Fundamentals

LLC vs. C-Corp

Ray Koh — Fri, 15 May 2026 14:00:00 +0000

🎉 Happy Friday, funds family!

Today, we're tackling one of the first and most consequential decisions a new company makes: should it form as an LLC or a C-corp? It's a question we constantly receive from founders, and an issue essential to investors. Entity choice shapes how a company raises capital, compensates its team, and eventually exits.

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When should a company form as an LLC versus a C-corp?

The short answer: If the company expects to raise venture capital, issue broad employee equity, or follow a standard startup financing path, it will usually want to be a Delaware C-corp. If the founders expect the company to remain relatively closely held, distribute cash to owners, or operate more like a traditional small business, holding company, or joint venture, an LLC is often the better fit.

➡️ Why choose an LLC?

LLCs are attractive because they offer:

pass-through tax treatment
flexibility in allocating economics among owners
highly customizable governance

That makes LLCs a strong option for businesses that are founder-owned, family-owned, cash-flow oriented, or not planning to raise institutional capital anytime soon. That is the key distinction.

➡️ Why choose a C-corp?

C-corps are attractive because they are the market standard for:

venture financings
preferred stock structures
employee stock options
multiple financing rounds
startup-style exits

Investors, employees, counsel, and cap table platforms are all generally more familiar with the C-corp model. If you want to cater to those stakeholders and their preferences, a C-corp can make sense. Entity type will always come up in an investor’s diligence process.

➡️ Why do investors often prefer C-corps?

Many investors, especially venture funds, prefer or require C-corps because LLCs can create tax reporting complexity, pass-through tax exposure, and administrative friction. Even if a fund can invest in an LLC, it may choose to require the company to convert into a C-corp. So if the company expects venture or institutional financing, a C-corp is usually the cleaner choice.

➡️ When should a company choose an LLC?

Usually when:

the business is expected to stay closely held
pass-through taxation is important
cash distributions to owners are likely
the owner group is small
institutional fundraising is not a near-term goal

➡️ When should a company choose a C-corp?

Typically when:

the company expects to raise venture capital
employee equity will be important
preferred stock financings are likely
the business is being built for scale and growth instead of steady cash flow revenue
a standard startup financing and exit path is the goal

➡️ Can a company start as an LLC and convert later?

Yes, and that happens fairly often in our work. But if the company already expects to raise venture capital in the near future, it may be simpler to start as a C-corp rather than pay to convert later. It’s worth noting that there are also tax implications you should discuss with your lawyer, such as QSBS: Qualified Small Business Stock.

Thanks for reading, everyone!

Have a great weekend! 🙌

/ JURY TRIAL

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⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.

QSBS: Qualified Small Business Stock

Michael Huseby — Fri, 08 May 2026 14:00:00 +0000

🎉 Happy Friday, funds family!

Today, we're diving into one of the most powerful tax tools available to founders, early employees, and venture fund investors: Qualified Small Business Stock (QSBS).

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If you spend much time around venture or growth-equity lawyers, you'll hear the acronym QSBS thrown around like it's some kind of secret handshake. That's because, in the right circumstances, Qualified Small Business Stock (QSBS) can turn what would otherwise be a hefty multi-million tax bill into…no tax at all! Quite the magic trick and worthy of the careful structuring we regularly provide clients. 🪄

For founders, early employees, and venture fund investors and principals, it's one of the most powerful tools in the tax code. But like all things tax, the details matter.

➡️ What Is QSBS?

At its core, QSBS is shorthand for IRC §1202's capital gain exclusion. Stock that qualifies for QSBS treatment can escape federal capital gains tax on exit — up to certain limits.

QSBS is generally available for early-stage venture companies (often in tech) and unavailable for other alternative classes such as real estate (sorry!). Thus, in the investment fund world, it is most commonly associated with venture capital (and sometimes private equity).

The policy rationale is straightforward – the government wants to encourage investment in early-stage, innovative U.S. businesses. The beneficiaries are U.S. taxable individuals, so it's squarely aimed at entrepreneurs, employees, and domestic investors willing to take risks. 🇺🇸

⚠️ Note: U.S. tax-exempt and foreign investors are often already exempt from U.S. capital gains under different tax provisions. For a deeper dive into how these investors are taxed, see our articles on 💰️ Strategies for ECI and 💰️ Strategies for UBTI.

A subtle but essential point: Carried interest held through a partnership can qualify for the QSBS exclusion if the underlying stock does. More on this later.

➡️ The Basic Requirements to Get QSBS

🔹 Holding period: Five years to get the full exemption, but as a result of the Big Beautiful Bill, we now have partial exemptions:

50% exemption if you hold for 3 years
75% exemption if you hold for 4 years
Limited rollover relief for shorter holds

🔹 Qualified business: Most active trades or businesses qualify with certain exceptions, such as service firms in health, finance, consulting, hospitality, and, unfortunately, law 🙁. I'm sure you just shed a tear for the poor lawyers out there.

🔹 Active business: At least 80% of the corporation's assets must be used in a qualified business during substantially all of the taxpayer's holding period.

🔹 Gross assets test: The issuing corporation must have aggregate gross assets under $75M before and immediately after the stock issuance (while beyond the scope of this article, gross assets are specially measured under an "adjusted basis" test that can produce some counterintuitive results). 📊

🔹 C corporation: Only U.S. C corporations for tax purposes can issue QSBS.

🔹 Original issuance: Stock must be acquired directly from the company (not purchased second-hand).

🚨 TRAPS:
Convertible debt does NOT count – the original issuance must be equity for tax purposes (equity later acquired on conversion might count, but the QSBS holding period would begin on the conversion date).
Warehousing investments that would otherwise qualify typically blows QSBS.

➡️ Funds, LPs, and Carry

What if you invest through a fund or syndication? Good news: QSBS eligibility flows through partnerships (venture funds are typically taxed as partnerships). If a venture fund buys QSBS-eligible stock, its U.S. taxable LPs can claim the exclusion on their allocable share of gain when the stock is sold. 🎉

Similarly, carried interest allocated to the GP can ride the QSBS train, assuming the fund holds qualifying stock.

One trap: blockers and other entities treated as C corporations for tax purposes (e.g., Delaware corporations) can break the chain. 🔗

Importantly, LPs in a fund are only eligible to receive QSBS in respect of investments that were made by the fund when the LP was already admitted. In other words, LPs who join a fund after the date a particular investment is made would not get QSBS in respect of such investment.

