in a 12-month period. Note: On February 17, 2026, the SEC’s Division of Corporation Finance issued new C&DIs (Question 100.05) clarifying that this $5 million limit is calculated on a rolling basis measured from the date of each closing, not from the offering launch or filing date. This is an important operational distinction for offerings with multiple or staged closings. This exemption has investment limits and other technical requirements.

• 4(a)(2): An exemption for transactions by an issuer of securities not involving a public offering.

While these exemptions are all well and good, most investment funds and SPVs rely on the golden child: Regulation D.

💪 What is Regulation D?

Regulation D is a magnificent law that provides a “safe harbor” for certain securities offerings.

There are multiple flavors to Regulation D. The two most typical options for investment funds and SPVs are Rule 506(b) and Rule 506(c).

They are easy to use, do not limit the amount of money you can raise, and require less lawyer time than the other options. 🕰️ 

This is a true private placement. What does that mean?

👍️ The upside of 506(b)

The beauty of 506(b) is that you can have investors self-certify whether they are an 🔗 accredited investor. All you have to do is ask (assuming you don’t have reason to believe they’re lying).

This is very simple and low friction.

⚠️ Legislative Update (Accredited Investor Definition): On December 11, 2025, the U.S. House of Representatives passed the Incentivizing New Ventures and Economic Strength Through Capital Formation (INVEST) Act (H.R. 3383, 119th Cong.) by a bipartisan vote of 302–123. If enacted, the INVEST Act would: (i) expand the accredited investor definition to include any individual who passes a new free SEC-created competency examination administered by FINRA (covering types of securities, disclosure requirements, corporate governance, financial statements, and conflicts of interest); (ii) add qualification pathways for individuals with certain professional licenses, qualifying education, or job experience; and (iii) require the SEC to adjust the income and net worth thresholds for inflation every five years, the first such adjustment since 1982. As of July 2026, the INVEST Act has been referred to the Senate Banking Committee and no Senate action has been taken. The existing income ($200k/$300k) and net worth ($1M) thresholds remain unchanged and in full effect.

We’ll keep you updated on the status of this legislation!

👎️ The downside of 506(b)

You must have a preexisting relationship with each investor. Friends, family, etc.

Ways you cannot fundraise:

• Podcasts

• Tweets

• LinkedIn

• Fund-related speeches at conferences

• Blasting an email to a bunch of people you don’t know

• General advertising

So…what can you talk about?

In general, it’s best to avoid all mention of the fund or fundraising. You can potentially mention that you make investments, and you can talk about your views on the market, but don’t solicit investors or even suggest you’re raising money. It’s a gray, murky analysis.

We counsel clients that it’s better to be safe than sorry and advise erring on the side of saying less rather than more. 🦺 

When in doubt, ask your lawyer.

⚠️ Non-Accredited Investors in 506(b)

506(b) technically allows you to have up to 35 non-accredited investors.

Many lawyers will tell you that.

What many lawyers will forget is that, pursuant to 🔗 Section 502(b), if you accept even one non-accredited investor, you must do a bunch of extra disclosure.

Below are some of the requirements:

Basically, you need a mountain of disclosure, similar to what you would need to disclose if using Regulation A. For this reason, many funds/SPVs accept only accredited investors even if they use Rule 506(b).

506(c) is a newer creature that is becoming increasingly popular. It allows for public solicitation.

👍️ The upside of 506(c)

You don’t need to worry about speaking publicly. Go ahead and talk about your fund or SPV wherever you want. You can post about fundraising on the internet. You can go on podcasts. You can even advertise.

Even if you don’t want to solicit per se, 506(c) is helpful because you can post updates on LinkedIn (or wherever) without sheepishly getting your lawyer to approve every little post. It gives you peace of mind.

👎️ The downside of 506(c)

Unlike 506(b), you must “take reasonable steps to verify” that 100% of investors are accredited.

You can do this by getting a letter from each investor’s attorney, CPA, or financial advisor verifying accreditation. You can also hire a third party to verify the investor for you. Common providers include VerifyInvestor, InvestReady, and Parallel Markets. ☑️ 

In a pinch, you can also review their tax returns. We try to avoid this whenever possible though.

💸“Per se” accredited investor verification based on minimum investment size

On March 12, 2025, the SEC issued a ⚖️ 506(c)-related no-action letter that shook things up. Issued in response to a request submitted by Latham & Watkins LLP (incoming letter dated March 6, 2025), the no-action letter was accompanied by two new Compliance & Disclosure Interpretations (C&DIs 256.35 and 256.36) under the Securities Act Rules, which codify and extend its guidance. In short, the letter suggests that funds/syndications may be able to assume that investors are accredited if the following requirements are met:

• Minimum Investment: The minimum check size is $200k for individuals and $1 million for entities.

• LP Representations: The LP represents that (i) it is an accredited investor and (ii) its minimum investment amount is not financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer.

• Issuer Representations: The issuer represents that it has no actual knowledge of any facts indicating that the LP is not an accredited investor, or that the LP’s minimum investment amount is financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer.

If an LP is an entity that is accredited only because all of the LP’s owners are accredited, then each of the above applies to each of the LP’s underlying equity owners.

For larger funds with larger minimums, this may offer an easy way to use 506(c) without explicit third-party verification. However, a no-action letter isn’t exactly black-letter law, so using this approach (or deviating from the exact facts in the no-action letter) could theoretically carry some risk. Ask your lawyer!

🤷‍♂️ Which is better – 506(b) or (c)? 

In short, the benefit of 506(c) is that you can raise money publicly.

The benefit of 506(b) is that investors can self-certify they are accredited without meeting the new minimum check size thresholds.

If you’re not sure which you prefer, you can change from 506(b) to 506(c) if you change your mind mid-fundraise. ♻️ 

However, you can’t go from 506(c) back to 506(b). No putting the genie back in the bottle, toothpaste back in the tube, rabbit back in the hat, etc. You’re locked in.

Anything you have to change in the legal documents if you switch from 506(b) to 506(c)? 

Most of your legal documents will be the same whether you use 506(b) or 506(c).

The primary difference is that you should require in the subscription documents that each investor must be accredited. In addition, if you’re going to do 506(c) and plan to “verify” by having high minimum investment sizes, your attorney should add the representations and warranties (by the GP and the LPs) mentioned above.

You can also include a form accredited investor verification letter that the investor can send to their financial or legal professional. 📧 

📜 What government filings are required for Regulation D?

If you use 506(b) or 506(c), you must file a 🛠️ Form D with the SEC within 15 days of the fund’s initial closing date.

This is a simple notice filing and isn’t difficult.

Some funds/SPVs file the Form D just before their initial closing, as pre-filing allows you to disclose less information (mostly about dollars raised and the number of investors admitted).

Many states also require “blue sky” notice filings within 15 days of the initial close. This is essentially a tax you pay in each state where you sell securities to investors. 🤑 

🦹‍♂️Bad Actor Disqualification

Regulation D (where both 506(b) and 506(c) live) is not available to “bad actors” as set forth in 🔗 506(d).

Examples of “bad acts” include:

• Financial crimes

• Being restricted from being a financial professional

• Generally getting in trouble with the SEC

If you have been subject to a “disqualifying event” prohibiting you from using Regulation D, you can still sell securities, but it’s more difficult.

One common route is to use 4(a)(2). However, unlike Regulation D, 4(a)(2) doesn’t “preempt” state law. 👨‍⚖️ 

In normal person terms:

• If you use Regulation D, you generally don’t need to deal with state-specific versions of the Securities Act (other than making the Blue Sky filings discussed above).

• If you use 4(a)(2), you need to research and comply with the state-specific version of the Securities Act in each state where one of your investors is based.

Reg D is much easier than 4(a)(2).

🤡 No Bamboozling the Public 

No matter how you sell securities, Regulation D or otherwise, you can’t lie.

More specifically, 🔗Rule 10b-5 prohibits fraud, material misstatements and/or omissions, and other methods of deceit.

Court cases have held that private citizens (as well as the SEC) can go after issuers of securities (including fund/SPV managers) for these actions, which are generally referred to as securities fraud.

Please don’t commit fraud.

To avoid fraud, don’t overpromise in your marketing materials.

And, for the love of funds, 🚨never “guarantee” returns🚨 

Thanks for reading, everyone.

Have a great weekend! 🙌 

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.

🎉 Happy Friday, funds family!

Closing a 📄 priced equity round is not the end of the legal relationship between a company and its investors. It’s just the beginning! It's an important topic for the companies and the investors who invest in them, because the ongoing contractual rights that investors hold determine what information they receive, what actions they can block (or approve), whether they can maintain their ownership in future rounds, and what happens if a founder or co-investor tries to sell their shares.

