Venture capital Indication of Interest template

As you know, raising a venture capital fund is a lot harder than raising money for a startup. You are also raising a lot more money, in many cases. To get the whole process ticking, you want to try and get prospective investors to give soft commitments you can leverage to encourage more investors to get on the choo choo train too. One thing you can do is to get prospective limited partners to sign a non-binding Indication of Interest document.

No one likes virgins in VC land. No one wants to be the first. You want to be the last (Trying hard not to make this sound gross 😉 ). Most investors take a wait and see approach to investing in venture capital funds. Most will wait for the first close to happen or even the first transaction in a fund if the fund starts investing out of the first close. There just isn’t any upside, financial or other. Though there are a few things you can do to incentivize people to get into the fund faster, such as offering no management fees (Yes, I know a fund that has done this).

Why not see who is kicking ass and get in on the final close, if not the last investor in the fund? If you are a fund of fund, this is even more likely. The only downside is that they get shut out of fast-moving, oversubscribed fund, but that’s rarely if ever the case for new funds (You aren’t reading this if you are a GP at a top, established fund).

As a GP of a first, or maybe second fund, you really need to try lock down investors with a hard commitment (by signing definitive documents). Knowing that most investors are sheep and driven by social proof, what you can do is elicit soft commitment. The tangible means of doing this is to get prospective limited partners to sign a document known as an Indication of Interest. You can then say to every new investor that you meet that you have signed Indication of Interest documents for $xm from x investors.

I know, I know… it’s not as good as a hard commitment, but you work with what you got. An Indication of Interest plays to the desire of LPs to invest, but also lets them ‘wait and see’. It doesn’t really cost them anything to sign the document, other than a few minutes (or maybe getting a lawyer to read), so why not?

I’ve been making intros for two funds to family offices and was sent an Indication of Interest. There is so little information around to teach prospective GPs, so I totally anonymized the document so I can share it with you and help educate. You can download the Indication of Interest template in Word in the next section.

I’m going to run through the whole document line by line with you now. No doubt a VC lawyer can do a better job than me, but this is free and you get what you pay for!

Intro to IOI

An IOI is a non-binding document signed by a prospective LP. It signals a serious level of interest in investing in the fund based on a presented summary of key terms. It allows the GP to tangibly demonstrate traction to other potential investors (“We have Indications of Interest totaling $X million from Y investors”). This plays into the psychology of fundraising – leveraging social proof to encourage others to move forward. For the LP, signing an IOI signifies genuine interest beyond preliminary conversations but preserves their flexibility, as it creates no legal obligation to invest. It’s a low-cost way (in terms of time and commitment) for them to stay engaged while continuing their diligence.

This post provides an anonymized example of an IOI template and walks through its components, particularly the attached Summary of Terms (often Exhibit A). While this aims to educate prospective GPs, it is crucial to remember:

Disclaimer: This information is for educational purposes only and does not constitute legal advice. Always consult with qualified legal counsel when preparing fund documents and navigating the fundraising process.

Let’s dissect the typical structure and key clauses.

Download the Indication of Interest template

Line by line explanation of the indication of interest template

[FULL VC FUND NAME]

 INDICATION OF INTEREST

The undersigned indicates an interest in making an investment in [FULL VC FUND NAME] (the “Fund”) on the terms set forth in the Summary of Terms attached hereto as Exhibit A by becoming a limited partner of the Fund with a capital commitment in the amount of:

$________________________

(Please indicate desired capital commitment or range)

The limited partner you are sending this to fills in the amount of loot they intend spotting you.

Exhibit A is the long ass explanation of the terms that will be in the definitive documentation so you can decide if you are happy with all the terms before wasting any time.

The undersigned acknowledges and agrees that no binding obligation shall exist prior to the execution and delivery of mutually agreeable, definitive legal documentation related to an investment in the Fund.  In addition, the undersigned acknowledges and agrees that the final capital commitment amount (if any) allocated to the undersigned by the general partner of the Fund (as determined in its sole discretion) may be less than that for which the undersigned may otherwise wish to subscribe.

