Deal Terms
Co-Investment Right
Last updated
Quick Answer
A contractual privilege allowing LPs to invest directly alongside the fund in specific portfolio companies, typically at no additional management fee or carried interest.
A Co-Investment Right is a provision granting limited partners the opportunity to invest additional capital directly into specific portfolio companies alongside the fund's investment, usually on a no-fee, no-carry basis. This right allows LPs to increase their exposure to the fund's best deals without paying the additional management fee and carried interest layers they pay on their fund commitment. Co-investment rights are highly valued by institutional LPs because they can significantly enhance net returns and allow more concentrated bets on companies the LP finds particularly compelling. The GP benefits by being able to write larger checks (fund + co-invest capital), take more ownership, and deepen LP relationships. Co-investment rights can be contractual (guaranteed in the LPA) or discretionary (offered on a deal-by-deal basis at the GP's discretion). LPs with contractual co-investment rights typically committed larger amounts to the fund.
In Practice
A pension fund commits $50 million to a VC fund and negotiates co-investment rights. When the fund leads a $30 million Series B round, the GP offers the pension fund an opportunity to invest an additional $10 million directly into the company alongside the fund. The pension fund makes this co-investment with zero management fee and zero carry—paying only its pro-rata share of deal expenses—effectively getting exposure at a much lower all-in cost than through the fund alone.
Why It Matters
Co-investment rights are one of the most valuable LP benefits because they allow fee-free access to the GP's best deals. For LPs building a venture portfolio, co-investments can dramatically improve net returns by reducing the blended fee burden. GPs should offer co-investments strategically to their most important LP relationships.
Further Reading
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Frequently Asked Questions
What is Co-Investment Right in venture capital?
A Co-Investment Right is a provision granting limited partners the opportunity to invest additional capital directly into specific portfolio companies alongside the fund's investment, usually on a no-fee, no-carry basis.
Why is Co-Investment Right important for startups?
Understanding Co-Investment Right is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
What category does Co-Investment Right fall under in VC?
Co-Investment Right falls under the deal-terms category in venture capital. This area covers concepts related to the financial and legal terms that define investment agreements.
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