What is a clawback provision in venture capital?

A clawback is a contractual mechanism that protects LPs from overpaying carried interest. Here's the problem it solves: in a fund that uses deal-by-deal carry distribution, GPs could receive carry on early successful exits even if the fund as a whole ultimately loses money (because later investments fail). The clawback requires GPs to return that excess carry at the end of the fund's life.

Example: A GP receives $10M in carry from early exits. Later investments underperform. At fund wind-down, the calculated carry on the full fund is only $6M. The GP must "claw back" and return $4M to the LPs.

Clawbacks are standard in LP agreements but are sometimes hard to enforce in practice — especially if GPs have already spent or distributed the carry to their partners. To address this, many fund documents require GPs to escrow a portion of carry (often 25-30%) in a separate account until the fund winds down, providing a funded clawback reserve.

European waterfall structures largely avoid the clawback problem by not paying carry until all invested capital is returned first. American waterfall structures distribute carry deal-by-deal, making clawback provisions more important and more often triggered.