 Please email this completed Indication of Interest to the attention of [GP PERSONAL NAME] of [FUND NAME] at [VC EMAIL].

This section then says that this document isn’t actually binding. Only when the limited partner signs the “definitive legal documentation” is it binding.

The “the final capital commitment amount” is the amount the investor actually can invest. The final sentence says that the fund says that the General Partner will decide how much the investors actually can invest. They are doing to prioritize big tickets and famous investors.

• Non-Binding Clause: It explicitly states that signing this document does not create a legally binding commitment to invest. The obligation only arises after negotiating and signing the formal “definitive legal documentation” (primarily the Limited Partnership Agreement (LPA) and Subscription Agreement).
• GP Discretion on Allocation: It clarifies that even if an LP indicates interest for a certain amount, the General Partner (GP) has the final say (“sole discretion”) on the actual amount allocated to that LP in the fund. This allows the GP to manage demand if the fund is oversubscribed, prioritize strategic LPs, or ensure minimum investment thresholds are met (They are doing to prioritize big tickets and famous investors.)

INVESTOR:

                                                                                    

(Print name of individual or entity that wishes to invest)

By:                                                                              Address:                                                         

                (Signature of authorized signatory)

Name:                                                                          Phone:                                                            

(Print name of authorized signatory)

Title:                                                                            Email:                                                             

(Print title of authorized signatory)

Date:                                      

Simple stuff. The limited partner just signs everything.

Exhibit A

This is all the legal shizzle.

Exhibit A is where the substantive proposed terms of the fund are outlined. It’s a condensed version of what will eventually be detailed in the much longer, complex Limited Partnership Agreement (LPA). LPs review this summary to decide if the fund’s proposed structure, economics, and governance align with their expectations before investing further time.

[FULL VC FUND NAME]

Summary of Terms

The following information is intended as a summary of certain key proposed terms and conditions of the limited partnership agreement of [FULL VC FUND NAME] This summary is intended to form the basis for further discussions regarding a potential investment in the Fund by one or more investors.  This summary is qualified in its entirety by reference to a definitive limited partnership agreement that would be drafted to reflect final agreed upon terms and conditions.

This is yet more FYI stuff, reiterating that this is just “key proposed terms and conditions”.

You only need to add the full name of the fund.

Structure:

[FULL VC FUND NAME] (the “Fund”) will be a venture capital fund organized as a [CITY OF INCORPORATION] limited partnership headquartered in [CITY, STATE].

How is your fund structured? It’s going to depend on where your investors are based. With American investors, you might have a Delaware company. This is really complicated stuff you need a lawyer for. Yes, that’s going to cost you. Maybe $40k without any connections, $20k if you have connections.

Specifies the legal structure and domicile of the fund. For funds targeting US investors, a Delaware Limited Partnership is very common due to its well-established body of partnership law. The choice of jurisdiction impacts legal, regulatory, and tax considerations. Setting up the fund structure correctly requires experienced legal counsel and typically involves significant cost.

Term:

The Fund will have a [ten]-year term (the “Initial Fund Term”) [with two one-year extensions at the option of the General Partner with the approval of the Advisory Committee]. [Eighty percent] in interest of the Limited Partners may elect to terminate the Fund for any reason or no reason.

VC fund lives are typically 10 years. you frequently see fund extensions, which mean that you can extend the life of the fund to give deals a little longer to reach an exit. In this case, we are saying that the Advisory Committee can agree to extend the life another two years.

Finally, if [80%] of limited partners call bullshite, they can shut the fund whenever they want. Don’t piss them off 😉

• Standard Duration: A 10-year initial term is standard for VC funds, reflecting the long lifecycle of venture investments.
• Extensions: Provisions for 1- or 2-year extensions (often requiring LP Advisory Committee (LPAC) or LP majority consent) are common to allow more time for portfolio maturation and exits. Here, it’s noted as GP option *subject to* LPAC approval.
• LP Termination Right: LPs typically have a “no-fault divorce” right to terminate the fund, but the threshold is usually very high (e.g., 75-80% or more of LP interests) to ensure stability.