➡️ Recent Law Changes (Big Beautiful Bill) 📜

🔹 Exclusion amount: Now $15M per taxpayer per issuer (up from $10M).

Per pre-existing law, the exclusion amount can actually be higher if 10× a taxpayer's "adjusted basis" (special tax term) in the stock exceeds $15M (i.e., if the taxpayer's adjusted basis in the stock > $1.5M).

🔹 Gross assets threshold: Increased from $50M to $75M, expanding eligibility for later-stage companies.

🔹 Partial credit mechanics: Reduced holding period can still get partial exempt credit (under prior law, it was 100% with a five-year holding period and no exemption for any lesser holding period).

➡️ Advanced QSBS Planning Techniques

💡 Stacking: By spreading stock among family members, trusts, or entities, you can multiply the exemption cap (normally $15M).

💡 Partnership conversions: If you hold QSBS inside a partnership, carefully structured conversions can sometimes "refresh" basis or unlock additional exclusion.

💡 Rollovers: A special QSBS "rollover" rule may apply if you exit a QSBS-eligible investment prior to the required QSBS holding period. You can defer tax on the gain if you re-invest your exit proceeds into one (or multiple) "new" QSBS investments within 60 days and make a special election on your tax return. Your "old" QSBS holding period rolls into your "new" QSBS holding period and future gain on any "new" QSBS exit is eligible for QSBS exemption if you've satisfied the holding period requirements by then!

💡 Reorganizations: Mergers and stock swaps can preserve QSBS status, but contributions to partnerships (e.g., under §721) will usually kill QSBS eligibility.

➡️ Why QSBS Matters

For founders, employees, and fund managers, understanding QSBS isn't a luxury — it's table stakes. The difference between a fully taxable $50M exit and a tax-free one can mean tens of millions of dollars.

QSBS requires careful planning from day one. Get the structure wrong, and the opportunity disappears. Get it right, and the tax savings can be game-changing.

Thanks for reading, everyone.

Have a great weekend! 🙌

/ JURY TRIAL

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🛠️ Investment Fund Key Terms, Part 30

Michael Huseby — Fri, 01 May 2026 14:00:00 +0000

🎉 Happy Friday, funds family!

Today, we have Part 30 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

This week focuses on Conflicts of Interest.

But first…

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Every private fund has potential conflicts. Because the GP, management company, and their affiliates often sponsor multiple vehicles, invest personally, or provide services to the fund, situations can arise where their interests are not perfectly aligned with those of the LPs. ⚖️

➡️ Where do conflicts typically arise?

Common examples include:

Allocation of investment opportunities among affiliated funds
Purchase of warehoused investments
Cross-fund transactions
GP or affiliate loans to the fund
Service arrangements between the fund and sponsor affiliates

These are normal in private fund structures, but they must be disclosed and properly governed.

➡️ How are conflicts addressed?

Most fund agreements include guardrails such as:

Requiring LPAC or majority-in-interest LP approval for material affiliate transactions
Priority allocation provisions during a defined "restricted period"
Limits on affiliate lending terms
Disclosure obligations in the PPM and annual reporting
Policies around personal investments by GP personnel

➡️ The role of disclosure

Disclosure is the baseline. The PPM should describe all material conflicts — not just theoretical ones, but the specific ones that are likely to arise given the sponsor's business.

The SEC has made clear (especially in enforcement actions and through the now-vacated private fund adviser rules) that vague or boilerplate conflict disclosures are insufficient.

➡️ Practical tips for GPs

Be specific in your PPM about how conflicts will be handled
Document all conflict-related decisions
Use the LPAC as a governance tool for real-time conflict resolution
Don't assume that disclosure alone satisfies your obligations — process matters too

➡️ LP perspective

LPs should review conflict provisions carefully during due diligence. Key questions include:

Does the GP have other funds or businesses that could compete for deal flow?
Are affiliate transactions subject to independent review?
Is the LPAC empowered to approve or reject conflicted transactions?
What are the reporting obligations around conflicts?

Thanks for reading, everyone.

Have a great weekend! 🙌

/ JURY TRIAL

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🛠️ Investment Fund Key Terms, Part 29

Michael Huseby — Fri, 24 Apr 2026 14:00:00 +0000

🎉 Happy Friday, funds family!

Today, we have Part 29 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

This week focuses on Pro Rata Co-Investment Rights.

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Co-investments allow investors to participate directly in a portfolio company alongside the fund, rather than only through their interest in the fund itself. 🤝

Instead of all capital flowing through the main fund vehicle, the GP may open up additional capacity in a deal for select investors to invest at the deal level — often through an SPV and typically on the same (or better) economic terms as the fund.

➡️ What are pro rata co-investment rights?

Pro rata co-investment rights give an LP a contractual right to participate in co-invest opportunities in proportion to its ownership percentage in the fund.

Example: If an LP owns 10% of the fund, it may have the right to take 10% of any co-investment allocation made available.

These rights are most commonly negotiated by anchor or large institutional investors.

➡️ Why do LPs push for this?

Increased exposure to high-conviction deals
Ability to concentrate into "winners"
Often better economics (frequently no management fee and reduced or zero carry)
More direct visibility into portfolio companies

➡️ Where complexity creeps in

Even "pro rata" rights raise practical questions:

Does the fund have to offer co-invest on every deal?
What if the LP doesn't respond in time?
Can the GP allocate co-invest to non-LPs?
How is "pro rata" calculated — based on commitments or invested capital?
What happens if multiple LPs have co-invest rights and the allocation is oversubscribed?

These details matter and should be clearly addressed in the side letter or LPA.

➡️ GP considerations

GPs should be cautious about granting too many co-investment rights. Overpromising co-invest can create:

Allocation headaches
Delays in closing deals
Conflicts between LPs
Administrative burden

Many GPs prefer to offer co-investment on a discretionary (not contractual) basis — preserving flexibility while still keeping LPs happy.

⏩ Next up in Part 30: Conflicts of Interest

Thanks for reading, everyone.

Have a great weekend! 🙌

/ JURY TRIAL

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🛠️ Investment Fund Key Terms, Part 28

Michael Huseby — Fri, 17 Apr 2026 14:00:00 +0000

🎉 Happy Friday, funds family!

