How To Legally Structure A Venture Capital Fund: A Guide For Managing Partners

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Raising a Venture Capital fund involves far more than building a strong track record or developing a compelling investment thesis. Institutional investors evaluate the quality of the management team with the same level of scrutiny as they assess the sophistication of the legal structure through which they will invest.

A well-designed legal structure not only facilitates the fundraising process, but also conveys professionalism, inspires investor confidence, and enables the fund to operate in accordance with internationally recognized market standards. For Managing Partners launching their first fund—or even subsequent vehicles—implementing an institutional-grade structure can make the difference between successfully closing a fundraising round and losing sophisticated investors.

At FlexLex, we have advised on the structuring of numerous international Venture Capital vehicles, making us one of the most specialized and cost-effective firms in Mexico for the implementation of these structures.

The International Standard Structure

Today, one of the most widely adopted structures among Latin American Venture Capital managers seeking to attract international capital combines:

• An Ontario Limited Partnership (LP) serving as the fund vehicle.
• A Delaware LLC, acting as the General Partner (GP) and fund manager.

This structure follows internationally accepted best practices and is widely recognized by institutional investors across North America and Europe, providing clear governance, tax efficiency, and operational flexibility.

Ontario Limited Partnership: The Investment Vehicle for Limited Partners

The Ontario Limited Partnership constitutes the investment fund itself. It is the entity through which investor capital is pooled and from which investments are made into portfolio companies.

Investors participate as Limited Partners (LPs), contributing capital without taking part in the day-to-day management of the fund. Their liability is generally limited to their committed capital, providing both legal certainty and asset protection.

One of the primary advantages of using a Canadian LP is that Ontario is a well-established and internationally recognized jurisdiction for private investment funds. It offers a modern, stable legal framework that is familiar to family offices, institutional investors, and professional fund managers.

Additionally, Canadian Limited Partnerships are generally treated as flow-through entitiesfor tax purposes, allowing tax consequences to flow directly to investors in accordance with the tax laws applicable in their respective jurisdictions. This feature is particularly attractive to sophisticated investors seeking to avoid unnecessary layers of taxation.

The Limited Partnership Agreement: The Economic Constitution of the Fund

While the Certificate of Limited Partnership establishes the legal existence of the fund, the Limited Partnership Agreement (LPA) serves as its economic constitution.

The LPA governs virtually every material aspect of the relationship between the General Partner and the Limited Partners, including:

• Investment strategy and investment thesis.
• Fund term.
• Powers and authority of the General Partner.
• Economic rights of investors.
• Capital Commitments and Capital Calls.
• Distribution mechanics.
• Distribution waterfall.
• Carried Interest.
• Transfer restrictions.
• LP Advisory Committee.
• Conflict of interest provisions.
• General Partner replacement procedures.
• Dissolution and liquidation events.

For institutional funds, the LPA is typically the most heavily negotiated document throughout the fundraising process, particularly when institutional investors or fund of funds participate.

How Do Investors Join the Fund?

New investors are typically admitted through the execution of a Unit Subscription Agreement.

Among other matters, this agreement governs:

• Capital Commitments.
• Investor representations and warranties.
• AML/KYC compliance representations.
• Acceptance of the Limited Partnership Agreement.
• Issuance of partnership units.

Institutional funds generally do not require investors to contribute their entire committed capital upon admission. Instead, capital is funded over time through Capital Calls during the investment period.

This mechanism allows the fund to deploy capital efficiently while avoiding idle cash for extended periods.

Delaware LLC: The General Partner Vehicle

While the Ontario LP serves as the investment vehicle, the fund’s management is typically carried out through a Delaware Limited Liability Company (LLC).

This entity is owned and controlled by the fund managers or Managing Partners, who act as the General Partner (GP).

The Delaware LLC offers numerous advantages, including:

• Contractual flexibility.
• Minimal administrative burden.
• International recognition.
• Highly developed corporate law.
• Flexibility in allocating economic rights among the managing partners.

Through this entity, investment decisions are made, the portfolio is managed, and the powers granted under the Limited Partnership Agreement are exercised.

In many structures, the Delaware LLC also serves as the entity entering into agreements with employees, consultants, service providers, and fund administrators.

How Does a General Partner Make Money?

The economics of a Venture Capital fund are generally based on two primary revenue streams.

Management Fee

The Management Fee is an annual fee intended to cover the operational expenses of managing the fund.

It typically ranges from 1% to 2.5% per year of committed capital during the investment period and may later be calculated based on invested capital.

These fees generally cover:

• Management team salaries.
• Office expenses.
• Due diligence costs.
• Legal expenses.
• Travel expenses.
• Audits.
• Fund administration.

Carried Interest

Carried Interest, commonly referred to as Carry, is the primary economic incentive for the management team.

It generally represents 20% to 30% of the profits generated by the fund after the LimitedPartners have received a full return of their invested capital and, where applicable, any preferred return.

This compensation structure creates strong alignment between the General Partner and the Limited Partners, as the GP earns the majority of its economic upside only when the fund delivers successful investment returns.

The Fund Life Cycle

Most Venture Capital funds have a lifespan of approximately 8 to 12 years.

The life cycle is generally divided into two phases.

Investment Period

During the first 3 to 5 years, the fund identifies investment opportunities, deploys capital, and issues Capital Calls as needed.

Harvest or Exit Period

During the remaining years, the objective shifts toward generating liquidity through exit events, including:

• Strategic acquisitions.
• Sales to Private Equity funds.
• Mergers.
• Secondary sales.
• Initial Public Offerings (IPOs).

It is during this phase that proceeds are distributed to investors and, where applicable, Carried Interest is paid to the General Partner.

What Type of Investors Should Be Your Limited Partners?

One of the most common mistakes first-time fund managers make is attempting to raise capital from virtually any type of investor.

In practice, successful Venture Capital funds build a base of sophisticated investors with experience in alternative assets and the ability to maintain long-term capital commitments throughout the life of the fund.

Typical Limited Partners include:

• Family Offices with Venture Capital exposure.
• Venture Capital Fund of Funds.
• Institutional Investors.
• Corporate Venture Capital funds.
• University Endowments.
• Foundations.
• High-Net-Worth Individuals with private investment experience.
• Entrepreneurs who have experienced significant liquidity events.
• Former founders seeking to diversify their wealth.

These investors contribute far more than capital. They often become valuable sources of deal flow, co-investment opportunities, strategic introductions, and long-term partnerships.

A Well-Designed Legal Structure Accelerates Fundraising

Increasingly, sophisticated investors expect fund managers to present institutional-grade legal structures before committing capital.

A properly designed fund vehicle enhances credibility, streamlines the legal due diligence process, and avoids costly restructurings after fundraising has begun.

At Vázquez Tercero & Zepeda, we specialize in structuring international Venture Capital funds for Latin American fund managers. Our team combines expertise in corporate law, cross-border structuring, and Venture Capital fundraising to design institutional investment vehicles that meet the expectations of family offices, fund of funds, and professional investors.

Our mission is to democratize access to institutional fund structures that have historically been available only through large international law firms, offering highly specialized legal services with one of the most competitive value propositions in the Mexican market.