Investment Objectives:

The Fund is being organized to provide a limited number of select investors (the “Limited Partners”) with an opportunity to realize substantial long-term capital appreciation. The Fund will invest primarily in private companies, with a focus on [SECTOR THESIS].

The fund is being set up to make money. You can chuck in what you are investing in such as startups in the healthcare or… crypto space.

A high-level statement of the fund’s purpose (generating returns) and its investment strategy or focus area (e.g., stage, sector, geography). This should align with the GP’s expertise and the narrative presented in the pitch deck.

Management of the Fund:

The Fund will be managed by its general partner, [MANAGING FUND NAME], a [STATE] limited liability company (the “General Partner”). [GP PERSONAL NAME] and will be the initial managing members of the General Partner.

Someone has to manage the fund, likely you, right? What’s the name od the fund manager, what state/city is it incorporated in and who are the GPs managing the firm. If you have multiple GPs you would add more names as the ‘managing members’.

Identifies the legal entity acting as the General Partner (which bears liability and has management authority) and the key individual(s) (“managing members” or principals) responsible for executing the fund’s strategy. LPs invest based on their confidence in this team.

Capital Contributions:

The total committed capital of the Fund is expected to be approximately [$xx] million, and shall not exceed [$xx] million. Closings may occur at the discretion of the General Partner, provided that any subsequent closings shall occur no later than [12] months after the date on which the initial capital contribution is due from Limited Partners (the “Initial Contribution Date”). The Limited Partners will contribute capital to the Fund in installments, upon [10] business days’ notice. The General Partner will have a capital commitment to the Fund of at least $[x] million.

What is the size of the fund in millions? You can have a minimum and a maximum amount. That ensures investors are confident that the size of the fund is sufficient to execute on the strategy at a minimum, but not so large to complicate the strategy.

You as the GP, can close when you like, but once you have the first close, you have a maximum amount of time, such as [12] months to do so once a first capital call has been made. This ensures that investors who come in early and late are aligned on risk and reward.

Limited partners don’t pony up their commitment all at once, to have it sitting in your bank account. It stays in theirs. When you are investing in a startup, you ‘call’ the capital from the limited partners pro-rata. Investors have 10 business days to pony up the cash they need.

Finally, the GP(s) will invest $[x]m in the fund. 1% is the typical minimum. For larger funds, you can take out loans against this. SVB and the like can assist with that. For a small, first time, I expect Lps to expect you are all in with your cash.

• Fund Size: Sets expectations with a target size and a maximum (“hard cap”). This assures LPs the fund will be large enough to execute its strategy but not so large that returns become diluted or strategy must drift.
• Closings: GPs can have multiple “closings” where batches of LPs are admitted. A deadline (typically 12 months from the first close) ensures all LPs are participating under roughly similar market conditions.
• Capital Calls: LPs don’t wire their full commitment at once. The GP “calls” capital proportionally from LPs as needed for investments and expenses. A 10-business-day notice period is standard.
• GP Commitment (“Skin in the Game”): LPs expect GPs to invest their own capital alongside them. 1-2% of the total fund size is a common minimum benchmark, though this can vary significantly. For emerging managers, LPs often prefer seeing significant personal net worth committed. Financing options (like NAV lines from banks like SVB used to provide) exist for established GPs but are less common for first-timers.

Investment Period:

The Fund’s “Investment Period” shall end on the [fourth] anniversary of the Initial Contribution Date. Without the consent of the Advisory Committee, the Fund will not call capital for the purpose of making investments in new portfolio companies after the Investment Period, other than (i) investments with respect to which the Fund had entered into a written agreement prior to the end of the Investment Period, and (ii) follow-on investments in companies the securities of which were held by the Fund as of the end of the Investment Period or acquired after the Investment Period pursuant to clause (i) or with Advisory Committee consent.

You typically have a 10-year fund, so the ‘investment period’ matters. The investment period is the time during which you are allowed to make new investments.

The definition is that the investment period here starts from the time money is drawn down from investors.

