J UL Y 1 S T , 2 02 0

Understanding Startup Studio and

Venture Studio Legal Structures

PREPARED BY

John Carbrey
Managing Director

T 1-416-889-4977
E john@futuresight.ventures
 CONTENTS

Acknowledgments — Contributors & Consultation........................................................................................ 3

Towards Understanding Startup Studio Structures ....................................................................................... 4
Reviewing The Most Common Startup Studio Structures ............................................................................. 5
Single Fund Model — Fund as Venture Studio ....................................................................................................... 6
Model Diagram ........................................................................................................................................................................................... 6

Key Model Points ...................................................................................................................................................................................... 6

Benefits and Disadvantages .................................................................................................................................................................. 6

Single Fund Model Foundry — Foundry with Bill Back........................................................................................ 7
Model Diagram ........................................................................................................................................................................................... 7

Key Model Points ...................................................................................................................................................................................... 7

Benefits and Disadvantages .................................................................................................................................................................. 7

Dual Entity Model — Fund and Studio Pairing ....................................................................................................... 9
Model Diagram ........................................................................................................................................................................................... 9

Key Model Points ...................................................................................................................................................................................... 9

Benefits and Disadvantages ............................................................................................................................................................... 10

Single Studio Model — Venture Studio Without Fund ......................................................................................11
Model Diagram ........................................................................................................................................................................................ 11

Key Model Points ................................................................................................................................................................................... 11

Benefits and Disadvantages ............................................................................................................................................................... 11

Single Studio Model + Syndicate — Studio with Extended Syndicate ...........................................................13
Model Diagram ........................................................................................................................................................................................ 13

Key Model Points ................................................................................................................................................................................... 13

Benefits and Disadvantages ............................................................................................................................................................... 13

Model Comparisons and Recommendations ................................................................................................ 15

Comparisons ............................................................................................................................................................................................ 15

Recommendations ................................................................................................................................................................................. 15

Appendix A - Ultimate Model — Dual Entity + Syndicate Model .............................................................. 16

UNDERSATNDING STARTUP STUDIO LEGAL STRUCTURES 2

Acknowledgments — Contributors & Consultation
There have been many contributors to this whitepaper. I particularly want to thank Mike Jones at Science who
contributed significant parts of this content. Many thanks to those that provided input as part of the research for
this article including:
• Eric Doherty (Cooley)
• Ash Kirvan (Polymath)
• Alex Bangash (Trusted Insight),
• Emilie Boutros (TandemLaunch) & Helge Seetzen (TandemLaunch)
• Quentin Nickmans (eFounders)
• Alex Maleki (IdeaLab)
• Eva Wang (AI Fund)
• Erik Logerquist
• Sarah Philips (BoulderBits) and
• Attila Szigeti

UNDERSATNDING STARTUP STUDIO LEGAL STRUCTURES 3

Towards Understanding Startup Studio Structures
One of the most common questions for startup studio investors and startup studio founders is around how studios
are structured and what the inherent trade-offs are between various models. As we are in the early days of startup
studios as an asset class, some of the most common questions we receive are the following:
• How are studios structured?
• What structures are working and why?
• What structures are not working and why?
• What are the most sustainable structures for studios?
• What structures optimize alignment between startup studio founders and investors?
• How can studios standardize their structure to meet investors needs?

This whitepaper ultimately strives to answer these key underlying questions. This whitepaper synthesizes the
most frequent approaches, articulates the emerging best practice, and provides a critical comparison of various
models.

In this whitepaper we:

• Explore Five of the Most Common Studio Structures
• Compare the Pros and Cons of Each Approach
• Review and Critique the Various Model Options
• Provide Recommendations on Best Practice Studio Structures

UNDERSATNDING STARTUP STUDIO LEGAL STRUCTURES 4

Reviewing The Most Common Startup Studio Structures
In our research, there are five most common startup studio structures that we are seeing globally. These include
the following:
• Single Fund Model
• Single Fund Model Foundry
• Dual Entity Model
• Single Studio Model
• Single Studio Model + Syndicate

In the following sections, we review each of these models and explore their pros and cons.

UNDERSATNDING STARTUP STUDIO LEGAL STRUCTURES 5

Single Fund Model — Fund as Venture Studio
Model Diagram

Key Model Points

• This is a single fund entity
• It has high fees and high carry to cover incubator costs.
• All equity sits within the fund — both founder provisions and purchased equity

The exception to having high fees and high carry would be in cases where there is a large fund that can finance the
studio operations off of classic VC management fees.

