Key Person Clause: What It Is and How to Structure It

Most fund managers don't think carefully about the key person clause until they're negotiating term sheets with institutional LPs — at which point the conversation can get uncomfortable fast. By then, the power dynamic has shifted, and a poorly structured provision can create operational headaches that follow the fund for its entire lifecycle.

Understanding how to draft, negotiate, and activate a key person clause is one of the more consequential skills a fund manager can develop. It's not just a legal formality — it's a signal to LPs about how seriously you take governance, continuity, and accountability.

What Is a Key Person Clause?

A key person clause (also called a key man clause in VC) is a provision in a limited partnership agreement (LPA) that identifies specific individuals whose active involvement is considered essential to the fund's investment strategy. If one or more of those individuals leave the fund, die, become incapacitated, or fail to devote a defined minimum amount of time to fund activities, a key person event is triggered.

When a key person event occurs, the fund's investment activity is typically suspended — meaning the GP loses the ability to make new investments or call capital for new deals — until LPs vote on how to proceed. Depending on the LPA, LPs may be able to remove the GP, dissolve the fund, or simply wait while the GP resolves the situation.

This clause exists because LPs are, in large part, investing in people. A seed fund backed by a single founder-turned-investor with a strong track record is a fundamentally different vehicle if that person exits. The key person provision is the structural mechanism that gives LPs recourse when that happens.

Why It Matters More Than Most GPs Realize

The key person clause is often treated as boilerplate, but it carries real operational and reputational weight.

For GPs, a poorly structured clause can create unnecessary vulnerabilities. If the definition of "active involvement" is too vague, an LP could argue a key person event has occurred even when it hasn't. If the clause names too many people, it becomes almost impossible to avoid a technical trigger during normal team evolution.

For LPs, the clause is a primary governance tool. According to ILPA's model LPA terms, key person provisions are one of the most heavily negotiated elements in fund formation. Institutional LPs — pension funds, endowments, fund-of-funds — will often walk away from a fund that has no key person provision or one that lacks enforcement mechanisms.

The clause also affects secondaries. When a fund is sold in the secondary market, buyers analyze key person provisions carefully. A fund that has already experienced a key person event, or has a clause that's easy to trigger, will typically trade at a discount.

How to Identify Key Persons

The first structural decision is determining who qualifies as a key person. There's no universal standard, but here are the most common approaches:

Naming All Senior Partners

Some funds list every partner at the senior level. This approach gives LPs broad coverage but creates fragility — a single departure triggers a pause in investment activity. For larger firms with deep benches, this can be operationally disruptive.

Named Individuals Only

Most emerging managers and smaller funds go with a narrower list of one to three named individuals. This is particularly common in solo GP funds, where there's typically one person whose continued involvement is truly essential. A fund run by a single GP should almost certainly have that GP named.

Role-Based Definitions

Some LPAs use role-based definitions rather than named individuals — for example, "the individuals serving as Managing Partner and Chief Investment Officer." This approach accommodates succession without requiring LPA amendments, but it can dilute the LP's actual intent if roles are reassigned strategically.

Practical guidance: For funds under $100M, naming one to two individuals is standard. For funds between $100M and $500M, two to four is typical. Mega-funds often use a quorum model — a key person event triggers only if a certain number of named individuals are no longer active simultaneously.

Defining "Active Involvement"

This is where the drafting gets technical and where disputes most often arise.

The clause needs to specify what "devoting time to the fund" actually means. Common formulations include:

• Percentage of professional time: The key person must devote at least 50% (or 75%, or "substantially all") of their professional time to the fund's activities
• Business day minimums: Active involvement defined as working a minimum number of days per quarter on fund business
• Exclusivity requirements: Some LPs push for full exclusivity, meaning the key person cannot simultaneously manage another fund or outside investment vehicle without LP consent

The exclusivity question is particularly important for emerging managers who often run multiple vehicles simultaneously — an accelerator fund, a main fund, and a follow-on vehicle, for example. If the LPA requires 100% exclusivity, the GP could inadvertently trigger a key person event by launching a new SPV.