The investment period is typically 3-5 years, with a bias to the short end. You might ask for a longer period to be opportunistic.  You would not want to be doing pre-seed deals in year 5 of an investment period unless you are pretty sure you can sell out in 5 years, though! Yeah, you have 5 years, but it’s going to be a headache at the end of it.

This defines the timeframe (typically 3-5 years from the first close) during which the GP can make *new* platform investments. After the Investment Period ends, capital calls are generally restricted to funding follow-on investments in existing portfolio companies, paying fund expenses, and fulfilling prior commitments. A shorter investment period (e.g., 3-4 years) concentrates investments, while a longer one (e.g., 5 years) allows more flexibility but can delay capital deployment.

Suspension of the Fund:

If, prior to the Substantial Investment Date, [GP PERSONAL NAME] ceases to devote the required amount of time to the operations of the Fund, then a suspension period shall automatically commence. Within six (6) months after commencement of a suspension period, a majority in interest of the Limited Partners may elect to terminate the suspension period. If the suspension period is not terminated within six (6) months after its commencement, the suspension period shall continue until the end of the Fund’s term, unless otherwise determined by the General Partner and a majority in interest of the Limited Partners. During a suspension period, no capital may be called for the purpose of making investments in new portfolio companies.

The ‘Substantial Investment Date’ is defined later, but simply put is once 70% of the fund has been invested (It’s more technical, but let’s park that for now).

This clause says that if the GP(s) don’t spend enough time on the fund before the ‘Substantial Investment Date’, then a ‘suspension period’ will commence. This basically means that the fund is dormant and you, the GP are dicking about playing polo or on the beach. During the suspension period, no money can be called from the LPs in the fund.

If the suspension period is not canceled within 6 months, then the fund basically does no new investments unless the majority of the LPs and the GP(s) agree.

This is a critical LP protection. A “Key Person Event” is triggered if the named principal(s) leave, die, become incapacitated, or otherwise stop dedicating sufficient time to the fund before a significant portion of the capital is deployed (often defined by the “Substantial Investment Date,” explained later). This automatically halts new investment activity (“suspension period”). LPs then typically have options, such as voting to continue with a modified team, appointing a replacement GP (rare), or deciding to wind down the fund early. This clause ensures LPs aren’t locked into a fund that loses its core management talent.

Allocation of Profits and Losses:

Net recognized profit and losses will be allocated in the following manner and order of priority:

First, [20]% to the General Partner and [80]% to the Partners (General and Limited), until the Fund has allocated aggregate net profit to the Limited Partners in an amount equal to [1.5]x the aggregate capital contributions of the Limited Partners (i.e., an amount sufficient to generate [2.5)x returns to Limited Partners); and

Thereafter, [25]% to the General Partner and [75]% to the Partners (General and Limited).

Money time!

You can make your returns as complicated as you like, but unless you have clout, not one is going to be Kool and the Gang.

Standard VC terms are 2 and 20. So 2% management fee and 20% performance fee.  If you are a big brand firm you might have 2.5% and 30%. If you are a tiny ass fund, you might have 3-5% and 20% so that your management fees are large enough to pay your salary. I have friends that have done this.

If you want to have a go, you can try asking for balloon payments for higher performance. In this example, we are asking for 20% up to 1.5x net and 2.5x gross multiple ROIC (return on invested capital).  THEN, if you make more than that, we are going to get our grubby little finders on 25% of the returns.

2.5x gross is ok, but I would think 3x would be more easy to sell, since 3x is typically what LPs are looking for.

This defines how the fund’s profits (and losses) are divided. The “2 and 20” model is standard: 2% annual management fee and 20% “carried interest” (carry) – the GP’s share of the profits.

• Standard Terms: While 2/20 is common, emerging managers might see variations. Established firms might command higher fees/carry (e.g., 2.5/25 or even 3/30). Very small funds sometimes have higher management fees (e.g., 2.5% or 3%) to cover fixed operating costs, but this can be harder to justify to LPs.
• Waterfall Complexity: The actual “waterfall” (how cash is distributed and profits allocated) can be complex. It typically involves returning LPs’ contributed capital first, often plus a “preferred return” (e.g., 8% annually) before the GP starts receiving carry.
• Tiered Carry: The example shows a “tiered” carry structure where the GP’s profit share increases (from 20% to 25%) after the fund achieves a certain performance level (e.g., returning 2.5 times the LPs’ invested capital). This incentivizes higher performance. Setting the hurdle (e.g., 2.5x or 3x total value to LPs) is a negotiation point. 3x is a common target return multiple for LPs in VC.

