Fund formation: A strategic blueprint

Author: The Carta Team
Read time: 10 minutes
Published date: 25 February 2026

Understand the complete process of fund formation, including the key legal, regulatory, and operational steps for launching a private fund or special purpose vehicle.

What is fund formation?

Fund formation is the complete legal, regulatory, and operational process of creating a pooled investment vehicle, like a venture capital (VC) fund, private equity (PE) fund, or special purpose vehicle (SPV). This process includes structuring the fund, drafting legal documents, securing capital from investors, and ensuring you comply with all securities laws. The decisions you make during this initial stage establish the foundation for your fund's entire lifecycle.

Fund formation is the creation of the operational blueprint for your fund. The choices you make around structure, terms, and service providers will directly impact your future efficiency, regulatory compliance, and investor relationships. A strategic, integrated approach from day one prevents operational debt—the rework caused by choosing manual or disconnected systems—and sets the stage for long-term success.

Key fund structures and vehicles

After you understand the concept of fund formation, the first major strategic decision you will make as a fund manager is choosing the right fund structure. This choice depends on your specific alternative investment strategy, the types of investors you plan to bring on, and your long-term goals for your firm.

The two primary structures used by fund managers are traditional private investment funds and SPVs. Each serves a different purpose and is suited for different investment strategies, so understanding the distinction is your first step.

Private investment funds

A traditional private investment fund, often a PE or VC fund, is a long-term investment vehicle designed to make multiple investments from a committed pool of capital. These funds are typically structured as a limited partnership and operate over a period of several years. While the initial period for making new investments has a median length of five years, the total fund term is often 10 years. This long-term structure is necessary because VC-backed companies continue to stay private for longer, and while VCs earn an average 12% return, 95% of those returns are generated by the top 5% of investors, underscoring the need for a disciplined, long-term strategy for liquidity.

Special purpose vehicles (SPV)

A special purpose vehicle (SPV) is a distinct legal entity created to pool capital from multiple investors for a single, specific investment. This stands in contrast to the multi-investment nature of a traditional fund, offering a more focused, deal-by-deal approach to co-investment and investing.

How to form a fund: A step-by-step guide

Now that you understand the basic structures, you can begin the process of forming your fund. The following steps provide an actionable playbook that can help you navigate the complexities offund formation and set you apart from those who take a less structured approach. Following a clear process ensures you don't miss critical legal or operational details.

Step 1: Define your fund thesis and model

Before any legal work begins, your investment thesis codifies your fund's strategy. A fund thesis is the story and strategy that will guide your portfolio construction and investment decisions, explaining what you invest in, why you are uniquely suited to do so, and how you will generate returns for your investors.

Step 2: Assemble your formation team

Forming a fund is a team sport that requires specialized external partners to navigate the legal, financial, and operational complexities. Assembling the right team from the outset is essential to a smooth and compliant launch, as each partner plays a distinct and vital role.

Your core formation team will typically include:

• Legal counsel: A fund formation law firm or attorney is essential for providing legal advice, structuring the fund, and drafting the governing documents. They ensure your fund is set up correctly from a legal and regulatory standpoint.
• Tax advisor: A tax professional ensures the fund is structured for tax efficiency for both you and your investors. They help navigate complex domestic and international regulations as tax issues can significantly impact returns.
• Auditor: An independent audit firm will be required to review the fund's financials annually. This provides a necessary layer of validation and transparency for your LPs.
• Fund administrator: A fund administrator provides the technology and services to manage fund administration and the fund's day-to-day operations.

Step 3: Structure your entities

The standard investment fund legal entity structure involves creating three separate legal entities. This separation limits liability and creates a clear operational framework for managing the fund and its investments.

Step 4: Draft governing documents

Your legal counsel will draft the key documents that govern the fund's operation and its relationship with investors. These documents are the legal backbone of your fund, and getting them right is paramount. The two most important documents are the limited partnership agreement (LPA) and the term sheet.

Step 5: Set up fund operations

With the legal structure in place, the next step is to establish the essential day zero (operational tasks that bring the fund to life). This includes opening a dedicated bank account for the fund, which is necessary to hold investor capital and manage all fund-related expenses.

Step 6: Onboard investors and close the fund

The final step in the formation process is to onboard your fund investors and collect their capital commitments.

Key regulatory considerations for fund managers

Throughout the formation process, you must navigate a complex regulatory landscape to ensure compliance. These rules are designed to protect investors and maintain the integrity of the private markets, and failure to comply can have serious consequences.

Budgeting for fund formation and ongoing operations

An important and often underestimated aspect of launching a fund is budgeting for both the initial organizational costs and expenses. For emerging managers, understanding these costs is essential for building a sustainable firm. According to a Carta analysis of about 2,000 private funds, the median VC fund between $1 million and $10 million in size spends about 3.4% of its committed capital on operating expenses during its first five years.