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Pro Rata Rights: Maintain an Equity Stake Without Dilution

Posted by Assure on Sep 3, 2020 12:41:02 PM

When Assure Co-Founder and CEO Jeremy Neilson managed the renowned $300 million Utah Fund of Funds economic development program, he heard hundreds of pitches from investment managers eager for the cash and imprimatur of an investment from the program in their respective firms. In all of these pitches, not one solitary time did the fund managers use the words “pro rata rights.”

This belies the reality that these rights can exercise immense strategic impact on a fund’s performance. Fund managers talk about how they “follow their winners” by investing more capital. Pro rata rights are what provides an investor or firm with the right to make follow-on investments in their star portfolio companies and to maintain their equity stake without dilution.

One particular venture capital fund made a concerted effort to receive an investment from the Utah Fund of Funds. At the time, the VC fund looked very solid on paper as its managers endeavored to bring the final dollars in to close their second fund. Due diligence revealed that in their first fund, the managers did not have a disproportionate amount of equity in their best portfolio companies; rather their capital was fairly evenly distributed across the entire fund portfolio. Jeremy concluded that either the managers didn’t know how to identify their winners – an unlikely event – or they had failed to receive the right to invest more capital. In other words, they didn’t have pro rata rights. This failure cost the fund investors millions of dollars in additional returns and increased its degree of difficulty in fundraising.

After Assure began to power AngelList and other networks with its structuring and administrative services, Jeremy and the team began to hear the term “pro rata rights” with much greater frequency.

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Topics: IPOs, Legal, Carry, For Founders

What about foreign investors?

Posted by Assure on Aug 17, 2020 11:48:58 AM

A few years ago, Assure had a client that was utilizing capital-raising SPVs to invest in startup companies. This client had a global network of both startup companies and investors. One particular deal needed to move quickly – a common occurrence for Assure. In the coming few days, this SPV needed to be set up, funds collected and then wired.

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Topics: Compliance, Legal, Taxes, Administration, Foreign Investors

Should Your SPV be an LLC or an LP?

Posted by Assure on Jun 9, 2020 10:32:29 AM

Limited Liability Corporations (LLCs) and Limited Partnerships (LPs) share many of the same beneficial characteristics in that they are both flexible in how they are used, and both provide pass-through tax treatment.

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Topics: SPV, Legal, Administration

Blue Sky Notice Filings: Do I Need to File?

Posted by Assure on Nov 19, 2018 3:05:12 PM

The question every fund organizer should ask is whether their investment fund must comply with state Blue Sky notice filings. The short answer, is yes. Why? Because almost all investment fund offerings meet the definition of a “security” for purposes of federal and state disclosure and notice requirements.

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Topics: SPV, Compliance, Legal, Taxes

Smart Contracts Are Not What You Think They Are—They Are Just Code

Posted by Assure on Nov 19, 2018 2:55:41 PM

Disruption of Private Equity by the Emergence of the Smart Contract Attorney: A smart contract is a computer code protocol using blockchain distributed ledger technology to execute transactions based on pre-defined parameters. At its core, a smart contract is not an agreement between parties memorialized in a document drafted by a lawyer but simply software code written by computer programmers. As such smart contracts are a software coding construct first and only peripherally refer to the legal construction of the underlying transaction relationship, that is, a smart contract is not a legally binding contract.

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Topics: Blockchain, Legal

Five Elements to Review Before Adding Smart Contracts to Your Business

Posted by Assure on Nov 14, 2018 11:28:18 AM

There are five key elements that you should be aware of before adding smart contracts to your business. Contracts are part of your everyday business life.  Smart contracts are built on blockchains, specified benefits, the importance of correct coding, and the current status of these contracts within particular industries.

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Topics: SPV, Cryptocurrency, Blockchain, Legal

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