To the extent that the allocation to the General Partner of a disproportionate share of the Fund’s net losses would exceed the amount of net profits previously allocated disproportionately to the General Partner, such net loss shall instead be allocated to the Limited Partners (“Contingent Loss”).  Such net losses shall be restored to the extent of future net profits that would otherwise be disproportionately allocated to the General Partner.

This section is about managing when the shite hits the fan. Funds rarely actually lose money, but when they do, they don’t want to be on the hook. LPs take the hit on losses and if there are new profits, they are credited against the losses.

This is a technical accounting provision. It essentially ensures that if the fund has losses after the GP has already been allocated carried interest (based on earlier unrealized or realized gains), those losses are first applied to notionally “claw back” the GP’s previously allocated carry in their capital account before being allocated more broadly to LPs. If future profits occur, they first restore these contingent losses before resuming the standard carry allocation. This helps ensure the GP doesn’t benefit disproportionately if early gains are followed by significant losses.

Distributions:

A portion of net recognized capital gains and net ordinary income sufficient to pay income taxes resulting from such gains and income may, from time to time and at the discretion of the General Partner, be distributed to the Partners in the proportions that such income is allocated to the Partners.

If the partners make money, then they can take fund money to cover their tax bill. Go figure.

Because partnerships are typically pass-through entities for tax purposes, profits allocated to partners (GPs and LPs) create tax liabilities for them, even if no cash is distributed. This clause allows the GP to distribute enough cash to partners specifically to cover these estimated tax obligations arising from fund profits.

In addition, the General Partner may, in its discretion, make additional distributions in cash and distributions in kind of marketable securities (other than Digital Assets) in the following manner and order of priority:

• First, 100% to all Partners in proportion to their capital commitments until they have received distributions (including tax distributions) equal to their aggregate capital contributions;
• Second, [20]% to the General Partner and [80]% to the Partners (General and Limited) in proportion to their capital commitments, until the Fund has distributed to the Limited Partners, for all periods and pursuant to all provisions, aggregate distributions in an amount equal to [2.5]x the aggregate capital contributions of the Limited Partners; and
• Thereafter, [25]% to the General Partner and [75]% to all Partners (General and Limited) in proportion to their capital commitments.

Now we deal with how everyone makes the real money from the performance.

GPs want to make sure they cover their ass first. They get 100% of any distribution until they have received their investment and any tax they need to pay. Hilarious, I know.

Next, we follow the waterfall we went through in the “Allocation of Profits and Losses” section above. 20/80 and then 25/75.

This outlines the priority sequence for distributing actual cash or marketable securities generated from investment exits. The “waterfall” ensures LPs get their money back (and often a preferred return) before the GP shares significantly in the profits via carried interest. The exact steps and percentages are key negotiation points. (Note: I’ve elaborated on a more standard waterfall structure here, as the original text was slightly simplified/ambiguous compared to the allocation section).

The General Partner may, in its discretion, make distributions in cash or distributions in kind of marketable securities, with such distributions being made to all Partners in accordance with contributed capital, if there are no unrestored Contingent Losses in the Limited Partners’ capital accounts. At any time the General Partner may, in its discretion, make distributions in cash or distributions in kind of marketable securities, with such distributions being made 100% to Limited Partners.

So long as the LPs haven’t any losses on their books, distributions of cash can be handed out like candy to everyone. If the GPs want they can make direct payments to the LPs.

Reinforces the GP’s discretion over the timing and form (cash vs. marketable securities) of distributions. It also notes that distributions according to the standard waterfall can proceed if there aren’t outstanding “Contingent Losses” impacting LP capital accounts. The GP also retains the option to make distributions solely to LPs (e.g., to accelerate return of capital or preferred return).

