For a myriad of complex legal reasons, Limited Partners require General Partners to contribute their own capital into their venture capital fund. While this amount can vary, the vast majority of the time GPs need to contribute 1% of the committed capital with LPs contributing the remaining 99%. Thus the 99/1 rule.
Private equity funds (including venture captial funds) are typically structured to be “self-liquidating”. This means that they dissolve at a pre-determined time, which is typically 10-12 years after its founding. However, if the fund is not fully invested and/or liquidated by the pre-determined time, the Limited Partners generally grant an extension to the General Partners.
When incorporating a new venture, a good rule of thumb is to authorize (or issue) 10 million shares @ 1/10 of cent. 50% of these shares should be issued to the founders (with a vesting schedule). 10% should be set aside for future employees. The remaining 40% will go to future investors.
A good rule of thumb regarding equity ownership in your company is to institute a vesting schedule on stock grants. This has numerous benefits the two primary being:
The rule of thumb for vesting time horizon is a 1 year cliff followed by straightline monthly vesting.
A good rule of thumb for a startup environment is to avoid “deferred” compensation. Any type of investor (bank, angel, friends and family, and especially venture capitalists) will view deferred compensation as a significant deterrant. Since deferred compensation has seniority over all other stakeholders, it adds a level of risk to their investment. A better way to compensate yourself is through paying yourself in equity through an earnout or vesting schedule.