Benefits and Disadvantages

Benefits
• The simplicity of single fund entity

Disadvantages
• High fee load on smaller funds to cover incubation overhead
• High carry allocation across a large incubation team to incentivize operational efforts on incubation
• Signalling issues if the fund does not lead or participate in a funding round
• A high level of fund commitment may bias a decision to stop funding an incubated company or write it down
• Portfolio companies may not get incubated to the point of viability or may get funded before they are ready

UNDERSATNDING STARTUP STUDIO LEGAL STRUCTURES 6

Single Fund Model Foundry — Foundry with Bill Back
Model Diagram

In this approach, you have a fund that is directly investing in NewCos. Each NewCo has the studio founders on the
cap table. Then there is an operating studio where the larger studio team sits with the staff and its associated costs.
A bill back relationship between the NewCos and the operating studios ensures that the operating studio would, in
the end, break-even because the NewCo’s are covering the ongoing costs.

Key Model Points

• This is a single fund entity — a fund with standard carry & fee allocation
• A Limited Partner Advisory Committee (LPAC) agreement allows management and fund staff to have direct
equity allocation in foundry companies
• An LPAC agreement that allows the operating studio to invoice portfolio companies $X / month for overhead
• LP’s receive X% direct allocated equity in a foundry company

Benefits and Disadvantages

Benefits
• Single structure
• Portfolio companies can allocate LP equity from new cap tables — no pre-existing investors or signalling
issues
• LP direct equity is not subject to the fund’s carry provisions
• NewCos pay for management overhead instead of LP’s
• LP’s could potentially receive direct equity allocation

UNDERSATNDING STARTUP STUDIO LEGAL STRUCTURES 7

Disadvantages

The largest disadvantage in this model is that there is a potential misalignment between investors and studio
founders. The key challenge is aligning investor interests when the studio founders are involved as founders and as
follow-on investors in these companies.

Other disadvantages include:

• Studio management incentivized to create more companies to increase overhead/fee load
• Studio management incentivized to focus on single winning companies due to direct management allocation
on companies
• Fund returns may not correlate with management returns
• No/limited ability to incubate companies that are not conceived and initially owned by the foundry
• Significant risk that fees are not collected from all companies, materially affecting the operational cash flow
of the foundry
• Outside investor signalling — why aren’t LP direct investors leading or participating?
• Outside investor reaction — billing companies is a non-standard VC practice

UNDERSATNDING STARTUP STUDIO LEGAL STRUCTURES 8

Dual Entity Model — Fund and Studio Pairing
Model Diagram

This structure is a dual structure with distinct studio and fund elements. When you are creating NewCos, the studio
receives common shares, and the fund receives preferred shares in the companies that spin out.

The fund is comparable to a VC fund in the structure where the management fee charged by the studio is 2–2.5%
per year with similar carry. As venture studios typically have higher expenses than a 2% management fee,
particularly in the early stage of the studio, given the initial limited fund size, the fund’s first investment would be in
the studio itself. That investment has the benefit of giving the fund access to a portion of the common shares that
typically would go to the studio. This investment doesn’t have to be structured as an equity interest in the studio; it
could be a debt instrument. In either case, the understanding is that a portion of the common shares are given to
the fund as part of its investment in formation.

Key Model Points

• Dual entity model
• Fund with standard carry & fee allocation
• Studio with X% owned by fund through $Y investment
• No restrictions on the use of Studio capital for incubation operations
• Studio allows fund a pre-funding right at preferred terms
• Studio syndicates future pro-rata rights to the fund from incubated common equity at $0 cost

The syndication of future pro-rata rights is a significant benefit studios can offer and, it is distinct from what a
typical VC would offer. If you were able to double down in a normal seed VC scenario, investors could quadruple
down on breakout companies in a studio context.

Note: Dual Entity is similar but different than having an OpCo with a side-car fund. In an OpCo with a side-car fund,
the alignment of studio founders and fund investors is not as strong as what is proposed here.