Management Fee:

The General Partner or its designee (the “Management Company”) will provide management and administrative services to the Fund. For its services to the Fund, the Management Company will receive an annual management fee initially equal to [2.0]% of the Fund’s committed capital.

LPs live on management fees, which is typically 2% of the total amount of the fund annually.

This establishes the annual fee paid by the fund to the GP’s management company to cover operating expenses. It’s typically calculated as a percentage of total LP capital commitments during the Investment Period. 2% is standard, but as mentioned, variations exist.

Beginning with the first full fiscal quarter after the earlier of (i) the end of the Investment Period, or (ii) the date on which management fees begin to accrue with respect to a Successor Fund with capital commitments of at least $[xx] million, the annual management fee percentage shall be reduced to [1.75]%, and shall thereafter be reduced by an additional [0.25]% per year (i.e., the annual management fee percentage shall be reduced from [2.0% to 1.75%, to 1.5%, to 1.25%, and so on); provided, that the annual management fee percentage shall not be reduced below 1.0%.

The management fees tend to get smaller over time as there isn’t all that much work to do towards the end of a fund life. The investment period is typically when most things happen. You need to remember drawing down management fees isn’t all roses. You are reducing the amount of investible assets, but you still need to return a multiple on the fund gross of fees.

Since you typically need less money over time, you reduce the fees. In this example, 3 months after the 1/ investment period ends, or 2/ you raise another fund at a min value of say [$50m] and make mulah from that, you start reducing the fund annually in 25bps. In this example, the minimum management fee is 1%.

Management fees typically “step down” after the Investment Period because the GP’s workload shifts from sourcing new deals to managing the existing portfolio. This clause defines the triggers for the step-down (e.g., end of Investment Period, or raising a new “Successor Fund”) and the mechanism (e.g., an initial drop, followed by annual reductions, subject to a floor). Calculating the fee based on *invested capital* rather than *committed capital* post-Investment Period is also common.

In addition, beginning with the first full fiscal quarter after the end of the Initial Fund Term, the management fee for each fiscal quarter shall be calculated based on the cost basis of the assets held by the Fund as of the first day of such fiscal quarter.

The ‘initial fund term’ is ten years. After ten years, if you extend the life of the fund, the management fee is based only on the assets invested and held, so if you sell off companies, there are less MF to pay out.

If the fund term is extended beyond the initial 10 years, the basis for calculating the management fee often changes again, typically shifting to the *cost* or *fair market value* of the *remaining* investments, rather than committed capital. This further aligns fees with the actual remaining workload.

The management fee shall be reduced by the amount of directors’ fees or other compensation (in cash or securities) received by the General Partner or the managing members of the General Partner from a portfolio company unless waived by the Advisory Committee.

If companies you invest in pay fees then that is deducted from the management fee. LPs don’t want you double dipping.

LPs want to prevent GPs from “double-dipping.” If the GP or its personnel receive fees (e.g., board fees, transaction fees) directly from portfolio companies, those amounts typically must be used to offset (reduce) the management fee paid by the fund. The LPAC might waive this in specific circumstances.

From the management fee, the Management Company shall pay the following normal operating expenses of the General Partner and the Management Company: (i) salaries and wages, entertainment and other customary expenses of the Fund’s, the General Partner’s and the Management Company’s employees; (ii) rents payable for space used by the Fund, the General Partner or the Management Company; and (iii) expenditures for equipment used by the Fund, the General Partner or the Management Company.

GPs don’t pay for any expenses (well, most expenses).  The management fee covers it all.

This clarifies that the management fee is intended to cover the GP/Management Company’s routine operating costs – salaries, rent, travel, IT, etc. These are *not* typically charged separately to the fund.

Fund Expenses:

The Fund will bear all expenses incident to the organization of the Fund, the General Partner and related entities.  In addition, the Fund shall also bear all costs incurred in connection with the operation of its business, including those costs associated with holding or sale of securities; all legal, audit, registration, financial fees; the cost of Fund meetings; and any extraordinary expenses of the Fund.