Today, we have Part 28 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

This week focuses on Warehoused Investments.

But first…

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What happens if the GP wants to purchase a great investment before the fund holds its initial closing? Warehoused investments are the answer.

➡️ What is a warehoused investment?

A warehoused investment is a deal acquired by the GP (or an affiliate) before the fund's closing, with the expectation that the fund will later purchase it. It's essentially a placeholder structure. The GP "holds" the asset temporarily until the fund is ready.

➡️ Why warehouse deals?

Common reasons include:

Timing gap between signing and fund close
Anchor investor delays
Fast-moving deal environment
Strategic opportunity the GP doesn't want to miss

In emerging manager funds, warehousing is especially common.

➡️ How does it work?

Typically, the steps are as follows:

The GP or affiliate acquires the investment with its own capital.
The fund closes.
The fund purchases the investment from the warehouse vehicle — often at cost plus expenses (sometimes with interest).

Another method involves forming the fund entity and having the GP affiliate loan money to the fund entity before the initial closing. Then, at the initial closing, the fund calls capital to repay the affiliate loan.

➡️ Where risk creeps in

Warehousing raises conflict issues:

Was the price fair?
Did the GP allocate upside appropriately?
Were terms fully disclosed?

Many LPAs require:

Cost-only transfers (no markup)
Disclosure of fees and expenses
LPAC review or approval if the investment is sold at fair market value (higher than cost)

➡️ Regulatory and tax issues

Warehoused investments typically are not eligible for QSBS treatment upon their transfer to the fund.

In addition, unless the warehoused investment is purchased (and transferred by) the fund's management company (or a wholly-owned subsidiary thereof), it's possible the transferred investment would not be a "qualifying investment" for the purposes of the "venture capital exemption" under the Investment Advisers Act.

Work with your lawyer!

⏩ Next up in Part 29: Co-Investments

Thanks for reading, everyone.

Have a great weekend! 🙌

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🛠️ Investment Fund Key Terms, Part 27

Michael Huseby — Fri, 10 Apr 2026 14:00:00 +0000

🎉 Happy Friday, funds family!

Today, we have Part 27 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

This week focuses on GP Removal.

But first…

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What happens if the LPs want to kick out the GP? ⚖️

GP removal provisions define how investors can remove the general partner of an investment fund or syndication.

➡️ Two types of removal

Most LPAs distinguish between removal for "Cause" and removal for any reason.

1️⃣ Removal for Cause

Removal for "Cause" typically requires between 51–75% of the LPs to vote.

"Cause" often includes triggers like the below, but the specific definition is often negotiated in institutional funds.

Fraud or willful misconduct
Material breach of the LPA
Criminal conviction
Regulatory disqualification

2️⃣ Removal Without Cause

Removal without "Cause" is generally a higher bar – often 75%–85% of LPs must vote in favor of removal.

In some cases, removal without "Cause" may be prohibited during the first year or two of the fund's operations (to give the GP a chance). Many funds have no ability for LPs to remove the GP without "Cause" at all.

➡️ Consequences of Removal

Removal often triggers:

Suspension of investment period
Termination or reallocation of carry
Appointment of a replacement GP
Potential fund shutdown
Management company removal

➡️ Points to Negotiate

Common negotiated provisions include:

What constitutes "cause" (GPs want a narrow definition; LPs want a broad definition)
Voting thresholds (GPs want higher thresholds; LPs want lower thresholds)
Economic consequences (LPs may request a haircut on carried interest)
Process and timing (GPs want a right to cure, such as the right to fire the offending person and make the fund whole)

⏩ Next up in Part 28: Warehoused Investments

Thanks for reading, everyone.

Have a great weekend! 🙌

/ JURY TRIAL

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🛠️ Investment Fund Key Terms, Part 26

Michael Huseby — Fri, 03 Apr 2026 14:00:00 +0000

🎉 Happy Friday, funds family!

Today, we have Part 26 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

This week focuses on Limited Partner Advisory Committees.

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Most private funds have a committee of LPs called the Limited Partner Advisory Committee ("LPAC"). That said, the LPAC's function is often misunderstood by newer GPs and LPs. 🏛️

➡️ What is an LPAC?

An LPAC is typically made up of 3-7 significant LPs. It often comprises the GP's favorite LPs (and those committing the most capital). Members are appointed by the GP (sometimes subject to size or strategic criteria).

In many cases, LPs affiliated with the GP are ineligible to be on the LPAC. In some cases, non-US LPs might be excluded from the LPAC due to CFIUS concerns.

The LPAC's core function is to oversee conflicts of interest and protect the integrity of the fund's governance process.

➡️ What does the LPAC typically approve?

Common LPAC matters include:

Conflicts of interest
Cross-fund allocations
GP-led secondaries
Key person determinations
Valuation issues
Extensions of the fund term
Waivers of certain LPA provisions

An example might be the GP or an affiliate warehousing a deal and selling to the fund at fair market value.

➡️ What the LPAC is not

The LPAC does not:

Manage the fund
Approve investments (in most funds)
Impinge on the general authority of the GP

If LPs want true control rights, that must be negotiated separately.

➡️ Practical dynamics

In general, LPAC members do not owe fiduciary duties to the fund (or the other LPs). In addition, LPAC members:

Receive more information
Have access to the GP
Influence how gray areas are handled
Are typically indemnified by the fund for fund-related business

Matters to be approved by the LPAC can also typically be approved by a majority in interest of the LPs at large.

The LPAC is helpful to the GP because it makes getting approval less burdensome – the GP can poll the 3-7 LPAC members instead of the full corpus of LPs.

⏩ Next up in Part 27: GP Removal

Thanks for reading, everyone.

Have a great weekend! 🙌

/ JURY TRIAL

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🛠️ Investment Fund Key Terms, Part 25

Michael Huseby — Fri, 27 Mar 2026 14:00:00 +0000

🎉 Happy Friday, funds family!

Today, we have Part 25 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

This week focuses on LP Defaults.

But first..

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What happens if an LP doesn’t fund a capital call? 🚨

It’s rare, but it happens. And it can be very disruptive to a fund that relied on the LP funding its capital commitment.

➡️ What is an LP Default?

An LP default occurs when a limited partner fails to fund all or part of a capital contribution when due.