But first…

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We’re a tech-enabled modern law firm with expertise in investment funds, SPVs, corporate & commercial matters, venture capital financings, M&A, private credit, outside general counsel, regulatory, and tax.

This article is part of the corporate series we are running that covers topics relating to an investment fund's investments into portfolio companies and the key items that matter both to the investors & companies throughout their entire lifecycles.

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Priced equity rounds come with a suite of investor agreements, most commonly a Certificate of Incorporation (Charter), Investors' Rights Agreement (IRA), a Voting Agreement (VA), and a Right of First Refusal and Co-Sale Agreement (ROFR/Co-Sale), that define the ongoing rights of preferred stockholders/investors. These agreements are as important as the economic terms of the deal itself, and their details often determine whether investors are protected or (unpleasantly) surprised in the most consequential moments.

➡️ What is the Investors' Rights Agreement?

The Investors' Rights Agreement is the primary document governing ongoing investor rights. It typically covers:

• Information rights: the right to receive regular financial reporting from the company: quarterly and annual financials, sometimes including board-level packages, budgets, and capitalization tables. Information rights matter because investors cannot protect their interests without visibility into the company's performance.

• Inspection rights: the right to inspect the company's books and records upon reasonable notice.

• Pro rata rights: the right to participate in future financing rounds to maintain ownership percentage (discussed in more detail below).

• Registration rights: for later-stage companies, the right to participate in or require an IPO registration of shares. These provisions are more commonly exercised at the Series B and beyond.

The difference between “we will keep investors updated” in general and legally enforceable quarterly financial reporting is significant. A well-drafted IRA specifies exactly what is delivered, when, and in what form, and creates an obligation the company must meet.

➡️ What are pro rata rights and why do they matter?

Pro rata rights, also called preemptive rights, give investors the contractual right to purchase a proportional share of any new financing round to maintain their ownership percentage. They are among the most important rights an early-stage investor can negotiate, because they allow the investor to maintain their position as the company raises at successively higher valuations.

Key nuances:

• Pro rata rights are typically limited to “major investors” meeting a minimum ownership/investment size threshold, not every small check.

• Some investors negotiate for “super pro rata” rights, giving them the right to invest more than their proportional share. But this is not common.

• Pro rata rights are not automatically preserved across rounds; later-stage term sheets sometimes seek to eliminate or reduce earlier investors' rights, which is a point worth protecting.

➡️ What is the Right of First Refusal and Co-Sale Agreement?

The ROFR/Co-Sale Agreement addresses what happens if a founder or other stockholder wants to sell shares to a third party before an exit. It contains two core rights:

• Right of first refusal (ROFR): the company (and then investors) have the right to purchase shares a stockholder (typically the founders) wants to sell, at the same price and terms offered to the third party, before the sale can proceed. This prevents unwanted outside parties from entering the cap table.

• Co-sale right (Tag-Along): if a founder sells shares to a third party and the ROFR is not exercised, investors have the right to sell a proportional portion of their own shares to that same buyer on the same terms. This prevents founders from achieving early liquidity while investors remain locked in.

These rights are particularly relevant as companies mature and secondary market interest develops. A founder who has been approached by a secondary buyer should review the ROFR/co-sale mechanics carefully before proceeding.

➡️ What is the Voting Agreement?

The Voting Agreement governs how stockholders vote on certain matters, particularly board composition. It is the document that gives legal force to the board structure agreed in the 📄 term sheet. Key provisions:

• It requires stockholders to vote their shares in favor of the agreed board composition at each annual election.

• It often includes a drag-along provision requiring certain minority holders to vote in favor of an acquisition approved by a defined supermajority of preferred and common stockholders.

• It usually remains in effect until a qualified IPO or other defined termination event.

A drag-along that is properly drafted ensures that a legitimate acquisition can be approved and closed without being blocked by a small number of dissenting minority holders. A poorly drafted one can create a stalemate or can deprive certain investors of the ability to vote against a deal they oppose, so it is an important issue to pay attention to.

➡️ The practical takeaway

For the company:

1. Understand every ongoing obligation created by these agreements before signing: information rights, ROFR compliance, and voting mechanics all require ongoing administrative attention.

2. Keep the investor list and major investor thresholds updated; major investor status determines who holds pro rata and other enhanced rights. The goal is to keep the rights as streamlined and uniform as possible.

3. Build a regular cadence for delivering information rights materials, as non-compliance creates liability and erodes investor confidence.

4. Manage ROFR/co-sale mechanics carefully whenever any stockholder proposes a share transfer; missing these steps can create legal liability.

For the investor:

1. Review the IRA carefully to ensure information rights are specific and enforceable, not aspirational or generic: quarterly financials by a fixed deadline is meaningfully different from “we will keep you informed.”

2. Protect pro rata rights aggressively, including in future rounds where new lead investors may try to eliminate them.

3. Understand the ROFR/co-sale mechanics; they are your primary protection against founders achieving secondary liquidity while you remain locked in.

4. Review the drag-along thresholds carefully: who needs to consent, at what ownership percentage, and whether those thresholds will work practically in the exit scenarios you anticipate.

Thanks for reading, everyone!

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.

🎉 Happy Friday, funds family!

The Series A (or sometimes the Seed) is typically the first 📄 institutional priced equity round a startup raises. It's an important milestone for the companies and the investors backing them, because the terms negotiated here (e.g., valuation, governance, economic protections, and investor rights) set the framework that will govern the company's relationship with its institutional investors for years, and that framework carries forward into subsequent rounds.

But first…

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We’re a tech-enabled modern law firm with expertise in investment funds, SPVs, corporate & commercial matters, venture capital financings, M&A, private credit, outside general counsel, regulatory, and tax.

This article is part of the corporate series we are running that covers topics relating to an investment fund's investments into portfolio companies and the key items that matter both to the investors & companies throughout their entire lifecycles.

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The short answer is: a term sheet is a non-binding summary of the proposed deal terms that serves as the starting point for negotiation and the roadmap for the definitive documents. The key areas are (1) valuation and dilution, (2) governance and control, (3) economic protections for investors, and (4) ongoing investor rights. Understanding what is market, and what is not, is essential for negotiating the term sheet.

➡️ What are the key economic and valuation terms?

The core economic terms of a Series A term sheet include:

• Pre-money valuation: the agreed value of the company before the new investment comes in.

• Investment amount and post-money valuation: the agreed value of the company incorporating the investment coming in and how much total the company is raising.

• Price per share: derived from the pre-money valuation divided by 📄 fully diluted shares outstanding (including the option pool and increases thereto, typically).

• Option pool: the size of the unissued option pool as a percentage of post-closing fully diluted capitalization and, critically, whether the pool refresh is priced pre-money or post-money. For investors reading this, you should almost always push for the pool refresh to be pre-money so that you are not diluted by it. That is market standard.

• Liquidation preference: typically 1x non-participating; anything else warrants scrutiny and specific negotiation.

• Anti-dilution protection: typically broad-based weighted-average.

• Dividends: non-cumulative preferred dividends are standard; cumulative dividends are unusual and heavily investor-favorable.

➡️ What are the governance terms?

Governance terms define how the company is controlled and on what issues investors have veto rights:

• Board composition: boards can vary significantly, but a typical Series A board may look something like this. Five members: two investor seats, two founder/management seats, and one independent director mutually agreed by both sides. Board composition is a meaningful negotiating point, specifically with respect to whether the company’s founders / leaders retain majority control of the board.

• Protective provisions: class-level veto rights held by preferred stockholders over major company actions (discussed in Article 10 📄 Preferred Stock Terms ).

• Drag-along: a provision requiring certain minority holders to vote in favor of an approved acquisition if a defined majority agrees to it. This is important for ensuring a deal can close without a minority blocking it, and what type of approval or blocking right investors have in that regard.

• Founder restrictions: founders may be required to enter into non-compete, non-solicit, vesting rearrangements, and/or transfer restriction agreements as conditions of the financing.

➡️ What investor rights are typically included?

In addition to governance rights, investors typically negotiate for:

• Information rights: the right to receive quarterly and annual financial statements, and sometimes board packages, budgets, and cap table updates.

• Pro rata rights: the right to invest in future rounds to maintain ownership percentage (there are numerous variations of this, which we will cover in a subsequent newsletter).

• Right of first refusal (ROFR): the right to purchase shares (typically the founders’ shares) before they are transferred to a third party.

• Co-sale rights (tag-along): the right to participate in any founder share sale to a third party on the same terms.

• Registration rights: for larger rounds, the right to participate in or require an IPO registration of shares.

