Fund Structure
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Quick Answer
A fund provision allowing LPs to suspend further capital contributions or terminate the fund if a named key GP leaves the fund.
A key person clause (or key man provision) protects LPs from the scenario where the partners they backed leave the firm — fundamentally changing what they invested in. If a named key person (or specified number of key persons) leaves the GP entity, LPs can trigger the key person clause: halting new investments, suspending capital calls, or in extreme cases, triggering fund dissolution. Key person clauses are negotiated carefully: GPs want as few named persons as possible (reducing risk of triggering), while LPs want all important decision-makers named. The clause incentivizes GPs to maintain team stability and succession plans. Key person events don't automatically dissolve funds — they typically trigger a suspension period during which GPs and LPs negotiate a path forward.
In Practice
Suppose Acme Ventures raises a $100M Fund III with Sarah Chen and Marcus Rodriguez designated as key persons, requiring both to remain with the fund. Two years into the fund's life, after deploying $40M across 20 investments, Sarah leaves to start her own fund. The key person clause is triggered, and LPs vote to suspend the investment period. Acme Ventures can no longer make new investments from the remaining $60M, though they can continue managing existing portfolio companies and making follow-on investments in current holdings. The fund enters harvest mode early, focusing solely on supporting existing investments toward exits.
Why It Matters
Key person clauses protect LPs from the risk that the investment expertise they backed will disappear after they've committed capital. Without these provisions, LPs could find themselves stuck in a fund managed by junior partners or replacements they never evaluated. For GPs, key person events can effectively kill a fund's ability to deploy capital, making team stability crucial for fund success. The clause also provides leverage for LPs to negotiate fund restructuring or fee reductions when key personnel depart.
VC Beast Take
Key person clauses have evolved from binary triggers to more sophisticated mechanisms. Modern funds often include cure periods, replacement provisions, or reduced key person requirements as funds mature. The smartest GPs negotiate reasonable substitution rights upfront, recognizing that a decade-plus fund life makes personnel changes inevitable. We're also seeing more nuanced definitions of what constitutes a 'key person departure' — sabbaticals, illness, and even spin-outs are being treated differently than outright resignations.
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This concept is especially relevant for these venture capital roles:
A key person clause (or key man provision) protects LPs from the scenario where the partners they backed leave the firm — fundamentally changing what they invested in.
Understanding Key Person Clause is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Key Person Clause falls under the fund-structure category in venture capital. This area covers concepts related to how venture capital funds are organized, managed, and governed.
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