Funds rely on committed capital to:

Close investments
Pay expenses
Support porfolio companies, investment properties, etc.

If one LP doesn’t fund, the fund still has obligations. The shortfall can be critical.

➡️ What are “GP expenses”? 💰

GP expenses are costs associated with running the sponsor’s business, not the fund.

These are typically paid by the GP or management company and not charged to the fund.

Common GP expenses include:

Principal and employee salaries, bonuses, and benefits
Office rent and overhead
GP-level technology and software
GP-level accounting and tax returns
Legal costs unrelated to fund operations

If the expense exists even without the fund, it’s usually a GP expense.

➡️ Why it matters 🗝️

Private funds are built on contractual commitments, not deposited cash.

A single default can:

Force additional capital calls on other LPs
Delay or jeopardize investments
Require bridge financing
Shift risk to non-defaulting investors

➡️ Common remedies 💊

Well-drafted LPAs typically include:

Default interest
Loss of voting rights
Forced sale at a discount
Dilution
Forfeiture of rights or economics
Legal action

There is usually a short cure period (often 5–10 business days). After that, penalties escalate.

These provisions are meant to deter default (and they usually do).

➡️ Practical reality

True defaults in institutional funds are uncommon. Reputation matters.

But in smaller funds or volatile markets, risk increases, and the default section suddenly becomes very important.

LPs: Don’t sign up for a fund commitment if you can’t perform. The consequences can be fire.

GPs: Ensure your fund documents have clear, comprehensive default provisions.

⏩ Next up in Part 26: Limited Partner Advisory Committees

Thanks for reading, everyone.

Have a great weekend! 🙌

/ JURY TRIAL

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🛠️ Investment Fund Key Terms, Part 24

Michael Huseby — Fri, 20 Mar 2026 14:00:00 +0000

🎉 Happy Friday, funds family!

Today, we have Part 24 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

This week focuses on Fund Expenses vs. GP Expenses.

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One of the most common (and most misunderstood) areas of fund economics: Who pays for what? 💳

Every fund incurs costs. The key question is whether those costs are properly borne by the fund (and indirectly the LPs) or by the GP or management company itself.

➡️ What are “fund expenses”?

Fund expenses are costs incurred in operating the fund and making investments, and are typically paid directly by the fund.

Common fund expenses include:

Organizational and offering costs (often capped)
Legal, audit, tax, and fund administration fees
Fund-level regulatory filings and compliance costs
Valuation and appraisal fees
Banking, custody, and fund accounting fees
Broken-deal expenses
Portfolio-level third-party costs

These expenses are usually outlined in detail in the LPA and PPM and are shared by the fund’s investors (LPs and the GP to the extent of its capital investment) pro rata.

➡️ What are “GP expenses”?

GP expenses are costs associated with running the sponsor’s business, not the fund.

These are typically paid by the GP or management company and not charged to the fund.

Common GP expenses include:

Principal and employee salaries, bonuses, and benefits
Office rent and overhead
GP-level technology and software
GP-level accounting and tax returns
Legal costs unrelated to fund operations

If the expense exists even without the fund, it’s usually a GP expense.

➡️ Why this line gets blurry

In practice, the line between fund and GP expenses can blur.

Examples of expenses that might be fund expenses or GP expenses include:

Advisers Act compliance costs
Marketing and branding costs
Attending industry events
Placement fees

More and more, LPs insist that the above are considered GP expenses.

➡️ Caps, reimbursements, and approvals

LPs often negotiate:

Caps on organizational expenses
Limits on reimbursable GP expenses
LPAC approval for unusual or non-routine costs

These guardrails protect against shifting GP business overhead onto LPs.

➡️ Disclosure, Disclosure, Disclosure

There is no single “right” allocation, but surprises (or lies) are never acceptable.

LPs and regulators will be very displeased if you don’t follow the rules you set for yourself in the fund documents.

GPs: Be explicit (and honest).
LPs: Read the expense section line by line.

⏩ Next up in Part 25: LP Defaults

Thanks for reading, everyone.

Have a great weekend! 🙌

/ JURY TRIAL

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You can also propose a topic that you would like us to cover! Just reply to this email or submit your suggestions 🔗 here.

🛠️ Investment Fund Key Terms, Part 23

Michael Huseby — Fri, 13 Mar 2026 14:00:00 +0000

🎉 Happy Friday, funds family!

Today, we have Part 23 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

This week focuses on Fees Paid to GP Affiliates.

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In addition to management fees and carried interest, many funds pay other fees to the GP or its affiliated entities.

These fees are common in many asset classes, but they are also one of the most scrutinized (and negotiated) areas of fund economics. LPs should understand them clearly, and GPs should disclose them carefully.

➡️ What are “affiliated fees”?

“Affiliated fees” are fees paid by the fund or its portfolio investments to the GP, the Management Company, or entities controlled by the GP principals.

These fees typically compensate the sponsor for transaction-level work, operational involvement, or risk assumed in connection with specific investments.

➡️ Common examples of affiliated fees

Depending on asset class, these fees may include:

• Acquisition/closing fees – often 1-3% of the purchase price of an asset
• Disposition fees – commonly 1% or less of the sale price
• Property management fees – often 3-7% of gross rents
• Development or construction fees – commonly ~5% of hard costs
• Guarantee fees – often 0.5-1% of personally guaranteed debt

Not every fund charges these fees, and some asset classes (e.g., venture funds) typically don’t have these fees at all.

➡️ Why do these fees exist?

Affiliated fees compensate the sponsor for real work or real risk that falls outside the scope of general fund management, such as sourcing deals, overseeing construction, operating assets, or personally guaranteeing debt.

These fees function as an additional revenue stream for the sponsor, which is why they receive close scrutiny. If you’re an LP, carefully review every way the GP makes money. Usually, the GP is entitled to these fees regardless of the profitability of the fund or syndication.

➡️ Fee offsets are common

Many LPs negotiate management fee offsets, meaning some or all affiliated fees reduce the management fee dollar-for-dollar. For example, board fees, monitoring fees, and transaction fees paid by portfolio companies to the GP or its affiliates often reduce the management fee.

These offsets help prevent “double dipping” by the GP. However, fees charged directly to the fund (like acquisition fees) typically do not reduce the management fee.

➡️ Disclosure is critical

Regardless of whether LPs like these fees, they must be clearly disclosed in the fund’s documents and marketing materials. Any new affiliate fees should be approved by the LPs as a whole group or the LP advisory committee.

Undisclosed affiliated fees are a major red flag and can create serious legal, regulatory, and reputational risk for sponsors.

⏩ Next up in Part 24: Fund Expenses vs. GP Expenses

Thanks for reading, everyone.

Have a great weekend! 🙌

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🛠️ Investment Fund Key Terms, Part 22

Michael Huseby — Fri, 06 Mar 2026 14:00:00 +0000

🎉 Happy Friday, funds family!

Today, we have Part 22 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

This week focuses on Management Fees.

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The management fee is a recurring fee paid to the manager of an investment fund or syndication. 💸

It sounds simple, but there are many ways to calculate (and reduce) the management fee. GPs and LPs alike should understand how management fees actually work.

➡️ What are management fees?

The management fee is a recurring fee (usually paid quarterly, but sometimes monthly) paid to the manager of an investment fund or syndication. It is typically paid to the Management Company entity (not the GP entity that receives the carried interest).

The management fee is intended to cover Management Company overhead, such as salaries, rent, compliance costs, and sponsor-level accounting.

➡️ How are management fees calculated?

Management fees are always an equation:

BASE × PERCENTAGE

💲 Percentage: Typically between 1.0%–2.5%, with the majority falling between 1.5%–2.0%.

💲 Base: Typically committed capital, invested capital, NAV, or gross income.

Too many investors focus on the percentage without fully appreciating the base…but the base can make a huge difference!

➡️ What’s a “normal” management fee?

“Normal” depends entirely on asset class.

Venture funds: often (i) 2% of commitments during the investment period, and (ii) 1.5% of commitments thereafter.

Private equity or real estate: often (i) 2% of commitments during the investment period, and (ii) 2% of invested capital thereafter.

Hedge funds: often 1.5-2% of NAV.

➡️ Step-downs are common

After the investment period ends, many funds reduce the management fee. In venture funds, the percentage usually steps down. In other closed-end funds, the percentage usually stays the same but the base downshifts from committed capital to invested capital.

The rationale is that the fund manager does more work during the investment period, when they are diligencing and making new investments.

➡️ Management fee reductions

Various items may reduce the management fee, including placement fees paid by the fund, excess organizational expenses (over a negotiated cap), or offsets for other fees earned by the sponsor.

In addition, GPs may elect to waive a portion of the management fee in exchange for a profits interest in the fund. This is essentially a mechanism for funding a portion of the GP commitment to the fund or syndication.

➡️ Fee discounts

LPs may be able to negotiate management fee discounts via side letter. GPs: only do this for large or strategic LPs.

GPs may also proactively offer fee discounts to investors who commit larger amounts of capital or who invest before a specified deadline.

⏩ Next up in Part 23: Fees Paid to GP Affiliates

Thanks for reading, everyone.

Have a great weekend! 🙌

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🛠️ Investment Fund Key Terms, Part 21

Michael Huseby — Fri, 27 Feb 2026 14:00:00 +0000

🎉 Happy Friday, funds family!

Today, we have Part 21 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

This week focuses on LP Giveback.

But first..

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Investment Fund Key Terms, Part 21 LP Giveback

An LP giveback ↩️ is an obligation of limited partners (and, to be fair, the GP) to return prior distributions to the fund.

➡️ Why would an LP need to return distributions?

The LP giveback comes into play when the fund needs to pay something…but the fund doesn’t have sufficient reserves, and each LP is fully funded (their uncalled commitment is $0).

These payments might include the following:

Fund-level indemnification obligations
Litigation judgments or settlements
Unpaid fund expenses or liabilities
Liabilities in connection with the sale of investments (such as breaches of reps or warranties)

➡️ What are the limits on LP giveback obligations?

Most LP giveback provisions are limited. Market-standard protections include:

Cap by commitment (often 20–30% of total commitment)
Cap by distributions received (i.e., you can’t be forced to return more than you’ve actually received)
Sunset period (commonly 2–3 years after distribution or 2-3 years after the fund’s term ends)

In some cases, these limits are waived for funds investing in other funds, if the liability arises from the underlying fund investment’s own LP giveback requirement.

Here’s what an actual provision might look like:

“Each Limited Partner shall, upon written notice from the General Partner, return to the Fund such portion of any distributions previously received by such Limited Partner as is reasonably necessary to satisfy the Fund’s indemnification obligations or other liabilities. Notwithstanding the foregoing, the aggregate amount that any Limited Partner may be required to return pursuant to this provision shall not exceed the lesser of (i) twenty-five percent (25%) of such Limited Partner’s Commitment and (ii) the aggregate amount of distributions previously received by such Limited Partner from the Fund. No Limited Partner shall be obligated to return any distribution made to such Limited Partner after the third (3rd) anniversary of the date on which such distribution was made.”

⏩ Next up in Part 21 – Management Fees.

Thanks for reading, everyone.

Have a great weekend! 🙌

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🛠️ Investment Fund Key Terms, Part 20

Michael Huseby — Fri, 20 Feb 2026 17:00:05 +0000

🎉 Happy Friday, funds family!

Today, we have Part 20 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

This week focuses on Carried Interest Clawback.

But first..

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Investment Fund Key Terms, Part 20 Carried Interest Clawback

Beware of the clawback! 🦀 It sounds like the villain from a children’s movie.

➡️ What is a clawback?

The carried interest clawback is a contractual obligation requiring the General Partner (or other carry recipients) to return previously distributed carried interest if, at the end of the fund, the GP has received more carry than it is ultimately entitled to.

Think of it as the “true-up” that protects LPs from over-distribution risk.

To be specific, the carried interest clawback essentially re-tests the waterfall as of the date of the final disposition of the fund’s assets. If the GP got more carried interest over the life of the fund if it would have pursuant to this re-test, the excess must be returned to the fund.

➡️ How could the GP get too much carried interest, such that a clawback is possible?

Clawbacks aren’t talking about accounting errors or fraud where GPs send themselves too much carry. Scenarios where a clawback comes into play include the following:

American Waterfalls. In “deal by deal” waterfalls, the GP might earn carry on “winners” even if other deals lose money.
European Waterfalls. Even in “netted” waterfalls, the fund could theoretically call 50% of capital commitments, exit favorably (and the GP earns carried interest), call the next 50% of capital, and have a total loss on this second round of investments.