These rights are documented across the definitive deal package: the Stock Purchase Agreement, the Certificate of Incorporation (aka the Charter), the Investors' Rights Agreement, the Voting Agreement, and the Right of First Refusal and Co-Sale Agreement.

➡️ So what is market versus aggressive?

A few reference points for evaluating term sheet terms:

• 1x non-participating liquidation preference: market standard.

• Participating preferred or 2x+ liquidation preference: non-market and aggressive in favor of investors.

• Broad-based weighted-average anti-dilution: market standard.

• Full ratchet anti-dilution: non-market and highly punitive for the company.

• Split board with independent director: market for institutional Series A, though the board control and composition can vary a lot.

• Quarterly financial information rights and annual audited financials: market for Series A.

• Option pool and refresh: to be included as pre-money.

• Redemption rights (the right to force share repurchase): rare in US venture and generally unfavorable for companies. Almost never see it.

➡️ The practical takeaway

For the company:

1. Read every term in the term sheet before signing, and model the cap table and waterfall at the proposed terms before agreeing to valuation and pool size.

2. The option pool timing is a significant economic point: a pre-money pool increase dilutes the founders before the new investor comes in; model both scenarios. Investors will want it to be pre-money and that’s fairly market.

3. Governance rights are not just administrative. A board with investor veto rights and protective provisions is a meaningful constraint on future flexibility.

4. Use a venture-experienced attorney; this is not the right context for general practice counsel.

For the investor:

1. Confirm that the terms are market-standard; outlier provisions can create friction at the next institutional round.

2. Information rights are your primary window into the company post-close, so make sure they are specific and enforceable, not aspirational language.

3. Pro rata rights may be your most valuable long-term right in the deal: the ability to maintain or increase ownership at subsequent rounds is where much of the return is built.

4. Make sure that certain items such as (option pool and refresh) are included as pre-money and that promised options are included as pre-money as well.

5. Understand what the drag-along requires: who needs to consent, what thresholds apply, and whether they work in practice for the exit scenarios you anticipate. You need to understand the mechanics.

Thanks for reading, everyone!

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.

🎉 Happy Friday, funds family!

When a company raises a 📄 Priced Equity Round, investors almost always receive preferred stock rather than common stock. It's an important topic for the companies and the investors because the governance and economic terms attached to preferred stock (particularly liquidation preferences, anti-dilution protections, and participation rights) determine how exit proceeds are divided between investors and founders / service providers, and can meaningfully shift the economics in outcomes that are good but not exceptional.

But first…

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/ SELF PROMOTION

We’re a tech-enabled modern law firm with expertise in investment funds, SPVs, corporate & commercial matters, venture capital financings, M&A, private credit, outside general counsel, regulatory, and tax.

This article is part of the corporate series we are running that covers topics relating to an investment fund's investments into portfolio companies and the key items that matter both to the investors & companies throughout their entire lifecycles.

Contact Our Law Firm

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The short answer is: preferred stock is designed to give investors downside protection and economic priority over common stockholders. Liquidation preferences ensure investors get their money back first. Anti-dilution provisions protect investors from down rounds. Participation / pro rata rights allow investors to share in the upside beyond their liquidation preference. The details of how these provisions are drafted matter significantly, especially in the middle-outcome exits that are far more common than “home runs.”

➡️ What exactly is a liquidation preference?

A liquidation preference gives preferred stockholders the right to receive a specified amount before common stockholders receive anything in a liquidation event, which includes not just bankruptcy and dissolution, but more commonly a sale of the company or a merger. The key variables are:

• The multiple: a 1x preference means investors get their original investment back first; a 2x preference means they get back twice their investment first. FYI, the market standard at Series A and beyond is 1x non-participating preferred.

• Participating vs. non-participating: non-participating preferred holders must choose between taking their liquidation preference or converting to common stock. Participating preferred holders take their preference first and then also share in the remaining proceeds as if they had converted to common. Full participation can be highly dilutive to founders and common stockholders in mid-sized exits. The most typical would be non-participating.

• Capped participation: a middle-ground structure where investors participate in proceeds up to a defined cap (often 2–3x), after which they convert to common. This is a reasonable compromise when full participation is on the table.

➡️ What are anti-dilution provisions?

Anti-dilution provisions protect investors if the company raises a future round at a lower valuation than what investors paid (a "down round"). There are two common forms:

• Full ratchet anti-dilution: the investor's conversion price is adjusted down to match the new, lower price. This is highly punitive to founders and other stockholders and is rarely seen in well-advised deals.

• Weighted-average anti-dilution: the conversion price is adjusted down based on a formula that accounts for both the lower price and the number of shares issued at that price. This is the market standard and produces a much more moderate adjustment (often on a broad-based weighted-average formula).

Within weighted-average, there is a further distinction between broad-based (which includes the option pool in the calculation, producing a smaller adjustment) and narrow-based (which excludes the option pool, producing a larger adjustment). Broad-based weighted-average is the market standard.

➡️ What are protective provisions?

Preferred stockholders also typically receive protective provisions, which are class-level veto rights over certain major company actions. Standard protective provisions require preferred stockholder approval for:

• Issuing shares senior to or pari passu with the existing preferred.

• Amending the certificate of incorporation or bylaws in a way that adversely affects the preferred.

• Paying dividends on common stock.

• Selling or merging the company.

• Incurring debt.

• Changes to the authorized board size.

These provisions are a core governance protection for investors. They ensure the company cannot unilaterally take actions that would harm the investors' economic position, and they create accountability checkpoints at key company inflection points.

➡️ Why do these terms matter most at exit?

In a large exit, liquidation preferences are usually irrelevant because the proceeds far exceed the preference stack, and everyone converts to common. But in the far more common scenario (a modest exit or a sale at or below the most recent round valuation), the preference structure determines who gets paid and in what order.

• Example: a company raises $10M at a $40M post-money valuation and is later sold for $30M. Investors with a 1x non-participating preference receive $10M back, leaving $20M for common stockholders. If those same investors had 1x participating preferred, they would receive the $10M preference and then share proportionally in the remaining $20M, potentially capturing roughly half the proceeds.

➡️ The practical takeaway

For the company:

1. Model the 📄 Liquidation Waterfall at multiple exit prices before agreeing to any preference terms—understand what you are giving away in every scenario, not just the best case.

2. Push for non-participating preferred; it is the market standard and is significantly more founder-friendly than participating preferred.

3. Broad-based weighted-average anti-dilution is the market standard; resist full ratchet and narrow-based formulations.

4. Understand which actions require preferred stockholder approval under the protective provisions and build governance processes around those triggers.

For the investor:

1. 1x non-participating liquidation preference is standard for Series A; anything higher is a signal that the deal is off-market.

2. Anti-dilution provisions are a protection mechanism, not a profit mechanism. Understand the formula and its practical effect in a realistic down-round scenario.

3. Model the waterfall at your expected exit range as part of every investment decision; the preference stack across multiple rounds can be significant.

4. Negotiate for market-standard protective provisions, which serve as important governance control mechanics.

5. Track the aggregate preference stack across all rounds as the company raises additional capital.

Thanks for reading, everyone!

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.

🎉 Happy Friday, funds family!

Equity compensation is one of the most important tools a company has to attract and retain talent. Naturally, it is a significant topic for companies and their investors because how equity is structured, granted, and taxed affects employee / consultant incentives, cap table management, and ultimately the value that founders and investors realize at exit.

But first…

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/ SELF PROMOTION

We’re a tech-enabled modern law firm with expertise in investment funds, SPVs, corporate & commercial matters, venture capital financings, M&A, private credit, outside general counsel, regulatory, and tax.

This article is part of the corporate series we are running that covers topics relating to an investment fund's investments into portfolio companies and the key items that matter both to the investors & companies throughout their entire lifecycles.

Contact Our Law Firm

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An employee stock option plan (ESOP) is a formal plan under which the company grants employees (or consultants, via non-qualified stock options )the right to purchase shares at a fixed price (aka the strike price) over time, subject to vesting. The goal is to align employee incentives with the company's long-term success. Employees benefit only if the stock price exceeds the strike price. But how that equity is structured, and particularly how it is taxed, matters enormously for both the company, the employee, and ultimately, the investors.

➡️ What exactly is a stock option and how does it differ from a stock grant?

A stock option is a right (not an obligation) to purchase shares at a set price at a later date. The option itself has no economic value until the stock price exceeds the 📄 strike price. When it does, that difference is called the "spread." Note that an option typically also does not have any governance or control rights because it does not constitute a voting share.

A restricted stock award (RSA) is different. The employee actually receives shares today, typically subject to a vesting schedule and a company repurchase right. RSAs are more common for founders (who receive them at formation) than for employees hired later. Restricted stock units (RSUs) are a third structure, which at a high-level promise to deliver shares at a future date and are more common at later stages or in public companies.

