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.
Conceptually, 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.
Exchange 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 for participants.
Adishian Law Group is a California law firm with a statewide practice in the areas of Corporate law, Employment law, Real Estate law and Mediation Services. Adishianlaw.com is one of the oldest continually operating law firm websites on the Internet. The firm serves its clientele via three offices located in the major business hubs of El Segundo, Palo Alto and San Francisco. As of March 2013, Adishian Law Group, P.C. has represented individual and corporate clients located across 20 California counties, 4 States outside of California and 9 foreign countries — in over 340 legal matters.
For more information about this topic or to speak with Chris Adishian: