[Originally published January 12, 2009 at California Corporate Lawyer]
What is an Exchange Fund?
An exchange fund allows
company founders and other large shareholders to contribute a portion of
their own company stock in exchange for an ownership percentage (i.e.
limited partnership interest) in a new entity that holds a diversified
portfolio of private company shares. As the portfolio companies realize
liquidity events (IPO, acquisition, etc.), the limited partners in the
new entity all share in the cash or stock distributions.
as a company co-founder, you are "going long" on your single idea. In
the meantime, your venture backers (and maybe your lawyers) have
literally dozens of other company co-founders just like you "going long for them".
The exchange fund allows you to shift part of your portfolio to mirror
the "higher-quality risk profile" of your venture capital backers. Yet,
you still retain a significant percentage of your company shares.
funds offer diversification, venture capital scale returns, higher
likelihood of a liquidity event, possible tax advantages versus a
comparable cash investment in a venture fund and no out of pocket costs
Adishian Law Group, P.C. represents and advises
entrepreneurs, company co-founders, and C-Suite executives on a wide
range of legal and strategic issues, including utilizing exchange funds
as a long-term wealth building tool. If the above sounds like you, call
us and we will be happy to discuss how we can be of service to you.
The information contained is not legal advice and does not establish an
attorney-client relationship. Our contact information is included and
we always offer a free consultation. For more information about the
EXCHANGE FUNDS, START-UPS, VENTURE CAPITAL, PRIVATE COMPANIES and/or
other areas of CORPORATE law, please visit http://www.AdishianLaw.com/,
contact us via email to firstname.lastname@example.org or call us at
415.955.0888 or 310.726.0888. Copyright Adishian Law Group, P.C. 2009.