➡️ What are the two types of stock options?

There are two main tax-law structures of stock options:

• Incentive Stock Options (ISOs): available only to U.S. employees (not contractors), subject to specific IRS requirements, and potentially eligible for favorable long-term capital gains treatment if holding period requirements are met. ISOs are the standard form for startup employees.

• Non-Qualified Stock Options (NSOs): available to employees, contractors, and advisors. Exercise of an NSO is a taxable event at ordinary income rates on the spread. NSOs are often used for grants above the annual ISO limit or for non-employees.

ISO treatment is generally more favorable for the employee, but with an important caveat: the spread on an ISO at exercise is a preference item for what’s called Alternative Minimum Tax (AMT) purposes, which can create a tax liability even before the employee sells any shares. This AMT exposure is a real issue for employees at high-valuation companies and should be understood before exercise.

➡️ How do option pools work?

The company establishes an equity incentive plan that reserves a pool of shares for future grants. This option pool is typically sized at ~10–15% of the company's fully diluted share count at initial formation, and is often increased as a condition of a priced financing round. Key mechanics:

• Ungranted options in the pool appear on the 📄 The Cap Table as reserved shares but do not dilute existing holders until granted (but count towards the “fully-diluted capitalization” number).

• Investors typically want an option pool refresh as part of a priced round, sized to cover expected hires for the next ~12–18 months.

• The timing of the refresh matters significantly: if done pre-money (before the round is priced), it dilutes founders before the new investor comes in; if done post-money, the dilution is shared proportionally across all holders. It is more common to do it as post-money.

➡️ What happens to options in an acquisition?

In an acquisition, stock options are typically treated in one of three ways:

• Acceleration: options vest early upon the change of control, either single trigger (automatic upon the sale) or 📄 double trigger double trigger (requires both the sale and a termination event).

• Assumption: the acquirer assumes the option plan and converts options into options on the acquirer's stock on adjusted terms.

• Cashout: the acquirer pays out the intrinsic value of vested in-the-money options at closing.

Which treatment applies is negotiated in the acquisition agreement, and the outcome can make a significant difference for employees with large unvested positions. Investors approving an acquisition should understand the option treatment before voting.

➡️ The practical takeaway

For the company:

1. Establish a formal equity incentive plan early, with proper board approval and legal documentation.

2. Use ISOs for employees and NSOs for contractors, advisors, and grants above the ISO annual limit.

3. Educate employees on the tax implications of exercising options, particularly AMT risk for ISOs and the holding period requirements for capital gains treatment.

4. Keep the option pool sized appropriately relative to hiring plans, and model the dilution from any pool increase before agreeing to it in a term sheet.

For the investor:

1. Review the equity plan as part of diligence: how large is the option pool, how much is issued versus reserved, and are the plan documents in order?

2. Understand the vesting schedules for key employees, not just founders. Employee departures at critical junctures can be destabilizing.

3. Pay close attention to option pool refresh provisions in term sheets and model the dilution impact before signing.

4. For acquisitions, understand how the option plan will be treated (assumption, acceleration, or cashout) before approving the deal.

Thanks for reading, everyone!

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.

🎉 Happy Friday, funds family!

When a company grants stock options to service providers, it has to set a strike price. That’s the price at which employees can pay and exercise the options for shares.

Setting that price correctly is mandatory.

It's an important topic for companies and the investors who back them, because getting it wrong exposes employees and the company to material tax liability. The 409A valuation also shows up in every subsequent financing and acquisition diligence process.

But first…

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/ SELF PROMOTION

We’re a tech-enabled modern law firm with expertise in investment funds, SPVs, corporate & commercial matters, venture capital financings, M&A, private credit, outside general counsel, regulatory, and tax.

This article is part of the corporate series we are running that covers topics relating to an investment fund's investments into portfolio companies and the key items that matter both to the investors & companies throughout their entire lifecycles.

Contact Our Law Firm

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Thanks for reading. Now, let’s jump into the article 😃

A 409A valuation is an independent appraisal of the fair market value (FMV) of a company's common stock, required by the IRS before options can be granted.

Options must be granted at no less than FMV at the time of grant. If they are granted below FMV (whether intentional or not), the options fall outside the safe harbor of Section 409A of the Internal Revenue Code, which results in immediate income recognition and an additional 20% penalty tax on the employee. 👎️ 

That is a serious consequence that companies can avoid entirely by getting a proper valuation done before granting options.

➡️ Why does the IRS care about option strike prices?

Section 409A was enacted to prevent companies from granting discounted options as deferred compensation (a structure that allows employees to defer income recognition to a later, potentially more favorable, tax year).

The rule requires that stock options be granted at FMV at the time of grant. An independent third-party appraisal is the standard way to establish FMV and create a safe harbor against IRS challenge.

Without it, the company would be relying on its own informal assessment, which typically does not hold up in an audit.

➡️ How does a 409A valuation work?

A 409A valuation is performed by an independent third-party appraiser. Many firms specialize in startup valuations - we can refer you if interested.

The appraiser analyzes, among others:

• The company's financial condition, revenue, and projections.

• Recent arm's-length financings (e.g., SAFEs, convertible notes, priced rounds).

• Comparable public companies and transactions.

• The rights and preferences of the preferred stock versus the common stock.

⚠️ That last point is important. Because preferred stock has economic preferences over common stock (e.g., liquidation preferences, anti-dilution, etc.), the common stock in an early-stage company is worth meaningfully less than the preferred stock price in a financing. A credible 409A reflects this discount and updates it after each new financing.

A 409A is generally valid for 12 months or until a material event that would change the valuation (most commonly a new priced financing round). After any priced round, the company should promptly get a new 409A before granting additional stock options.

➡️ What is the relationship between the 409A value and the preferred stock price?

In early-stage companies, the FMV of common stock (as set by the 409A) is typically some fraction of the price paid for preferred stock. The ratio depends on the company's stage, but commonly ranges from:

• 10–25% of the preferred price at seed stage.

• 25–50% at Series A.

• 50–75% or higher at later stages.

As the company approaches a liquidity event, the common stock value converges toward the preferred stock price because the liquidation preference and other preferred economics become less meaningful relative to the overall company value.

➡️ Why do investors care about the 409A?

Investors care about the 409A for several reasons:

• If options have been granted below FMV, the company may have employees with significant latent tax liability. That’s a problem that can surface during diligence or post-close.

• The 409A value is used as a reference point for employee option grants, which affects the company's ability to attract and retain talent competitively.

• Acquirers and later-stage investors will review the 409A history as part of diligence. Therefore, gaps in coverage or stale valuations raise questions about the company's compliance posture.

• In any acquisition where options are being cashed out, the 409A history directly affects the tax treatment of option proceeds.

➡️ The practical takeaway

For the company:

1. Get a 409A valuation before granting any employee options—do not rely on an informal internal estimate.

2. Refresh the 409A annually or immediately following any material financing event, including new SAFE rounds.

3. Use a reputable, defensible appraiser; the cost is modest, and the protection is meaningful.

4. Track option grant dates relative to valuation dates; do not grant options while an updated 409A is pending.

For the investor:

1. Ask whether the company has current 409A coverage before every investment.

2. Review the ratio between the 409A strike price and the preferred stock price; a very low ratio relative to the company's stage may indicate aggressive option grant practices.

3. Include representations in financing documents confirming that all outstanding options were granted at or above FMV.

4. For portfolio companies preparing to make significant equity grants, flag the need for a fresh 409A before those grants are made.

Thanks for reading, everyone!

Have a great weekend, and happy Fourth of July! 🎉 

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.

🎉 Happy Friday, funds family!

A company’s capitalization table is the “definitive” record of who owns what securities and how much. It’s an important topic for companies and the investors alike, because a poorly managed cap table creates confusion and misunderstandings about ownership, dilution, and economics at subsequent financings and/or liquidation, and in the worst case, can make a company difficult or sometimes (nearly) impossible to fund.

But first…

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/ SELF PROMOTION

We’re a tech-enabled modern law firm with expertise in investment funds, SPVs, corporate & commercial matters, venture capital financings, M&A, private credit, outside general counsel, regulatory, and tax.

This article is part of the corporate series we are running that covers topics relating to an investment fund's investments into portfolio companies and the key items that matter both to the investors & companies throughout their entire lifecycles.

Contact Our Law Firm

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Thanks for reading. Now, let’s jump into the article 😃

Overall, the cap table should be accurate, up to date, and modeled forward at all times. For companies, that means tracking every share, option, warrant, stock plan, SAFE, and convertible note from day one (the company’s lawyers can do this on their behalf). For investment funds, it means reviewing and diligencing the cap table carefully before every check is written. That is not just to understand current ownership, but to understand the waterfall of economic outcomes at different exit/liquidation scenarios.

