Fund Structure
No-Fault Divorce Clause
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Quick Answer
A fund provision allowing LPs to remove the GP or suspend the investment period without proving cause, typically requiring a supermajority vote.
What it is
A No-Fault Divorce Clause is a provision in the Limited Partnership Agreement that allows a supermajority of LPs (typically 66.7-80%) to suspend or terminate the GP's investment period, and in some cases remove the GP entirely, without needing to prove cause such as fraud, breach of duty, or misconduct. Unlike a for-cause removal that requires evidence of wrongdoing, a no-fault divorce can be triggered simply because a sufficient majority of LPs have lost confidence in the GP's ability to generate returns. When triggered, the most common consequence is suspension of the investment period—the GP can no longer make new investments but continues to manage existing portfolio companies toward exit. Some no-fault provisions go further and allow full GP removal with appointment of a successor. No-fault divorce clauses have become more common as LPs seek stronger governance protections, though they remain contentious because GPs argue they create uncertainty and can be triggered prematurely by short-term performance fluctuations.
In Practice
A fund's early investments significantly underperform, and two of three key persons depart. LPs representing 72% of commitments invoke the no-fault divorce clause, suspending the investment period. The GP can no longer make new investments but continues managing the 15 existing portfolio companies. The remaining committed but uncalled capital ($40 million of a $100 million fund) is returned to LPs, and the fund enters a managed wind-down of its existing portfolio.
Operational context
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Why It Matters
No-fault divorce gives LPs a powerful exit mechanism when the GP relationship deteriorates but no clear misconduct has occurred. For GPs, the existence of this clause creates additional pressure to maintain LP confidence through consistent communication and transparent performance reporting, as LPs can effectively shut down investing without proving wrongdoing.
VC Beast Take
No-fault divorce clauses have become increasingly common as LPs learned from spectacular GP blowups in previous cycles. While they seem harsh, they actually protect both sides—LPs get an exit ramp from underperforming or problematic GPs, while good GPs can point to these clauses as evidence of institutional-quality governance. First-time fund managers often resist them, but accepting no-fault provisions signals confidence and professionalism to sophisticated LPs.
Frequently Asked Questions
What is No-Fault Divorce Clause in venture capital?
A No-Fault Divorce Clause is a provision in the Limited Partnership Agreement that allows a supermajority of LPs (typically 66.7-80%) to suspend or terminate the GP's investment period, and in some cases remove the GP entirely, without needing to prove cause such as fraud, breach of duty, or...
Why is No-Fault Divorce Clause important for startups?
Understanding No-Fault Divorce Clause is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
What category does No-Fault Divorce Clause fall under in VC?
No-Fault Divorce 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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