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How to think about technology investments portfolio
Technology investments portfolio vehicles: who holds the shares, what a unit in a single-deal vehicle really is, and the questions to ask before joining one.
Two people can hold what looks like the same investment and own completely different things. One holds shares directly. The other holds a unit in a vehicle that holds shares, alongside strangers, managed by somebody who takes a cut and makes the decisions.
This page is about those vehicles. It sets out what each one is, who actually holds the paper, and what a person's stake in a technology investments portfolio really consists of. The vehicles named further down are celebrity-backed funds, and they sit in the same LLCs and LPs everyone else uses. Fee figures appear as market norms, not as terms published by any single vehicle.
What to take away
- A portfolio of technology investments is usually a portfolio of positions in vehicles, not a portfolio of companies.
- The vehicle decides who signs, who is informed, who can sell, and who is paid first.
- Where a name attracted the other investors, the person is being paid in access rather than in money, and that has consequences at exit.
Five vehicles
Who holds the shares
- Direct holding
- The individual
- A personal holding company
- The individual's company
- A single-deal vehicle
- The vehicle
- A fund
- The fund
- A syndicate or club
- Varies, often a vehicle per deal
Who decides
- Direct holding
- The individual
- A personal holding company
- The individual
- A single-deal vehicle
- The organizer
- A fund
- The manager, within a mandate
- A syndicate or club
- A lead investor
What the investor holds
- Direct holding
- Shares, and the obligations attached
- A personal holding company
- Shares in their own company
- A single-deal vehicle
- A unit in a vehicle with one asset
- A fund
- A commitment, drawn down over time
- A syndicate or club
- A unit, and a relationship with the lead
Most vehicles in the middle three rows are limited liability companies or limited partnerships. That choice affects taxes and liability, not glamour.
The guide to choosing a business structure outlines those options. The note on the limited liability company explains how one entity can be taxed several ways.
What the LLC or LP choice changes
An LLC is taxed as a pass-through by default: income and loss land on the members' own returns. Members are not personally liable for the entity's debts. A multiple-member LLC files a partnership return and issues each member a Schedule K-1.
An LP has a general partner who is personally liable, and limited partners who are not, provided they stay out of control. Tax is pass-through in the ordinary case.
Self-employment tax can reach a member's distributive share in an LLC and usually does not reach a limited partner's share in an LP. State fees and annual reports differ by state. A K-1 typically arrives later than a Form 1099 and can force a filing extension.
What a single-deal vehicle changes
A vehicle formed for one investment collects money from several people, buys one position, and holds it until an exit. That is efficient for the company being invested in, which sees one name on its share register instead of forty.
For the investor it changes four things.
What a single-deal vehicle changes
- Your name is not on the register
- No direct company relationship or rights
- You cannot sell your position independently
- Organizer takes a share of the gain
- Visibility. The investor receives reports from the organizer, not the company's own updates.
- Control. The organizer votes the shares.
- Liquidity. A unit can be sold only if the documents permit it, often with consent.
- Order of payment. Fees and expenses come out first, and some vehicles pay investors a preferred return before the organizer takes a share.
A typical single-deal vehicle is an LLC. It charges about 2 percent of committed capital, once or annually, and 20 percent of profit above a preferred return in the region of 8 percent.
Reporting is usually quarterly, with an annual statement that may or may not be audited. Those are market norms for the structure, and a vehicle's own documents decide which apply.
The celebrity companies portfolio page describes five different containers that all get called a portfolio, and this is the version of that problem specific to technology investing.
Who owes what to whom
An organizer or manager running other people's money is in a position of trust. That obligation is summarized in the note on fiduciary duty.
What the duty requires in a given vehicle is set by its own documents. Those documents routinely permit things an investor would not assume. They allow investing alongside the vehicle, taking fees from the company as well as from investors, and allocating opportunities between vehicles the manager also runs.
None of that is improper when disclosed. All of it is invisible unless somebody reads the documents.
The position a well-known name is usually in
Where someone's involvement attracted other investors, they often get terms others do not.
Those can include a share of the organizer's economics, an allocation at a preferential price, or free units in exchange for the association.
That has three consequences worth stating plainly. Their return is not the same as their co-investors'. Their incentive to promote the deal is different. And a public claim that they "invested" is compatible with them having paid nothing. The technology investments page sets out the five separate things that word can mean.
Celebrity-backed technology vehicles are the same containers with a famous name on the cover. Sound Ventures, the fund Ashton Kutcher and Guy Oseary run, holds its technology positions through classic fund and single-deal vehicles. Marcy Venture Partners, co-founded by Jay-Z, Serena Williams's Serena Ventures, and Kevin Durant and Rich Kleiman's Thirty Five Ventures work the same way. Kutcher's earlier vehicle, A-Grade Investments, held early positions in Airbnb, Uber and Spotify — companies a reader can check long before the terms of the vehicle that held them.
What public records do and do not show
- State business registries, run by the secretary of state where the vehicle was formed, which show formation and status but not holdings.
- Company registers, which may show a vehicle on a cap table but not who is inside it.
- Form D filings made with the SEC under Regulation D, which show that a vehicle raised money without showing from whom.
- Announcements, which are written by the participants.
Nothing in that list shows what anyone paid or what they own. The portfolio case studies page sets the evidence standard, and this category sits near the bottom of it: technology holdings are among the least visible arrangements described anywhere on this site.
Questions to ask before joining a vehicle
Questions before joining
- What exactly will I ownshares, or a unit in something that owns shares?
- Who is the organizer, what are they paid, and when?
- Are they investing their own money on the same terms?
- What information will I receive, and how often?
- What happens if the company raises again and the vehicle cannot follow?
- Who decides when to sell, and can they sell without asking me?
Those questions are answerable before signing and unanswerable after. The media companies portfolio page describes a parallel structure in a different sector.
Documents to read before signing
Documents to read
- The operating agreement or partnership agreement, including fees, carry and what the manager may do without a vote.
- The subscription documents, including the representations the investor is asked to make.
- Any side letter, where terms for one investor sit and other investors cannot see them.
- The private placement memorandum, and the risk factors in it.
- Examples of past reports, so the promised cadence can be checked against what was delivered.
Common questions
Is a fund better than a single-deal vehicle?
It spreads risk and it commits you to decisions you have not seen. A single-deal vehicle lets you choose each time and concentrates everything. Neither is safer in the abstract.
Why would anyone invest through a vehicle rather than directly?
Because most rounds are not open to small amounts. A vehicle aggregates them into one line that the company will accept.
Can I check what a vehicle holds?
Usually not from public records. You are relying on reporting from the organizer, which is why the documents governing that reporting matter more than the pitch.
Does a well-known name in a round tell me anything?
It tells you the round was marketable. It says nothing about price, terms, or whether that person paid anything at all.