➡️ What exactly goes on a cap table?

A fully diluted cap table includes:

•  Common stock (typically held by founders and early employees).

• Preferred stock (typically held by investors in priced rounds).

• Options issued to service providers under the equity incentive plan, whether vested or unvested.

• Unissued options in the option pool (i.e., authorized and reserved but not yet granted).

• Outstanding 📄 SAFEs and/or convertible notes, and the buffer shares they will convert into.

• Warrants to purchase stock, if any.

🔍️ An important term: “fully diluted” means counting all shares on the assumption that all convertibles have converted, all options have been exercised, and all reserved shares exist validly. Investors care about fully diluted ownership because that is what typically gets paid out at exit.

➡️ What is dilution and how does it work?

Dilution occurs whenever new securities are issued. So that means every new financing round, every option grant, and every SAFE or note conversion increases the total fully diluted cap count. That means each existing holder owns a lower percentage of the company. Though if the company is worth more after the round than before, even a smaller percentage of a larger pie can be worth more in absolute terms.

Some common dilution mechanics to understand:

• Pre-money vs. post-money valuation determines how much the new investor is paying and how much dilution the existing holders bear.

• Option pool shuffles, where the option pool is increased as a condition of a new round. That dilutes founders and existing investors but not the new investor, because they usually take effect on a pre-money basis.

• SAFE conversions can be surprising if the company has stacked multiple SAFEs at different caps without modeling the cumulative dilution.

• Weighted-average anti-dilution provisions protect investors in later rounds from down-round dilution (more on that in a future article).

➡️ What tools do companies use to manage the cap table?

The most common platforms are the likes of Carta and Pulley, both of which provide software for tracking equity, modeling scenarios, managing option grants, and generating the reports investors and counsel need at each round.

Using spreadsheets is technically possible, but prone to error, especially as the company grows and the number of convertibles, option grants, and share classes increases. A cap table that cannot be quickly reconciled or modeled forward becomes a liability. We usually recommend that companies use the above platforms once they have raised their first institutional capital.

➡️ What should investors look for and diligence when reviewing the cap table?

Before every investment, an investor should request and review:

• The current fully diluted cap table, showing all share classes, stock plan numbers, and all outstanding convertibles.

• A waterfall analysis showing how proceeds would be distributed at different exit prices.

• A model of the cap table post-closing, including any option pool increases.

• A list of all outstanding SAFEs and convertible notes with conversion mechanics.

• Any side letters that grant special economic or governance rights not reflected on the face of the cap table.

Investors should also ask how the company manages its cap table and whether it is on a platform like Carta or Pulley. A company that cannot produce a clean, fully diluted cap table in response to a diligence request is a concern that should be raised and discussed sooner rather than later.

➡️ The practical takeaway

For the company:

1. Get on a cap table management platform (Carta, Pulley, or equivalent) as reasonably soon as possible and keep it current.

2. Model every SAFE and convertible note in the cap table so that the conversion math at the next round is not a surprise.

3. Build a habit of producing a clean, fully diluted cap table before every financing conversation (that can be done via lawyers).

4. Understand the waterfall: model what the exit looks like for each share class at different prices before agreeing to terms.

For the investor:

1. Request and review the fully diluted cap table before every investment, not just the headline ownership percentages.

2. Run a waterfall analysis at your anticipated exit range to understand what you will actually receive.

3. Ask about all outstanding SAFEs, notes, and side letters. Look for bespoke economics that don’t appear on the face of the cap table.

4. Confirm that the post-closing cap table (including any option pool increase) accurately reflects the deal terms.

Thanks for reading, everyone!

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.

🎉 Happy Friday, funds family!

When a company starts operating online, taking customer data, processing payments, and/or running a marketplace, it needs a set of legal terms and policies that govern how it interacts with its users & customers. It’s an important topic for companies and their investors, because these documents are not just legal boilerplate. They define how the company collects revenue, allocates risk, and protects the user data that often forms a core part of the investment thesis.

But first…

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We’re a tech-enabled modern law firm with expertise in investment funds, SPVs, corporate & commercial matters, venture capital financings, M&A, private credit, outside general counsel, regulatory, and tax.

This article is part of the corporate series we are running that covers topics relating to an investment fund's investments into portfolio companies and the key items that matter both to the investors & companies throughout their entire lifecycles.

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The short answer is: every company that has a website, an app, or a customer-facing service needs at least a terms of service (or terms of use) and a privacy policy. Depending on the business model, it may also need additional policies addressing data, cookies, returns, acceptable use, intellectual property, and dispute resolution. These should be put in place before launch, not after the fact (once problems arise).

➡️ Why should investors care about terms and policies?

Investors should care about the following reasons:

• The terms define the company’s legal relationship with its users, which drives revenue protection and risk allocation.

• The privacy policy governs the company’s obligations with respect to user data, which is often a core asset.

• Regulatory exposure (e.g., GDPR, CCPA/CPRA, state privacy laws, sector-specific rules) flows through these documents

• Badly drafted or missing terms create real liability that an acquirer or later-stage investor will diligence and potentially price into the deal itself.

➡️ What are the core documents most companies need for terms and policies?

At a minimum, most companies should properly implement:

• Terms of service (or terms of use) governing the user’s relationship with the company, including, for example, limitations of liability, dispute resolution, intellectual property ownership, and acceptable use.

• A privacy policy disclosing what personal data is collected, how it is used, with whom it is shared, and how users can exercise rights regarding their data.

• A cookies policy (or integrated language in the privacy policy) for any company using cookies or similar tracking technologies.

• For marketplaces, processors, and platforms: additional layered terms for sellers, merchants, or partners.

If the company processes payments, hosts user-generated content, sells regulated products, or operates internationally (through subsidiaries or otherwise), additional policies will likely be required.

➡️ What are the most common problems?

The most common issues we see are:

• Companies using boilerplate templates downloaded from the internet without tailoring them to the actual business (and thus irrelevant).

• Privacy policies that don’t accurately describe what the company is actually doing with user data.

• Terms that are not properly accepted by users (no clickwrap or weak browsewrap), leading to enforceability problems.

• Missing state-specific disclosures (e.g., California CCPA/CPRA, Virginia VCDPA, Colorado CPA, Texas TDPSA).

• No 📄 IP assignment language for user-generated content, when the business model depends on it substantially.

• Limitation of liability and indemnification provisions that are missing or unenforceable as drafted.

• Arbitration and class action waiver provisions that are not properly drafted to be enforceable.

These issues are fixable, but they create exposure that compounds over time as user counts grow and data accumulates.

➡️ How should an investor diligence terms and policies?

Diligence here is straightforward but often skipped. An investor should:

• Review the terms of service and privacy policy that are actually live on the site or app, not just a draft sent over by counsel.

• Confirm that user acceptance is mechanically enforceable.

• Check that the privacy policy matches the company’s actual data practices.

• Confirm compliance with applicable privacy laws based on where customers are located.

• Review any terms governing IP ownership of user content, especially for content-generating platforms.

• Look for an information security program / SOC 2 audit if the company processes sensitive data.

• Confirm there is a clear process for updating the policies and notifying users of material changes; if not, come up with a plan to do so with the company.

➡️ Why this matters more as the company scales

In the early days, gaps in terms and policies are mostly theoretical risks. But as the user base grows, regulators take interest, and the company moves toward a financing or exit, those gaps become real liabilities and problems. As one example, class action plaintiffs target privacy missteps. Acquirers run privacy diligence. State attorneys general enforce state privacy statutes. The cost of cleaning up early-stage policy gaps at the scale of millions of users is significantly higher than the cost of getting it right at launch. So let’s make sure to get it right.

➡️ The practical takeaway

For the company:

1. Put a tailored terms of service, privacy policy, and any other applicable policies in place before launch.

2. Use a proper acceptance mechanism.

3. Make sure the privacy policy matches actual data practices, and update it whenever those practices change.

4. Review the documents at least annually, and whenever the business model, geography, or product set changes.

5. For data-heavy businesses, build a privacy and security program (not just a policy document) early.

For the investor:

1. Diligence the live terms and policies, not the version shared in the data room.

2. Confirm that user acceptance is enforceable.

3. Check privacy law compliance based on where users are located.

4. Build representations and warranties on terms, privacy, and data security into the financing documents.

5. For data-heavy businesses, treat the privacy and security program as part of the investment thesis, not as an afterthought.

Thanks for reading, everyone!

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.

🎉 Happy Friday, funds family!