The costs of running the fund from a boring legal point of view are treated differently. These fees don’t come out of the management fees, they also come separately from the fund.

These expenses are distinct from the GP’s overhead covered by the management fee. They are paid directly out of the fund’s capital (i.e., from LP commitments). Key categories include:

• Organizational Expenses: Costs of setting up the fund (legal, formation fees). These are often capped at a specific dollar amount or percentage of the fund size.
• Operating Expenses: Costs directly related to fund activities – deal sourcing (including travel for diligence, expert networks, data services), legal/accounting/audit/tax/administration specific to the fund and its investments, D&O insurance, LP meeting costs, and potential litigation or other non-routine expenses. Broken deal costs (expenses incurred on deals that don’t close) are also typically fund expenses.

LPs scrutinize these definitions to ensure the GP isn’t passing inappropriate overhead costs onto the fund.

Lookback:

If at the time the Fund is liquidated the General Partner’s cumulative distributions (exclusive of the General Partner’s distributions in respect of the General Partner’s committed capital) exceed net recognized gains and losses allocated to the General Partner in respect of its carried interest, the General Partner will refund such excess distributions; provided that the General Partner shall not be required to refund an amount in excess of the cumulative distributions (exclusive of the General Partner’s distributions in respect of the General Partner’s committed capital) received by the General Partner less taxes paid or deemed paid by the General Partner in respect of its carried interest.

If the GPs make more money than they should, then they pay the money back, less anything they have paid tax on already.

This is a crucial LP protection mechanism. Because carry can be distributed deal-by-deal (“American waterfall”) before the fund’s overall performance is known, it’s possible for the GP to receive more carry early on than they are entitled to based on the fund’s final, lifetime results. The clawback requires the GP to return any excess carry received at the end of the fund’s life, ensuring the agreed-upon profit split (e.g., 80/20) is achieved on a whole-fund basis. The “net of tax” provision acknowledges that GPs have likely paid taxes on the carry received and limits the clawback amount accordingly, though the specifics can be complex.

All Partner Givebacks:

Merger Proceeds – If the Fund, in connection with the disposition of an investment, is required to return all or a portion of the proceeds of such disposition, the General Partner may require that the Partners return distributions of such amounts in accordance with the proportions in which such amounts were received from the Fund.  A Partner’s obligation to return such distribution shall survive the liquidation of the Fund; provided that such obligation will not extend past the earlier of (a) 5 years after the date of the distribution to which it relates and (b) 3 years after the date of the Fund’s final liquidating distribution, without in either case the prior consent of the Advisory Committee.  In such event, any such return shall be treated as a return of the original distribution and not as a new contribution to the Fund.

If you sell an investment and there is a claim against a fund that the fund does not have enough assets to pay (this usually occurs late in a fund’s life), then the GP can require LPs to pay back to the fund any distributions received by the LP to pay the claim. This lasts 5 years from the distribution of capital, or 3 years after the last distribution from selling a company.  The GP doesn’t need approval from the Advisory Committee to do so.

Finally, this is a return of capital to cover liability and not a new investment into the fund.

When a portfolio company is sold, some proceeds might be held back in escrow or subject to future claims (e.g., for breaches of representations and warranties). If the fund has already distributed proceeds from that sale and is later required to pay back some amount, this “giveback” clause allows the GP to recall the necessary portion of those distributions from *all* partners (GPs and LPs) who received them. The obligation is typically time-limited to align with standard escrow/indemnity periods in M&A deals.

Indemnification – If the Fund incurs an indemnification obligation that exceeds the assets of the Fund, the General Partner may require that the Partners return prior distributions from the Fund in order to enable the Fund to satisfy such indemnification obligation.  Such contributions will be made by the Partners in proportion to the aggregate amount of distributions received from the Fund by such person.  No Partner shall be required to return an aggregate amount pursuant to this provision greater than the lesser of (a) [50]% of the aggregate amount of distributions made to such Partner, and (b) [33]% of such Partner’s capital commitment.  Notwithstanding the foregoing, in no event shall a Partner be required to return any amount pursuant to the foregoing sentence that exceeds the amount of distributions received by the Partner during the two years prior to receipt of notice from the General Partner of such return obligation.