In both situations above, the clawback is the great equalizer at the end of the fund’s life.

➡️ What are variations on clawbacks?

Most clawbacks are tested at the final distribution of the fund’s assets. However, some agreements might have multiple clawbacks staged throughout the fund’s life.

Some fund agreements have escrow provisions requiring a portion of the carry to remain escrowed in the fund until the clawback risk has been reduced.

Many fund agreements reduce the amount of money the GP must return by the amount of actual taxes the GP paid when it received the carry in the first place.

Some fund agreements require the principals of the GP (the actual humans) to personally guarantee the clawback, as opposed to the obligation resting with the GP entity alone.

⏩ Next up in Part 21 – LP givebacks

Thanks for reading, everyone.

Have a great weekend! 🙌

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⚖️ California’s New Demographic Reporting Law for VC Funds

Michael Huseby — Fri, 13 Feb 2026 14:00:18 +0000

🎉 Happy Friday, funds family!

Today, we’re interrupting the programming of our Fund Terms series to share an update on a new compliance regime for venture capital firms.

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California VC Demographic Reporting Regime Overview

California just enacted a new mandatory state-level compliance regime for venture capital firms.

The Fair Investment Practices by Venture Capital Companies Law (Corp. Code Div. 2.5, Title 4) requires certain VC firms with a California nexus to register with the state and file annual demographic and investment reports starting in 2026.

Here’s what fund sponsors and lawyers need to know.

Who Is Covered ☂️

A “covered entity” is a venture capital company that:

1️⃣ Primarily invests in startup, early-stage, or emerging growth companies; and

2️⃣ Has a California nexus, which includes the following:

The venture capital company is headquartered in California.
The venture capital company has a significant presence or operational office in California.
The venture capital company makes venture capital investments in businesses that are located in, or have significant operations in, California.
The venture capital company solicits or receives investments from a person who is a resident of California.

Bottom line: It’s going to apply to tons of VC funds, whether or not the GPs are in California. Many multi-state or “remote-first” VC firms will fall into this regime.

What Covered Entities Must Do

Here are the immediate next steps for VC funds with a California nexus.

Register with DFPI (Due March 1, 2026)
Covered entities must register with the California Department of Financial Protection and Innovation (DFPI), providing basic identifying and contact information and updating it annually.
This is the on-ramp into the regulatory system.
File an Annual Report (Due April 1, 2026, and annually thereafter)
The annual report covers venture capital investments made during the prior calendar year and must include the information described below.
Founding-Team Demographics (Aggregated & Anonymous)
For each portfolio company funded during the year, the firm must report aggregated survey data from founding team members regarding:
- Gender identity
- Race and ethnicity
- LGBTQ+ status
- Disability and veteran status
- California residency
- Whether founders declined to provide information
Key guardrails:
- Surveys must be voluntary
- Conducted after the investment closes
- Include a clear “decline to state” option
- Reported only in anonymized, aggregate form
Investment Metrics 🔬
Covered entities must also report:
- The percentage and dollar amount of investments in companies primarily founded by “diverse” founding teams
- The total dollar amount invested in each portfolio company
- Each portfolio company’s principal place of business

Non-Compliance Penalties

DFPI can bring enforcement actions and impose penalties for non-compliance.
Records supporting the annual report must be retained for at least five years.
Reports will be publicly available.

Next Steps for VC Funds 📑

Determine whether you have a California nexus (given the broad definition, this will likely be a significant number of VC funds).
Register with the DFPI by March 1.
Reach out to your portfolio companies and start collecting information for the April 1 deadline.
File your initial report for April 1.
Build demographic survey workflows into post-closing processes for future annual reports.

The DFPI’s page on the new compliance regime is here: VCC Reporting Program - DFPI

Thanks for reading, everyone.

Have a great weekend! 🙌

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🛠️ Investment Fund Key Terms, Part 19

Michael Huseby — Fri, 06 Feb 2026 14:00:04 +0000

🎉 Happy Friday, funds family!

Today, we have Part 19 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

This week focuses on Split Waterfalls (Cash Flow / Dispositions).

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Does your strategy focus on cash flow? Want to hold assets for the long term?

If so, you might want a “split waterfall” that gets you carried interest sooner.

➡️ Why have a split waterfall?

Split waterfalls are helpful if your strategy focuses on cash flow. Most standard waterfalls require a return of capital to LPs as well as a preferred return before the GP can start earning carried interest.

Clearing these hurdles is manageable if the GP plans to sell the assets in a short window.

However, if the plan is to hold the investments for the long term, the “return of capital” step can be problematic. It will take forever for the GP to get carry.

➡️ How does a split waterfall work?

A split waterfall is actually two waterfalls – one for cash flow and one for disposition proceeds. Typically, the two waterfalls look the same, except the cash flow waterfall removes the “return of capital” step.

Here’s an example:

💵 Ongoing cash flow (rents, interest income, operating profits)

First, 100% to LP until LP has received an 8% preferred return.
Thereafter, 80% to LP and 20% to GP.

💰 Capital events (sales, refinances, recapitalizations)

First, 100% to LP until LP has received a return of capital.
Second, 100% to LP until LP has received an 8% preferred return.
Thereafter, 80% to LP and 20% to GP.

➡️ Anything to keep in mind when using split waterfalls?

You should always have a return of capital step in the disposition waterfall. Full stop.

Refinancing proceeds could theoretically go towards either waterfall, depending on how the LPA is drafted. I take the position that refinance proceeds should run through the disposition waterfall.

This only really makes sense if the fund wants to incentivize the GP to hold onto assets long term but there’s a preferred return to clear. In general, this is suited for private credit and buy-and-hold real estate and private equity. It doesn’t make as much sense for venture capital (which doesn’t have a preferred return) and development (if the plan is to sell the project after it’s built).

⏩ Next up in Part 20 – Carried Interest Clawback

Thanks for reading, everyone.

Have a great weekend! 🙌

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🛠️ Investment Fund Key Terms, Part 18

Michael Huseby — Fri, 30 Jan 2026 14:00:13 +0000

🎉 Happy Friday, funds family!

Today, we have Part 18 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

This week focuses on American vs. European Waterfalls.

But first…

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Time to get political (not really, don’t worry).