The SAFE (Simple Agreement for Future Equity) has become the default early-stage financing instrument for VCs/investors. But despite the name, a SAFE is not always simple! The market terms have also evolved meaningfully over time. It’s an important topic for companies and investors alike, because what looks like a small set of economics can drive significant dilution and value transfer at the next round.

But first…

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This article is part of the corporate series we are running that covers topics relating to an investment fund's investments into portfolio companies and the key items that matter both to the investors & companies throughout their entire lifecycles.

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A SAFE is a contract between the company and the investor under which the investor pays cash (typically) now in exchange for the right to receive equity later, on terms determined at the next priced equity round. There is no maturity date, no interest, and no obligation to repay (unlike convertible notes). The terms of the conversion turn on a few key parameters: valuation cap, discount, most-favored-nation, and pro rata.

➡️ How does a SAFE actually convert?

When the company raises a priced equity round, the SAFE converts into shares of preferred stock. The price per share at conversion is generally the lower of:

• The price implied by the valuation cap, or

• The price implied by the discount applied to the next round’s price

As an example, if the next round is priced at $10 per share with a 20% discount, the SAFE converts at $8 per share. If the SAFE has a $10 million post-money valuation cap and the company raises at $20 million, the cap drives the conversion price even lower than the discount would. SAFEs may also convert on a liquidity event (e.g., sale of the company) or a dissolution, with mechanics that determine whether the holder gets cash, stock, or a return of capital. In the market nowadays, valuation cap has become the norm, and many companies forgo the discount percentage entirely.

➡️ What are the common market terms today?

The market today generally looks like:

• Post-money SAFEs are now the standard form, not the older pre-money form. The post-money form gives investors clearer dilution protection because the cap is measured after all SAFEs convert.

• Valuation caps are the primary economic lever, with discounts being secondary or absent in the market these days. When used, discounts are typically in the ~10–20% range.

• The most-favored-nation (MFN) provisions are common for early checks, allowing the SAFE holder to elect into more favorable terms granted to later SAFE investors.

• Pro rata rights are increasingly negotiated separately and are often not included in the standard form as a default.

• Side letters covering pro rata, information rights, or board observer rights are fairly common for larger checks (“lead investors”).

• MFN-only or uncapped SAFEs still appear, but generally only for the very earliest checks or for investors with significant strategic value.

➡️ What are the most common problems in a SAFE financing?

The most common SAFE issues we see in practice are:

• Companies stacking too many SAFEs at different caps, leading to surprise dilution at the priced round.

• Founders and investors not modeling the conversion correctly, and discovering at the next round that they have given away more equity than expected.

• Investors signing pre-money SAFEs that get diluted by every subsequent SAFE, instead of post-money SAFEs that lock in the ownership percentage.

• Missing or unclear pro rata rights, which leave investors unable to maintain ownership in subsequent rounds.

• Conversion mechanics that are inconsistent with later-round terms, creating cleanup costs at the priced round.

➡️ How should investors evaluate SAFE terms today?

For an investor, we’d say the key questions are:

• What is the valuation cap, and is it consistent with the company’s stage, traction, industry, and progress?

• Is it post-money or pre-money? (post-money, typically).

• Are there MFN and pro rata provisions, and are they cleanly drafted?

• How many other SAFEs are outstanding, at what caps, and what does the conversion table look like at different next-round valuations?

• Does the company understand what the conversion will do to its cap table?

• Is there a side letter, and if so, are its terms consistent with the SAFE?

➡️ The practical takeaway

For the company:

1. Post-money SAFE form unless there is a specific reason to use the pre-money form.

2. Pick valuation caps deliberately, and model the conversion at the planned next round before signing.

3. Track every outstanding SAFE in a cap table tool that can model conversion correctly.

4. Don’t let the SAFE round drift too long without a priced round, or the stack of SAFEs may become unmanageable.

5. Be careful with side letters and MFN provisions — each one creates downstream cleanup work.

For the investor:

1. Read the SAFE form carefully and confirm it is post-money.

2. Negotiate the cap, discount, and MFN clearly and ensure they are reflected on the face of the document.

3. Push for pro rata rights, especially for larger checks.

4. Run the conversion math at multiple potential next-round valuations before signing.

5. Ask for the existing SAFE/note schedule and a cap table, and review them as part of diligence.

Thanks for reading, everyone!

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.

🎉 Happy Friday, funds family!

When a company raises capital, one of the first and most significant decisions it has to make is whether to fundraise through a bridge financing instrument (usually a SAFE or, less commonly now, convertible note) or through a priced equity round (“Series Seed,” “Series A” and so forth). It’s an important question for companies and investors, because the decision affects valuation, dilution, governance, tax treatment, and potentially the company’s ability to raise additional capital down the line.

But first…

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We’re a tech-enabled modern law firm with expertise in investment funds, SPVs, corporate & commercial matters, venture capital financings, M&A, private credit, outside general counsel, regulatory, and tax.

This article is part of the corporate series we are running that covers topics relating to an investment fund's investments into portfolio companies and the key items that matter both to the investors & companies throughout their entire lifecycles.

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The short answer is: bridge financing is usually faster, cheaper, and lighter touch, which makes it a good fit for [very] early-stage companies that need to move quickly and/or aren’t ready to set a valuation.

Priced equity financing is meaningfully more substantive and expensive, but it sets a clear valuation of the company, defines investor rights and control, and may also have some additional tax benefits (which warrants a whole separate conversation, frankly).

➡️ What is the difference between bridge financings and priced rounds?

Bridge financing instruments are typically designed to convert into equity later, usually at the next priced equity round (or, less typically, an exit). The investor gives the company money now in exchange for the right to receive shares later, often at a discount to the future round’s price and/or subject to a valuation cap. So there are no shares issued today, no board seats or extensive investor rights granted today, and no clear valuation set as of today.

Priced equity financings, by contrast, issue actual shares (preferred stock) at closing, with a defined valuation (usually post-money valuation, which includes the cash coming in), defined governance rights, and full transaction/financing documents (i.e., stock purchase agreement, certificate of incorporation/charter, investors’ rights agreement, voting agreement, and right of first refusal/co-sale agreement).

➡️ When does bridge financing make sense?

Bridge financing tends to be the better fit when:

• The company needs capital quickly (e.g., to extend runway right away).

• The parties cannot agree on a valuation as of now (or the valuation would be unfavorable for the company).

• The company expects a priced round in the near future.

• The round is small, and the cost/time of full equity documents is disproportionate.

• The investor base is primarily friends and family, angels, or early venture checks.

The trade-off is that the company defers valuation to a later round, which means uncertainty (for all stakeholders) about the ultimate dilution.

➡️ When does a priced equity round make sense?

Priced equity rounds tend to be the better fit when:

• The company is raising a meaningful amount of institutional capital.

• The parties can agree on a clearer valuation.

• Investors want defined governance rights (board seats, protective provisions, information rights).

• The company wants to clean up the “cap table” before scaling and wants dilution to be clearly defined.

• The company wants to start the QSBS clock for shareholders/investors (though tax folks do often agree that a SAFE can start the QSBS holding period – see below).

This format gives both sides certainty, but it also costs more in legal fees and takes longer to close.

🏦 Tax corner: The 💰️ QSBS point matters for the bridge versus equity decision because the QSBS holding period generally starts when the stock is actually issued, not when the convertible note is signed. So a convertible note that doesn’t convert until two years later means the holder doesn’t start the five-year clock until conversion. If the company is sold soon after, the investor may miss the QSBS exclusion entirely. While it is not determinative or perfectly guided, many tax advisors do take the position that a SAFE, in contrast to convertible notes, does in fact constitute equity for the purposes of starting the QSBS holding period (again, this should be taken with a grain of salt and analyzed with independent tax advisors on the risk).

➡️ The practical takeaway

For the company:

1. Use bridge financing for speed and simplicity, but understand that the valuation and dilution conversation is being deferred, not avoided.

2. Move to a priced equity round when the round size, investor profile, or tax planning calls for it.

3. Keep the cap table clean and track every SAFE and note so that the conversion math at the next round is not a surprise.

For the investor:

1. Understand which instrument starts the QSBS clock and when, and factor that into the holding period analysis; understand the tax implications.

2. Review the conversion mechanics carefully (caps, discounts, MFN, pro rata) before signing.

3. For meaningful checks, push for a priced round if the company can support it, especially if specified economic or governance rights are important.

4. Don’t assume that a SAFE or note is harmless because it is short – the conversion can drive significant dilution at the next round.

Thanks for reading, everyone!

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.

🎉 Happy Friday, funds family!

When and how should a company start thinking about protecting its intellectual property? It's an important question for companies and the capital providers who invest in them — IP can often be the single most valuable asset underlying the business.

