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.
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