UNDERSATNDING STARTUP STUDIO LEGAL STRUCTURES 9

Benefits and Disadvantages

Benefits
• Management aligned with investors across both vehicles
• No direct equity in incubated companies placed in studio management or studio staff names directly
• Low cost on failed incubated concepts or companies
• Allows for studio management alignment with LP’s
• No “win” for management without a win for LP’s both through ownership in the studio as well as fund
exposure to incubated companies
• Provides a built-in viability checkpoint for fund investment — fund investment requires solid fundamentals,
team and GP conviction

Disadvantages
• Dual structure complexity
• Variable cost on Fund’s incubated company equity depending on the number of companies incubated

UNDERSATNDING STARTUP STUDIO LEGAL STRUCTURES 10

Single Studio Model — Venture Studio Without Fund
Model Diagram

This model is as simple as you can get. There is a studio that is forming and funding NewCos. The studio may have
common and/or preferred interest in the NewCo’s. But there are significant trade-offs.

Key Model Points

• No carry / no fee economics
• LP’s purchase a fixed % ownership in studio and studio management owns the remainder
• LP’s contribute full capital at the time of subscription
• Studio agrees to operate for a set number of years, typically 3, and draws capital as needed
• Studio typically assigns pro-rata rights/financing right of first offer to LP’s

Benefits and Disadvantages

Benefits
• Nimble for evaluating concepts at-will
• Simple structure
• Studio determines necessary staffing level and capital allocation for projects

Disadvantages

Startup studios are hugely capital intensive. Studios need a significant amount of capital initially to create
companies and the successful companies need upwards of 10–20x more capital than the studio initially invests as
they grow. In this case, the studio and investors are not getting the value that they typically would in a VC fund
from their pro-rata rights. While this is solved in the Dual Entity Structure, in this model the studio isn’t able to
capture that follow-on value over time.

Other disadvantages include:

• This model needs an associated fund to leverage the full value of ROFR and pro-rata
• Complicated process to get LP’s to lead rounds or co-invest

UNDERSATNDING STARTUP STUDIO LEGAL STRUCTURES 11

• This alternative structure is difficult to benchmark against traditional funds
• High level of fund commitment may bias a decision to stop funding an incubated company or write it down
• Spending discipline required to avoid investing too deeply in a single company or giving up too early

UNDERSATNDING STARTUP STUDIO LEGAL STRUCTURES 12

Single Studio Model + Syndicate — Studio with Extended
Syndicate
Model Diagram

This model takes the idea of the Single Studio Model but mitigates some of the negatives of that model with the
addition of a syndicate. The studio is creating NewCos and when these NewCos need additional investment you
create single-purpose vehicles (SPVs) to enable LP’s or a syndicate of angel investors to invest through or alongside
the studio.

Key Model Points

• This model introduces the concept of an investor syndicate
• Captures carry through an SPV on follow-on rounds unlike single studio model
• No management fee economics from a fund
• No pre-committed fund capital available to be deployed for follow-on

Benefits and Disadvantages

Benefits
• Relative to the individual studio, this model captures most of the value of ROFR and pro-rata
• SPV typically gives control rights to studio GPs
• Nimble for evaluating concepts at-will
• Simple studio structure
• Studio determines necessary staffing levels and capital allocation for projects
• Syndicate platforms like Zenvest massively simplify follow-on funding

Disadvantages
• Difficult process to get investor syndicate up and running and enable co-investment

UNDERSATNDING STARTUP STUDIO LEGAL STRUCTURES 13

• Investor syndicate is not committing to the company creation program but rather individual deals — as a
result, some ventures may not be able to be capitalized from the syndicate
• Potential to have alignment issues since studio and investor syndicate ownership are not the same

UNDERSATNDING STARTUP STUDIO LEGAL STRUCTURES 14

Model Comparisons and Recommendations
Comparisons
As a way to synthesize the research above, below is a comparison of the various models with key pros and cons of
each.

Recommendations
Overall, the diversity of models and structures can be quite confusing to investors to whom venture studios are new.
It is important that venture studios standardize on the model and approach where possible.

Based on the research and comparisons above we propose that the Dual Entity Model or Single Studio +
Syndicate seem best when evaluated objectively.

UNDERSATNDING STARTUP STUDIO LEGAL STRUCTURES 15

Appendix A - Ultimate Model — Dual Entity + Syndicate
Model

If we were to design the “perfect” model, it would be a combination of these two recommended approaches. You
would have the dual entity model but there are still some pro-rata rights that may not be fully captured. To ensure
you capture the economic value of all those rights you could open those up through SPV’s to a larger syndicate of
investors. This would be an upgrade to either of these two models once you get up and running.

UNDERSATNDING STARTUP STUDIO LEGAL STRUCTURES 16