Best practice: Define time commitment as a percentage of professional time and carve out specific permitted activities explicitly. Spell out whether managing a predecessor fund, serving on portfolio company boards, or participating in angel investing counts as time "away" from the fund.

What Happens When a Key Person Event Is Triggered

A key person event typically produces one of two immediate consequences:

1. Investment Suspension (Automatic Pause)

The most common mechanism. Upon a key person event, the GP's right to make new investments and call capital for new deals is automatically suspended. The fund can still manage existing portfolio companies — it can exercise pro-rata rights, approve follow-on investments already in progress, and handle administrative functions. But it cannot initiate new investments.

2. LP Consent to Resume

To lift the suspension, the GP must typically obtain LP consent — often a majority-in-interest (by commitment, not headcount) or sometimes a supermajority. The LPA should specify:

• The voting threshold required (majority? 66%? 75%?)
• The timeline in which LPs must respond
• What happens if LPs don't respond within the window (deemed consent or deemed rejection?)
• Whether resumption requires the GP to name a replacement key person

Some LPAs allow the GP to propose a cure — naming a replacement, bringing in a new senior partner, or otherwise restructuring the team — before calling an LP vote. This gives the GP an opportunity to resolve the situation without a full-scale LP confrontation.

3. Fund Dissolution Rights

In more LP-friendly structures, a key person event that isn't resolved within a defined cure period (commonly 180 days) gives LPs the right to remove the GP or elect to wind down the fund. This is a significant provision that most GPs should push back on in negotiation, or at minimum ensure the cure period is long enough to be workable.

Common Negotiating Points Between GPs and LPs

Key person clause negotiations often come down to a handful of recurring friction points:

• Who is named: LPs want comprehensive coverage; GPs want a narrower list to avoid fragility
• Time commitment thresholds: LPs prefer strict minimums; GPs want flexibility
• Cure period length: GPs want more time to address the situation; LPs want swift resolution
• Voting threshold to resume: LPs want high bars (supermajority); GPs prefer simple majority
• Concurrent fund activity: LPs may restrict the GP from raising a new fund until the key person issue is resolved
• Definition of departure: Does a key person need to formally resign, or does reduced involvement count? Does a leave of absence trigger the clause?

For emerging managers raising their first institutional fund, it's worth engaging a fund formation attorney who has negotiated these provisions from both sides. The language matters enormously, and small differences in drafting can have major consequences five years down the road.

Key Person Provisions in Emerging Manager Contexts

First-time fund managers face a specific challenge: they often are the key person, and naming themselves creates a clause that's very easy to trigger and difficult to cure. There's no partner to step in, no bench to draw from.

A few structural approaches help here:

• Advisory boards with named advisors: Some managers supplement key person protections by naming senior advisors whose continued involvement provides a secondary layer of assurance to LPs
• Successor GP provisions: Pre-agree with LPs on a process for bringing in a replacement GP or merging with another firm if the key person exits
• Staged capital calls: Structure capital deployment so that early-period investments are made before the fund becomes vulnerable, reducing the damage of a later-stage key person event

Institutional LPs investing in emerging managers often negotiate harder on key person provisions precisely because the team is small and concentration risk is high. Anticipating these concerns and building a thoughtful, well-documented clause into the LPA from the start signals maturity and reduces friction in the fundraise.

Actionable Takeaways

• Draft with specificity: Vague time commitment language creates disputes. Define percentages, carve out permitted activities, and specify what triggers the clause explicitly.
• Match the clause to the fund structure: A solo GP fund needs different protections than a four-partner firm. Don't use a template that doesn't fit.
• Negotiate the cure period: Push for at least 180 days, and ideally include a structured cure process before the LP vote is triggered.
• Think about secondaries: A key person clause that's easy to trigger will affect your fund's value in the secondary market years from now.
• Review the clause every fund cycle: Team composition changes. What made sense in Fund I may not reflect reality in Fund III.

The key person clause isn't just about protecting LPs — it's about building a durable fund structure. Getting it right early means fewer difficult conversations later.