The short answer is...

But first…

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We’re a tech-enabled modern law firm with expertise in investment funds, SPVs, corporate & commercial matters, venture capital financings, M&A, private credit, outside general counsel, regulatory, and tax.

This article is part of the corporate series we are running that covers topics relating to an investment fund's investments into portfolio companies and the key items that matter both to the investors & companies throughout their entire lifecycles.

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The short answer is...you guessed it: Companies should start protecting their intellectual property from day one. If the company's value is tied to its technology, brand, content, and/or proprietary processes, the IP needs to be properly created, assigned, and protected long before investors come to the table. If it isn't, what the investor thinks it's buying may not actually belong to the company. 😱 

➡️ Why does IP matter so much to investors?

When an investor writes a check into an early-stage company, it is usually investing in one or more of the following:

• Proprietary technology or software.

• A brand and/or trademark.

• Trade secrets or proprietary know-how.

• Content, data, or creative works.

If the company doesn't actually own the foregoing IP, or if ownership is disputed (e.g., versus any persons or entities), the entire basis for the investment is at risk. That's not just a legal technicality, but a critical valuation and an investment issue.

➡️ How companies fail to protect their IP

The most common IP issues we see in early-stage companies are:

• Founders built the technology before incorporating, and never (properly) assigned it to the company.

• Employees, contractors, or freelancers developed key technology without proper IP assignment agreements.

• The company is using open-source software without tracking license obligations.

• Trademarks were never registered or searched for conflicts.

• IP was developed while a founder was still employed somewhere else, creating potential claims from that prior employer.

These are all fixable, but they get more expensive and more complicated to fix the longer they sit. Over time, it can become an actual existential problem, so it is best to ensure these items are taken care of correctly as soon as possible.

➡️ How should an investor diligence IP?

An investor should approach IP diligence to answer one core question: Does the company actually own all the IP it says it owns? That means reviewing:

• Founder IP assignment agreements (especially for anything created pre-incorporation).

• Employee and contractor invention assignment and work-for-hire agreements.

• Open-source software usage and license compliance.

• Trademark filings and any pending or threatened disputes.

• Patent filings (if applicable) and prosecution status.

• Any third-party licenses the company depends on.

• Prior employment agreements of key founders to check for assignment or non-compete carryovers.

If the company can't produce proper and executed documentation on any of these, that's a red flag worth pausing on and addressing right off the bat.

➡️ Why does this matter more as the company scales?

Early on, IP gaps are usually manageable. For instance, a missing assignment can be signed, and a trademark can be filed.

But as the company raises more capital, hires more people, licenses its technology, or heads toward an exit, those gaps become real liabilities. A potential acquirer or later-stage investor will diligence IP thoroughly, and anything unresolved from the early days will either delay the deal, reduce the price, or kill it. Cleaning it up at founding costs almost nothing…and on the other hand, cleaning it up at exit can be a critical, potentially deal-breaking issue.

➡️ The practical takeaway

For the company

1. Assign all pre-incorporation IP to the company at formation, in writing.

2. Use proper invention assignment agreements for every founder, employee, and contractor from day one.

3. Track all open-source usage and maintain a log of license types and obligations.

4. File trademark applications early for the company's core brand and product names.

5. Keep an internal IP register that catalogs patents, trademarks, trade secrets, domain names, and key licenses.

6. Make sure employment agreements include clear IP assignment, confidentiality, and non-compete provisions (to the extent enforceable in the relevant jurisdiction).

For the investor

1. Include IP representations and warranties in the financing documents (ownership, no encumbrances, no infringement, no open-source contamination of proprietary code).

2. Require IP assignment as a closing condition if it hasn't already been done.

3. Build IP diligence into every round, not just the first check.

4. Ask for the open-source log and actually review it.

5. Flag any founder who built technology while employed elsewhere and diligence that prior employer's IP policies.

Thanks for reading, everyone!

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.

🎉 Happy Friday, funds family!

Founder vesting is one of the first (and most important) things an investor should look at when evaluating a deal. If a founder leaves the company early, do they walk away with their equity? Without vesting, the answer is yes, which is a problem from an incentive and future scaling perspective. ⚠️ 

But first…

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We’re a tech-enabled modern law firm with expertise in investment funds, SPVs, corporate & commercial matters, venture capital financings, M&A, private credit, outside general counsel, regulatory, and tax.

This article is part of the corporate series we are running that covers topics relating to an investment fund's investments into portfolio companies and the key items that matter both to the investors & companies throughout their entire lifecycles.

Contact Our Law Firm

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➡️ Why does founder vesting matter to investors?

Investors write checks based on the expectation that the founders will stay and build the business. Let’s say a founder holds ~40% of a company's equity with no vesting and walks out six months after closing an investment (e.g., SAFE, Series A, etc.). The cap table is now burdened with a large block of what we call “dead” equity 💀held by someone who is no longer contributing. That dilutes everyone, misaligns incentives, and makes future fundraising from other investors harder. Equity vesting protects against that by ensuring that founders earn their equity over time by continuing to add value to the business.

➡️ What does a standard founder vesting schedule look like?

The market standard for startup company vesting is:

• Four-year total vesting period.

• One-year cliff (i.e., no equity vests until the first anniversary).

• Linear monthly vesting after the cliff.

• Unvested shares subject to repurchase (typically at the original purchase price instead of the new FMV) if the founder departs before fully vesting.

Some founder-friendly structures shorten the schedule to three years or provide credit for time already spent building the company pre-investment (by making the vesting commencement date earlier). Both are negotiating points.

Note: These vesting terms are different from how carried interest vests in respect of investment fund GPs, which we discuss here: 💼 Negotiating Co-GP Deals, Part 3

➡️ Why should investor equity generally be free of vesting?

Investors and founders are in fundamentally different positions. Investors contribute mostly capital, while founders contribute labor over time. That distinction drives the structure:

• Investors fulfill their obligation at closing when the money is wired

• Founders fulfill their obligation over time by building the business

• Vesting exists to match equity earned to value delivered, and the investor's value is delivered on day one

That is why investor shares are typically fully vested and freely transferable at issuance, while founder shares are subject to time-based vesting and transfer restrictions. An investor who has paid fair value for equity should not be at risk of forfeiting it.

➡️ What is vesting acceleration?

Acceleration allows unvested founder shares to vest early upon certain trigger events. There are two types of acceleration, as outlined below.

“Double trigger” is the market standard. “Single trigger” can create misaligned incentives because it removes the founder's equity-based motivation to stay through a transition period after an acquisition.

• Single trigger: All or a portion of unvested shares vest upon one event, usually a change of control (e.g., sale of the company).

• Double trigger: Unvested shares vest only if two events occur, typically a change of control plus the founder's termination without cause (or resignation for good reason) within a defined window after closing.

➡️ How should investors diligence founder vesting?

Before closing, investors should confirm:

• Whether all founder shares are subject to vesting (and if not, why).

• What the vesting schedule is and how much has already vested.

• Whether there are any acceleration provisions and what triggers them.

• Whether the company has repurchase rights on unvested shares at cost (or fair market value).

• Whether any founders received early vesting “credit”, and on what basis.

• Whether proper securities and tax filings (such as 83(b) elections) have been made.

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/ WRAPPING THE CASE

Founders should expect to vest their equity over time, typically four years with a one-year cliff. Investors should expect their equity to be fully vested at issuance, because their capital contribution is complete at closing. If there is going to be acceleration, it should be “double trigger” (for founders and not others) unless there is a specific reason to deviate. Diligence on these items should happen early, not at the tail end of a closing checklist.

Thanks for reading, everyone.

Have a great weekend! 🙌 

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⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.

🎉 Happy Friday, funds family!

Today, we're tackling one of the first and most consequential decisions a new company makes: should it form as an LLC or a C-corp? It's a question we constantly receive from founders, and an issue essential to investors. Entity choice shapes how a company raises capital, compensates its team, and eventually exits.

But first…

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We’re a tech-enabled modern law firm with expertise in investment funds, SPVs, corporate, venture capital, M&A, fractional general counsel, regulatory, and tax.

Contact Our Law Firm

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When should a company form as an LLC versus a C-corp?

The short answer: If the company expects to raise venture capital, issue broad employee equity, or follow a standard startup financing path, it will usually want to be a Delaware C-corp. If the founders expect the company to remain relatively closely held, distribute cash to owners, or operate more like a traditional small business, holding company, or joint venture, an LLC is often the better fit.

➡️ Why choose an LLC?

LLCs are attractive because they offer:

• pass-through tax treatment

• flexibility in allocating economics among owners

• highly customizable governance

That makes LLCs a strong option for businesses that are founder-owned, family-owned, cash-flow oriented, or not planning to raise institutional capital anytime soon. That is the key distinction.

