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The ideal studio structures, with Byron Dailey — Partner at Fenwick

September 27, 2023

Establishing the ideal legal structure for a startup studio is no easy feat—it’s complicated, perplexing, and costly, often leaving investors bemused and reluctant.

Many new studio GPs incur $200k+ in legal fees over 18 months trying to decipher the model.

But what if there was a more refined, scrutinized, and clear approach to studio structures?

I recently met Byron Dailey at Fenwick, a prestigious law firm, who has conceived the most cogent and extensive series of studio structures ever seen.

A few years ago, Byron saw that there was no established, customary way to organize a venture studio or even it’s cousins; accelerators and incubators. He set out develop models that tackle the most pressing long-term and short-term issues that studios face, including tax, IP, and securities laws.

Byron and I recently sat down to uncover his models and frameworks, revealing the inherent benefits and limitations of each.

We invite you to delve into this deep-dive, uncovering methodologies and structures that might be the key to your startup studio’s success.

I urge studio GPs and those thinking of launching a studio to watch the full video (linked above) and refer back to this article as needed. It is crucial to spend a little more money upfront with sophisticated, experienced advisors to develop proper structures, because you will end up saving a LOT more money in the long haul when you have successful, exited companies in your portfolio.

For a more personalized guide to structuring your studio, I encourage you to connect with Byron directly. If you are interested, please email me here, and I’ll ensure a warm introduction.

Let’s dive in!

Crucial Considerations

Byron developed his models based on several foundational considerations to ensure clarity, compliance, and efficiency:

Flexibility in Capital Intake:

The models should allow for the acceptance of additional capital in future raises as portfolio companies expand.

Transparent Communication with LPs:

It's imperative that the models explicitly convey to LPs their actual investments to eliminate any potential confusion.

Tax Efficiency:

The structures should protect GPs from paying excess taxes as their portfolio companies exit or IPO.

Proper IP Ownership:

It’s critical that the right intellectual properties are owned by the appropriate entities.

Compliance with Securities Laws:

The models must strictly comply with all applicable securities laws.

The Models

Startup Portfolio Standard Framework

When Byron starts his discussions with new studios, he typically begins with the Standard Framework in mind.

In this model, there is one operating company, called the OpCo. It is an LLC. The OpCo is essentially where the R&D happens, where the IP creation happens, and where the employees are employed.

In this model, investors are investing in the “Startup NewCo’s” created by the studio. They are NOT investing in the OpCo. All the economics are run through Startup Portfolio 1 (the OpCo), and then the upside is split between the studio team and investors.

When pitching to potential LPs, the only thing you really want to show is the entity that they’re going to invest in , and more importantly, the actual startups that they’ll have ownership in. We encourage you to not confuse them with much more than that.

Benefits of the Standard Framework:

— Investors are investing in the success of the portfolio of Startup NewCos formed with their capital.

— The focus is on the ultimate performance of startups rather than the Studio Opco itself, and where success is based on proceeds from the startups, which can be revenue-based or exit-based.

— All necessary IP ends up owned by the startups, as required for their future financings and exits; and the IP gets to the startups in a tax efficient manner.

— Exits are tax efficient, as there are no extra layers of taxation. Investors can immediately benefit from startup exits, because net proceeds are distributed.

— Incentive compensation is aligned with the interests of investors, because it is based on net performance of the portfolio of startups.

— Incentive compensation is structured as tax-advantaged profits interest that complies with deferred compensation and other IRS rules.

— Studio employees don’t need to be accredited investors to receive the profits interests.

— Later rounds of fundraising don’t dilute earlier investors; instead, they are used to form a new portfolio (see next diagram).

Now, let’s look at how the Standard Framework evolves as your studio and your portfolio companies grow.

Successor Portfolio

At this point, you may be asking, “but what happens if I’ve raised the money from my first group of investors for my first few startups, following the standard framework, but now I want to build some more startups and continue to grow the studio?”

Essentially, you do not want to layer capital into the original model that you already raised money into.

Instead, develop a “Successor Portfolio”.

This includes a handful of benefits:

— You do not need to value the startups in Portfolio 1 in order to raise more capital to build more startups.

— You do not need complex layers of capital from old and new investors.