Today, we'll discuss the two dominant models: (1) the American waterfall (“deal-by-deal”); and (2) the European waterfall (“fund-as-a-whole”).

They can produce dramatically different economics — even with the same preferred return and carry percentages.

➡️ What’s the Difference?

At a high level:

🔸 American Waterfall: Carry is calculated deal-by-deal.
🔸 European Waterfall: Carry is calculated only after the LP has been fully returned across all deals.

This seemingly small difference creates massive variations in timing and risk allocation.

➡️ American Waterfall Setup

Under an American 🇺🇸 waterfall, each investment has its own mini waterfall:

1. Return of capital (for that deal)
2. Preferred return (for that deal)
3. GP catch-up (for that deal)
4. Profit split (for that deal)

Once a single deal performs well enough to clear its mini waterfall, the GP can receive carry even if other deals are underwater. That’s the positive for GPs.

However, there’s no free lunch. Most fund documents have a “clawback” provision. If a GP takes carry from an early deal and later deals lose money, the GP may have to return previously paid carry to the LPs.

Note that there are many flavors of American waterfalls. For example, some are truly “deal by deal” but most are a bit more complicated – essentially serving as a European waterfall for realized (sold or written down) investments only. Plus, American waterfalls treat fund expenses differently. Some require a return of all fund expenses in step 1, while others only require a return of expenses allocable to the investment at issue.

➡️ European Waterfall Setup

In a European 🇪🇺 waterfall, everything aggregates at the fund level. So it looks something like this:

1. Return of capital (for the whole fund)
2. Preferred return (for the whole fund)
3. GP catch-up (for the whole fund)
4. Profit split (for the whole fund)

The GP cannot earn any carry until the return of capital and preferred return are cleared with respect to all LP capital contributions – not just those for the deal that was sold.

➡️ Which Is “Better”?

It depends on who you ask! GPs generally prefer American waterfalls (faster payouts, more predictable cash flow). LPs almost always prefer European waterfalls (greater protection, cleaner economics). First time fund managers often opt for European waterfalls, but not always! I would say roughly 85% of our clients opt for European waterfalls.

🗓️ Next up in Part 19: Split Waterfall

Thanks for reading, everyone.

Have a great weekend! 🙌

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🛠️ Investment Fund Key Terms, Part 17

Michael Huseby — Fri, 23 Jan 2026 14:00:17 +0000

🎉 Happy Friday, funds family!

Today, we have Part 17 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

This week focuses on GP Catch-Up Provisions.

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If the preferred return (discussed in Part 16) is the LP’s “head start,” then the catch-up provision is the GP’s sprint to get back to its intended share of profits.

A catch-up is the mechanism that allows the GP to receive priority distributions for a short phase after the LP has received its preferred return.

➡️ What Is a Catch-Up?

A catch-up is the bridge between the preferred return (LP-friendly) and the final profit split (e.g., 80/20).

The standard formulation looks something like:

“After the Limited Partners have received (i) a return of capital and (ii) the preferred return, the General Partner shall receive 100% of additional distributions until it has received 20% of all profits distributed by the Fund.”

In plain English: The GP gets all of the cash flow for a moment to “catch up” to its carried interest percentage.

➡️ Why Do Catch-Ups Exist?

Without a catch-up, it’s a mathematical certainty that the GP will end up with less than its intended carry percentage (e.g., the 20% in an 80/20 waterfall). This is because the LPs got their referred return (which constitutes the first distribution of profits).

Note that not all waterfalls have GP catchups. More LP-favorable waterfalls have a pref but no catch-up. However, in institutional funds, catch-ups are quite common.

➡️ Key Components of a GP Catch-Up Provision

Here are the major levers:

🔸 Catch-Up Percentage: This is the percentage of profits the GP gets after the preferred return until the GP is “caught up” to the target carry percentage. The GP often receives 100% of distributions during the catch-up. However, more LP-friendly deals use a partial catch-up (e.g., 50/50).
🔸 Target Carry Percentage: The GP stops receiving 100% once it has received its full carry percentage (e.g., 20%) of all profits distributed to date. If the ultimate profit split is 70/30, the GP would get the catch-up until it receives 30% of the profits, for example.
🔸 Deal-by-Deal vs. Fund-Level: In an American waterfall, each deal has its own miniature catch-up. In a European waterfall, the catch-up applies only after the entire fund has satisfied the pref across all deals.

➡️ Simple Example

Assume:
🔸 LP invested $1,000,000 two years ago
🔸 Pref = 8% simple
🔸 GP carry = 20%

After return of capital and the $160,000 preferred return, the next phase looks like:

GP receives 100% of distributions until the GP has received 20% of all profits distributed to both parties. In this case, that would be $40,000 (20% of $160k + $40k).

After the GP “catches up” to 20% of the profits, the waterfall reaches the final 80/20 profit split.

🗓️ Next up in Part 18: American vs. European Waterfalls

Thanks for reading, everyone.

Have a great weekend! 🙌

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🛠️ Investment Fund Key Terms, Part 16

Michael Huseby — Fri, 16 Jan 2026 14:00:33 +0000

🎉 Happy Friday, funds family!

Today, we have Part 16 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

This week focuses on Preferred Returns.

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An investment fund or syndication’s preferred return (“pref,” “hurdle,” or “priority return”) is one of the most misunderstood concepts in fund formation.

The preferred return is NOT a guaranteed dividend. It’s simply the LP’s minimum annualized return before the GP can participate in carry.

➡️ What is a Preferred Return?

At its core, a preferred return is a priority yield on contributed capital. Philosophically, the idea is that the GP shouldn’t earn carry unless LPs have received a baseline return. Otherwise, why not just invest in the S&P500?

Whether it’s 8%, 6%, simple, compounded, or non-compounded depends entirely on the strategy and market norms. The economic effect, though, is the same: LPs get paid a little extra (on top of a return of capital) before the GP gets carried interest.

➡️ Key Components of a Preferred Return

Here are the main variables you’ll see in the wild (and the ones you negotiate constantly):

🔸Rate: Common rates are between 6-12%, but can be higher or lower depending on the asset class. Riskier strategies usually have higher preferred returns.
🔸Compounding: Is the pref compounded annually or non-compounded (simple)?
🔸Ordering: Is the pref the first step in the waterfall, or is it the second step in the waterfall after the “return of capital” step?
🔸Accrual timing: When does the pref “clock” start ticking? Most common is when the capital hits the fund or syndication’s bank account from the LP’s bank account.

