Fund agreements will typically contain a section dedicated to what types of fees, services, and other expenses can be allocated to the Fund (“Fund Expenses”). This means, for any specified Fund Expense, the Fund Manager will be permitted to use the Fund’s available capital to pay for such Fund Expense (or the Fund Manager can reimburse itself if the expense came out-of-pocket). While Fund Expenses can vary drastically from one Fund agreement to another, there are some common categories of permitted Fund Expenses:
- Legal or accounting expenses in connection with Fund matters; annual audits (if the Fund is audited);
- Formation expenses in connection with forming the Fund entity;
- Regulatory filings for the Fund (e.g., Form D);
- Expenses incurred with the winding down of the Fund;
- Marketing expenses of the Fund (e.g., preparing pitch books); and
- Due diligence expenses on potential Fund investments.
The following are typically not permitted Fund Expenses:
- Meals or entertainment with LPs or potential LPs;
- Travel expenses to meet with potential LPs;
- Computers, cell phones or other office equipment used by the Fund Manager (or its team members);
- Form ADV filings; and
- Conferences to meet potential LPs.
*Note - Every Fund agreement is different, and some agreements may permit a wider variety of Fund Expenses. When launching a Fund, a Fund Manager typically works with counsel to properly draft and craft the Fund Expense section as needed to fit the Fund Manager’s specific needs.
Fund Expense provisions can be a highly negotiated subject between Fund Managers and their LPs. It is also worth noting that Fund Expenses and more generally, the misuse of LP contributions, tend to be a source of SEC enforcement and action against Fund Managers. Given Fund Managers will typically owe fiduciary duties to the Fund and its investors, Fund Managers should be cautious about expensing any service or fee that is not explicitly permitted by the Fund’s governing agreement. In situations where a Fund Manager would like to expense a fee or service that is not specifically addressed in the Fund’s governing agreement, the Fund Manager may consider amending the agreement (with LP consent) to permit charging the expense to the Fund.
For Fund Managers using an AL-Advised Fund or SPV setup, if you have a question about a potential expense, we would recommend contacting your existing Venture Associate prior to incurring or seeking reimbursement from the Fund.
For Fund Managers using a Self-Advised Fund or SPV, if you have a question about a potential expense, we would recommend contacting legal counsel.