LPA Template for Venture Capital: Key Terms and Structure Guide

Management Fee

The management fee is the annual fee charged by the GP to cover fund operating expenses — salaries, office rent, travel, legal, and other overhead. The market-standard fee is 2% per year of committed capital during the investment period (typically years 1–5) and then steps down to 1.5–2% of invested capital (net invested capital or cost basis of remaining investments) for the remainder of the fund term.

For emerging managers with smaller funds (under $25 million), it is common and generally accepted to charge 2.5% during the investment period. The rationale is simple: 2% of a $15 million fund generates only $300,000 annually, which may not cover basic operating costs. LPs understand this math and are typically comfortable with a higher rate on small funds, provided the fee steps down appropriately and the overall fee load across the fund life is reasonable.

Market standard: 2% on committed capital during investment period, stepping down to 1.5–2% on invested capital thereafter

Carried Interest

Carried interest is the GP's share of the fund's investment profits — the primary way fund managers make money beyond management fees. The standard VC carry rate is 20% of net profits, meaning LPs receive 80% and the GP receives 20% of gains above contributed capital.

In venture capital, carry is almost universally calculated on a whole-fund (aggregate) basis rather than a deal-by-deal basis. This means the GP earns carry only after all contributed capital has been returned to LPs across the entire portfolio. Some funds include a preferred return (hurdle rate) — typically 8% — that LPs must earn before the GP participates in profits. While preferred returns are standard in buyout and growth equity, they are less common in early-stage VC, where the return profile is more binary and the J-curve is more pronounced.

Market standard: 20% carried interest, whole-fund basis, with or without 8% preferred return

Hurdle Rate (Preferred Return)

The hurdle rate, also called the preferred return, is the minimum annual return that LPs must receive before the GP earns any carried interest. When included, the standard hurdle is 8% per year (compounded). If the fund returns less than the hurdle rate, the GP receives no carry regardless of absolute returns.

When a hurdle is included, the LPA must also specify whether the GP receives a catch-up. A 100% catch-up means that once LPs have received their preferred return, the GP receives 100% of subsequent distributions until they have caught up to their 20% carry on total profits. After catch-up, distributions revert to the standard 80/20 split. Without a catch-up, the GP receives 20% only on profits above the hurdle, which significantly reduces total carry on moderate-return funds.

Market standard: 8% preferred return with 100% GP catch-up (when included); many early-stage VC funds have no hurdle

Clawback Provision

The clawback is a contractual obligation requiring the GP to return excess carried interest distributions if, at the end of the fund's life, the GP has received more carry than they were entitled to based on final fund performance. This happens when early exits are profitable (triggering carry distributions) but later investments lose money, bringing the overall fund return below the carry threshold.

LPs view the clawback as essential protection. Without it, a GP could receive significant carry from one early winner and keep it even if the rest of the portfolio fails. Most LPAs require GPs to escrow 20–30% of carry distributions as a clawback reserve, reducing the risk of a GP being unable to return excess carry at fund dissolution.

Fund Term and Extensions

The standard VC fund term is 10 years from the final close, with two or three optional one-year extensions that the GP can exercise with LP consent (or sometimes unilaterally for the first extension). The investment period — the window during which the GP can make new investments — typically runs for 3–5 years from the final close. After the investment period, the GP can only make follow-on investments (using reserved capital) and must focus on managing existing portfolio companies toward exits.

Market standard: 10-year fund term with 2–3 one-year extension options; 3–5 year investment period

Key Person Provisions

The key person clause identifies the individuals whose continued, active involvement is essential to the fund's operation. If a key person departs, is incapacitated, or reduces their time commitment below a specified threshold (typically 50–75% of their professional time), the investment period is automatically suspended. The GP cannot make new investments during the suspension.

The suspension typically continues until either the key person issue is resolved or a supermajority of LPs (usually 66–75% by commitment) votes to lift the suspension and allow the fund to continue investing. For single-GP funds, the key person clause is especially critical — if the sole GP becomes unavailable, LPs need a clear mechanism to protect their capital.

Investment Restrictions

Investment restrictions define the boundaries within which the GP must operate. Common restrictions include maximum concentration limits (no single investment exceeding 10–15% of committed capital), prohibitions on certain asset types (public securities, real estate, debt instruments), geographic restrictions, and stage-specific constraints. These restrictions protect LPs from style drift — a GP who raises a seed fund but then starts writing growth-stage checks.

Smart managers draft investment restrictions that are specific enough to give LPs comfort but flexible enough to accommodate the inevitable evolution of market opportunities. Overly narrow restrictions can hamstring a fund, while overly broad ones may concern institutional LPs who want to understand exactly how their capital will be deployed.

LP Advisory Committee (LPAC)

The LPAC is a committee of LP representatives (typically 3–5 members, drawn from the fund's largest investors) that provides guidance on conflicts of interest, valuation matters, and other situations where the GP may have divided loyalties. The LPAC does not have management authority — it serves an advisory and oversight role.

Common LPAC approval matters include co-investment alongside the fund, transactions involving GP affiliates, changes to the fund's valuation methodology, extension of the fund term, and any situation where the GP has a material conflict of interest. For emerging managers, a well-structured LPAC can actually be an asset — it gives larger LPs a sense of involvement and can help build deeper relationships with your most important investors.

Distribution Waterfall

The distribution waterfall defines the order in which fund proceeds are distributed to LPs and the GP. The standard VC waterfall follows this sequence: first, return of contributed capital to LPs (return of capital); second, preferred return to LPs (if applicable); third, GP catch-up (if applicable); and fourth, remaining proceeds split 80/20 between LPs and GP (carried interest).

In practice, most VC funds distribute proceeds on a deal-by-deal basis as exits occur, rather than waiting for the entire fund to be liquidated. This creates the possibility of the GP receiving carry early from a successful exit that may need to be returned via clawback if later investments underperform. The waterfall mechanics must be clearly specified, including how recycled capital (reinvesting proceeds from early exits) affects the waterfall calculations.

Indemnification & Exculpation

Indemnification provisions protect the GP and its personnel from liability arising from actions taken in good faith in connection with fund business. The standard carve-out excludes protection for fraud, gross negligence, willful misconduct, and material breaches of the LPA. Exculpation clauses similarly limit the GP's liability to LPs, provided the GP acts within the agreed-upon scope of authority and exercises reasonable care. These provisions are standard in VC fund LPAs and provide essential protection for GPs making inherently risky early-stage investments. LPs accept this framework because they understand that venture investing involves high failure rates — they want protection against malfeasance, not against bad investment outcomes.