After a meeting with another lawyer, we got a deeper glimpse at the structure of a typical venture fund:
There is a General Partnership LLC which contains all the managers of the fund, and any other Special Limited Partners. These people generally run the fund operations.
A Limited Partnership also exists, of which the General Partnership LLC is a General Partner. This Limited Partnership also contains all the investors of the fund, but investors are only limited partners and generally do not participate in active management.
Then there is a management entity, typically a corporation or LLC, which hires all the operations people that do work for the fund. This is hired by the Limited Partnership. This management entity pays all payroll and infrastructure costs.
The Limited Partnership then goes and invests into new businesses. It is basically the venture fund itself.
Profits on investment flow in three directions.
There is a management fee that goes to the management entity, and then there are the profits, which go in two directions – to the investors, and to the General Partners LLC.
A typical deal is “2/20”, where there are 2% management fees off invested capital, and 20% profits that go to the General Partnership LLC for identifying/managing/creating the opportunities. The other 80% profits go to the investors as return on their investment.