➡️ Why choose a C-corp?

C-corps are attractive because they are the market standard for:

• venture financings

• preferred stock structures

• employee stock options

• multiple financing rounds

• startup-style exits

Investors, employees, counsel, and cap table platforms are all generally more familiar with the C-corp model. If you want to cater to those stakeholders and their preferences, a C-corp can make sense. Entity type will always come up in an investor’s diligence process.

➡️ Why do investors often prefer C-corps?

Many investors, especially venture funds, prefer or require C-corps because LLCs can create tax reporting complexity, pass-through tax exposure, and administrative friction. Even if a fund can invest in an LLC, it may choose to require the company to convert into a C-corp. So if the company expects venture or institutional financing, a C-corp is usually the cleaner choice.

➡️ When should a company choose an LLC?

Usually when:

• the business is expected to stay closely held

• pass-through taxation is important

• cash distributions to owners are likely

• the owner group is small

• institutional fundraising is not a near-term goal

➡️ When should a company choose a C-corp?

Typically when:

• the company expects to raise venture capital

• employee equity will be important

• preferred stock financings are likely

• the business is being built for scale and growth instead of steady cash flow revenue

• a standard startup financing and exit path is the goal

➡️ Can a company start as an LLC and convert later?

Yes, and that happens fairly often in our work. But if the company already expects to raise venture capital in the near future, it may be simpler to start as a C-corp rather than pay to convert later. It’s worth noting that there are also tax implications you should discuss with your lawyer, such as 💰️ QSBS: Qualified Small Business Stock. :money

Thanks for reading, everyone!

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.

🎉 Happy Friday, funds family!

Today, we're diving into one of the most powerful tax tools available to founders, early employees, and venture fund investors: Qualified Small Business Stock (QSBS).

But first…

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If you spend much time around venture or growth-equity lawyers, you'll hear the acronym QSBS thrown around like it's some kind of secret handshake. That's because, in the right circumstances, Qualified Small Business Stock (QSBS) can turn what would otherwise be a hefty multi-million tax bill into…no tax at all! Quite the magic trick and worthy of the careful structuring we regularly provide clients. 🪄

For founders, early employees, and venture fund investors and principals, it's one of the most powerful tools in the tax code. But like all things tax, the details matter.

➡️ What Is QSBS?

At its core, QSBS is shorthand for IRC §1202's capital gain exclusion. Stock that qualifies for QSBS treatment can escape federal capital gains tax on exit — up to certain limits.

QSBS is generally available for early-stage venture companies (often in tech) and unavailable for other alternative classes such as real estate (sorry!). Thus, in the investment fund world, it is most commonly associated with venture capital (and sometimes private equity).

The policy rationale is straightforward – the government wants to encourage investment in early-stage, innovative U.S. businesses. The beneficiaries are U.S. taxable individuals, so it's squarely aimed at entrepreneurs, employees, and domestic investors willing to take risks. 🇺🇸

A subtle but essential point: Carried interest held through a partnership can qualify for the QSBS exclusion if the underlying stock does. More on this later.

➡️ The Basic Requirements to Get QSBS

🔹 Holding period: Five years to get the full exemption, but as a result of the Big Beautiful Bill, we now have partial exemptions:

• 50% exemption if you hold for 3 years

• 75% exemption if you hold for 4 years

• Limited rollover relief for shorter holds

🔹 Qualified business: Most active trades or businesses qualify with certain exceptions, such as service firms in health, finance, consulting, hospitality, and, unfortunately, law 🙁. I'm sure you just shed a tear for the poor lawyers out there.

🔹 Active business: At least 80% of the corporation's assets must be used in a qualified business during substantially all of the taxpayer's holding period.

🔹 Gross assets test: The issuing corporation must have aggregate gross assets under $75M before and immediately after the stock issuance (while beyond the scope of this article, gross assets are specially measured under an "adjusted basis" test that can produce some counterintuitive results). 📊

🔹 C corporation: Only U.S. C corporations for tax purposes can issue QSBS.

🔹 Original issuance: Stock must be acquired directly from the company (not purchased second-hand).

➡️ Funds, LPs, and Carry

What if you invest through a fund or syndication? Good news: QSBS eligibility flows through partnerships (venture funds are typically taxed as partnerships). If a venture fund buys QSBS-eligible stock, its U.S. taxable LPs can claim the exclusion on their allocable share of gain when the stock is sold. 🎉

Similarly, carried interest allocated to the GP can ride the QSBS train, assuming the fund holds qualifying stock.

One trap: blockers and other entities treated as C corporations for tax purposes (e.g., Delaware corporations) can break the chain. 🔗

Importantly, LPs in a fund are only eligible to receive QSBS in respect of investments that were made by the fund when the LP was already admitted. In other words, LPs who join a fund after the date a particular investment is made would not get QSBS in respect of such investment.

➡️ Recent Law Changes (Big Beautiful Bill) 📜

🔹 Exclusion amount: Now $15M per taxpayer per issuer (up from $10M).

Per pre-existing law, the exclusion amount can actually be higher if 10× a taxpayer's "adjusted basis" (special tax term) in the stock exceeds $15M (i.e., if the taxpayer's adjusted basis in the stock > $1.5M).

🔹 Gross assets threshold: Increased from $50M to $75M, expanding eligibility for later-stage companies.

🔹 Partial credit mechanics: Reduced holding period can still get partial exempt credit (under prior law, it was 100% with a five-year holding period and no exemption for any lesser holding period).

➡️ Advanced QSBS Planning Techniques

💡 Stacking: By spreading stock among family members, trusts, or entities, you can multiply the exemption cap (normally $15M).

💡 Partnership conversions: If you hold QSBS inside a partnership, carefully structured conversions can sometimes "refresh" basis or unlock additional exclusion.

💡 Rollovers: A special QSBS "rollover" rule may apply if you exit a QSBS-eligible investment prior to the required QSBS holding period. You can defer tax on the gain if you re-invest your exit proceeds into one (or multiple) "new" QSBS investments within 60 days and make a special election on your tax return. Your "old" QSBS holding period rolls into your "new" QSBS holding period and future gain on any "new" QSBS exit is eligible for QSBS exemption if you've satisfied the holding period requirements by then!

💡 Reorganizations: Mergers and stock swaps can preserve QSBS status, but contributions to partnerships (e.g., under §721) will usually kill QSBS eligibility.

➡️ Why QSBS Matters

For founders, employees, and fund managers, understanding QSBS isn't a luxury — it's table stakes. The difference between a fully taxable $50M exit and a tax-free one can mean tens of millions of dollars.

QSBS requires careful planning from day one. Get the structure wrong, and the opportunity disappears. Get it right, and the tax savings can be game-changing.

Thanks for reading, everyone.

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.

🎉 Happy Friday, funds family!

Today, we have Part 30 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

This week focuses on Conflicts of Interest.

But first…

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Every private fund has potential conflicts. Because the GP, management company, and their affiliates often sponsor multiple vehicles, invest personally, or provide services to the fund, situations can arise where their interests are not perfectly aligned with those of the LPs. ⚖️

➡️ Where do conflicts typically arise?

Common examples include:

• Allocation of investment opportunities among affiliated funds

• Purchase of warehoused investments

• Cross-fund transactions

• GP or affiliate loans to the fund

• Service arrangements between the fund and sponsor affiliates

These are normal in private fund structures, but they must be disclosed and properly governed.

➡️ How are conflicts addressed?

Most fund agreements include guardrails such as:

• Requiring LPAC or majority-in-interest LP approval for material affiliate transactions

• Priority allocation provisions during a defined "restricted period"

• Limits on affiliate lending terms

• Disclosure obligations in the PPM and annual reporting

• Policies around personal investments by GP personnel

➡️ The role of disclosure

Disclosure is the baseline. The PPM should describe all material conflicts — not just theoretical ones, but the specific ones that are likely to arise given the sponsor's business.

The SEC has made clear (especially in enforcement actions and through the now-vacated private fund adviser rules) that vague or boilerplate conflict disclosures are insufficient.

➡️ Practical tips for GPs

• Be specific in your PPM about how conflicts will be handled

• Document all conflict-related decisions

• Use the LPAC as a governance tool for real-time conflict resolution

• Don't assume that disclosure alone satisfies your obligations — process matters too

➡️ LP perspective

LPs should review conflict provisions carefully during due diligence. Key questions include:

• Does the GP have other funds or businesses that could compete for deal flow?

• Are affiliate transactions subject to independent review?

• Is the LPAC empowered to approve or reject conflicted transactions?

• What are the reporting obligations around conflicts?

Thanks for reading, everyone.

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.