— Maintain clear incentive alignment between the Studio team and the investors in specific portfolios.

Raising Additional Capital Into Portfolio Companies

What happens when your startups gain some traction and are independently growing and need to raise some capital on their own?

As a studio, you can raise your own “opportunity fund” to deploy capital into your most exciting startups that you’ve created, which allows you to maintain as much ownership as possible along their lifecycle.

Alternative Starting Points

We’ve seen hundreds of new studios pop-up, but before they raise a bunch of money, they need to prove to LPs that they’re great at building multiple companies in parallel. This can be done in 12-18 months with roughly $1M. Here are two models that are of the utmost simplicity, but do come with a handful of (not so serious) limitations:

Single Entity Model

This is the simplest model.

Think of the Single Entity Model as, “I’m just going to start some startups, and prove that I’m great at building multiple companies.

This is really great if you want to start with a million or a few million dollars and then want to evolve from this model as you grow. It’s a great place to start if you have no investors and are self-funding the launch of the studio, or have a just a handful of investors. Additionally, this is a great model if you have a small team of a handful of operators.

But, you do need to be aware of a few limitations and challenges of this model:

— This model does not accommodate incentive equity grants to Studio employees.

— It requires clear delineation in the operating agreement that Investors participate only in the economic results of the portfolio.

— It entangles Investors in the operating company, even if they’re only investing for the portfolio of startups.

— Even if this model evolves into the more fully developed model, these Investors will always have rights as members of the Studio OpCo until their portfolio has fully liquidated.

Two-Entity Model

If you’re looking for a model that is slightly more evolved than the Single-Entity Model, the Two-Entity Model may be a good starting point.

The most common consideration for choosing this model is if you are raising $3-5M to prove your concept, and want to hire 3-5 people right out of the gates. This model also allows you to offer incentive equity to those employees.

But again, be aware of a few limitations of this model:

— It directly intermingles Investors with Studio Employees and founders in a single entity, potentially giving everyone visibility into everyone else’s relative stakes and rights (which we can fix by adding an Incentive LLC).

— It may require all Studio employees to be accredited investors (which can be fixed by adding a HoldCo LLC).

Virtual Portfolio Companies; Accelerator

Lastly, we felt it was crucial to address a very common scenario that new studios face, where they have a mix of Studio-created companies and externally formed companies.

Benefits of this model:

— The studio team can operate multiple startups through initial development and growth.

— Startups can hire full-time team when justified and needed

— Studio OpCo can provide services (development, operational, consulting) directly to startups

— The Portfolio LLC can purchase shares in the externally formed startups and the startups can pay some or all of the purchase price to Studio for the services.

One common question that many new studios face is, can a VC invest in this model?

The answer is yes, if you can solve two issues:

A VC that is relying on the VC exemption from registering as an RIA will have regulatory limitations on how much of any of its funds (20%) can invest in an “investment company”.

— If the VC is not relying on the VC exemption, this is not applicable.

— The VC may have enough leeway to invest under this limitation.

— You may be able to provide the VC with comfort that the Startup Portfolio LLC is not an“investment company,” or you may be able to build in features that prevent it from being one. This is a complex analysis but can be solved here.

A VC will often have contractual limitations in its LPA on how much of the fund (usually 20%) can invest in pooled investment vehicles with fee and/or carry type economics (fund-of-funds limitations).

— The VC may have enough leeway to invest under this limitation

— You can modify the features of this model to avoid this limitation. Potentially tricky, butprobably solvable.


Navigating the intricacies of structuring a startup studio can be a daunting endeavor, but it doesn't have to be. Start with a simple approach, and as you gain understanding and insight, adjust and refine your model as required.

Never underestimate the power of expert guidance from the outset—it can potentially save you from colossal fees in the future. Byron is an authority in this space, and I can't stress enough the value of his expertise. Do consider meeting with him for a free consultation. If you are interested, please email me here and I will facilitate a warm introduction.

While every model is uniquely tailored to suit individual needs, the core principle remains constant: clarity and simplicity are paramount. To truly grasp the depth of the strategies and models discussed here, I recommend watching the full episode in detail. The insights you'll garner could be pivotal to your startup studio's success.

As always, keep building!

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