The above are just examples. In the wild, you’ll find all sorts of splits, percentages, and structures.

➡️ Simple Example

Here’s the kind of simplified illustration LPs love:

🔸LP invests $1,000,000
🔸Pref = 8% simple
🔸After two years, LPs must first receive $160,000 in preferred return + return of the original $1,000,000

Only then does the GP become eligible to earn carried interest.

➡️ Venture Capital

VC funds are a little different than other asset classes – they almost never have a preferred return!

🗓️ Next up in Part 17: GP Catch-Up Provisions

Thanks for reading, everyone.

Have a great weekend! 🙌

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🛠️ Investment Fund Key Terms, Part 15

Michael Huseby — Fri, 09 Jan 2026 14:01:45 +0000

🎉 Happy Friday, funds family!

Today, we have Part 15 in our many-part series walking through each term in an investment fund term sheet in detail.

Last week, we discussed🛠️ Successor Funds. Here’s the index of each article in this series (so far):

Today, we'll learn about Carried Interest.

But first..

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Carried interest is the magical elixir of investment funds – the GP’s share of the profits.

➡️ What is Carried Interest?

Carried interest is the performance-based portion of the GP’s compensation. You might hear other terms to describe the GP’s share of the profits, including “promote,” “carry,” or “incentive allocation.”

This post will merely contain a general overview of carried interest. Future posts will highlight specific aspects of how carried interest works.

Here’s a (radically) simplified version of how a carried interest provision might work:

“After returning all contributed capital to the Limited Partners, the General Partner shall receive 20% of all subsequent distributions of profits.”

Note that the carried interest is usually described in the “Distributions” section of an investment fund’s LPA.

➡️ What are the components of a carried interest distribution waterfall?

Here are some common terms in carry waterfalls. We’ll discuss these in more detail in future posts.

1️⃣ Return of Capital: LP must first receive back an amount equal to their capital contributions.
2️⃣ Preferred Return (Hurdle): LP must receive a priority return after the return of capital. Example might be 8%, compounded annually, on the capital contributions of such LP.
3️⃣ Catch-Up: The GP may receive 100% of profits for a short period until the GP has received 20% of all profits distributed (including profits distributed to the LP pursuant to the preferred return).
4️⃣ Profit Split: From that point forward, profits are split 80% to the LP and 20% to the GP.

The above are just examples. In the wild, you’ll find all sorts of splits, percentages, and structures.

➡️ Two Common Structures

Here’s a very simplified explanation of the two principal frameworks for how investment fund waterfalls work:

Deal-by-Deal (American Waterfall): Carry is calculated per investment — more favorable to the GP.
Netted (European Waterfall): Carry is calculated only after all LP capital (and pref, if applicable) is returned — more favorable to LPs.

➡️ Clawbacks & Escrows

If early deals do well but later ones flop, LPs might have overpaid carry. That’s why many LPAs include a clawback mechanism whereby the GP must return any excess carry to the fund. Some LPAs require carry to be escrowed in the fund for a time to cover potential clawback risk.

➡️ Tax Treatment

In the U.S., carried interest may be taxed as long-term capital gains if the fund holds assets for more than 3 years (under §1061 of the Internal Revenue Code). Shorter-term gains? They’re generally taxed at ordinary income rates.

🗓️ Next up in Part 16: Preferred Returns

Thanks for reading, everyone.

Have a great weekend! 🙌

/ JURY TRIAL

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/ MISSED SOMETHING?

We’ve covered several other key terms related to investment funds. Check out the previous topics here and stay tuned for next week’s article.

🛠️ Investment Fund Key Terms, Part 11 - [www.fundamentals.law].pdf

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🛠️ Investment Fund Key Terms, Part 14

Michael Huseby — Fri, 02 Jan 2026 14:00:34 +0000

🎉 Happy Friday, funds family!

Today, we have Part 14 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

This week focuses on Successor Funds.

But first..

/ SELF PROMOTION

We’re a tech-enabled modern law firm with expertise in investment funds, SPVs, corporate, venture capital, M&A, fractional general counsel, regulatory, and tax.

Contact Our Law Firm

Thanks for reading. Now, let’s jump into the article 😃

➡️ What is a Successor Fund?

A successor fund is a new investment vehicle raised by the same manager, typically with the same strategy and target investments as the current fund. If the current fund is “Fund II” in a particular line of funds, Fund II’s successor fund would be Fund III. Please note that to be sophisticated, you must use Roman numerals.

➡️ Why Limit Successor Funds?

Most closed-end investment fund documents have a restriction on successor funds. LPs don’t want the GP forming a successor fund until the current fund is deployed. Otherwise, the GP might focus on the new fund and forget about the current fund.

Here’s what a successor provision might look like in real life:

"Unless consented to by the LPAC or a majority in interest of Limited Partners, during the Investment Period, neither the General Partner nor its affiliates will consummate an investment on behalf of a new blind-pool equity investment fund controlled or managed by the General Partner or an affiliate thereof and that has substantially identical investment objectives, criteria and scope as the Fund."

Note that a closed-end investment fund’s “investment period” is typically roughly the first half of the fund’s life. This is the period when the fund makes new investments.

➡️ What Counts as a “Successor Fund”?

In general, only funds that have the same scope as the current fund count as successor funds. So if the current fund is an early-stage venture fund, only early-stage venture funds would be restricted. Late-stage funds, private equity funds, and funds-of-funds would likely not be subject to the successor fund restriction.

This makes sense, as the purpose of the provision is to prevent diverting investment opportunities to the successor fund.

➡️ Allocation Policies

In some cases, a fund’s LPA will contain a provision outlining how investment opportunities will be allocated between the current fund and a successor fund (if formed). This offers additional clarity for LPs in the current fund.

🗓️ Next up in Part 15: Carried Interest.

Thanks for reading, everyone.

Have a great weekend! 🙌

JURY TRIAL

Have you enjoyed this newsletter? Don’t forget 🔗 to share it with your GP, Co-GP, LPs, or anyone else you think might find it valuable!

You can also propose a topic that you would like us to cover! Just reply to this email or submit your suggestions 🔗 here.

🛠️ Investment Fund Key Terms, Part 11 - [www.fundamentals.law].pdf

559.16 KB • PDF File

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