The GPs are covering their ass from any losses. If profit from sale of investments are given to investors, then if there are any subsequent liabilities larger than the assets of the fund, the GPs can claw back any money that was distributed to the LPs in proportion to the amounts handed out.

If LPs/GPs need to pay money back then they pay either 1/ 50% of the money they got, or 2/ 33% of the amount that they invested. Furthermore, you don’t have to pay more than the amount you got in the past 2 years.

This covers situations where the fund itself faces a liability (e.g., a lawsuit settlement) that it cannot cover with its remaining assets, usually late in the fund’s life after most capital has been distributed. It allows the GP to recall previously distributed funds from LPs (and the GP) to meet this obligation. Critically, this obligation is almost always capped – typically as a percentage of the distributions received or total commitment – and often limited to distributions received within a recent timeframe (e.g., the last 12-24 months) to provide LPs with some certainty.

Investment Restrictions:

Without the approval of the Advisory Committee, (i) no more than [15]% of total capital commitments of the Fund shall be invested in the securities of any single issuer, (ii) no more than [10]% of total capital commitments of the Fund shall be invested in other investment funds with respect to which the Fund pays management fees or carried interest, unless management fees and carried interest paid by the Fund are reduced to avoid duplicative management fee or duplicative carried interest, (iii) no more than [20]% of total capital commitments of the Fund shall be invested in cryptocurrencies, tokens, app coins, or other digital instruments that are based on blockchain, distributed ledger or similar technologies (collectively, “Digital Assets”), and (iv) the Fund shall not invest in “passive” investments in securities publicly traded at the time of investment (other than Digital Assets).  As used herein, “passive” shall mean those investments where the General Partner does not anticipate an active role in advising management. The Fund will not purchase securities in a transaction that is opposed by the issuer’s Board of Directors.  The Fund may reinvest proceeds realized on the sale or disposition of Securities in the Fund’s portfolio, provided that the Fund’s cumulative investment in portfolio companies over the term of the Fund shall not exceed [120]% of the Fund’s capital commitments.  Any amounts withheld pursuant to the preceding sentence shall be withheld from distributions in proportion to the capital commitments of the Partners.  Unless otherwise approved by the Advisory Committee, the Fund will not invest in any company in which any of the General Partner or any of its affiliates have an investment. Without the approval of the Advisory Committee, neither the General Partner nor any managing member of the General Partner will (i) invest in any privately held portfolio companies of the Fund or (ii) make any investment that would reasonably be viewed as an investment opportunity of the Fund.

LPs don’t want GPs doing just anything. They have restrictions.

The fund will not:

• Put more than 15% of the fund into one deal
• 10% into another fund where there are multiple layers of fees
• No more than 20% of the fund into crazy crypto shite
• Won’t invest in the stock market (passive assets)
• Be hostile and invest in assets where their Board do not approve
• ‘Recycle funds’ of more than 120% the fund size. This means if you sell a company and make money, during the investment term you can invest more money. Not everyone allows this
• Have a conflict of interest by investing in a company that the GP has invested in (unless the Advisory Committee says ok)
• The GPs can’t invest int the portfolio companies directly (potentially reducing the allocation size) or in any company that the fund might otherwise invest in (again, why isn’t the fund doing it?)

These “negative covenants” define what the fund *cannot* do without specific LP consent (usually via the LPAC). They serve to:

• Ensure Diversification: Concentration limits prevent overexposure to a single company.
• Control Risk: Limits on leverage, public securities, or specific assets align investments with the stated strategy.
• Prevent Style Drift: Ensures the GP sticks to the mandate LPs signed up for.
• Manage Conflicts of Interest: Restrictions on affiliate transactions and GP co-investments ensure the fund’s interests are prioritized.
• Control Fees: Limits on investing in other funds prevent layering of fees.
• Govern Recycling: Provides clarity on whether and how much capital can be reinvested.

SPVs:

Notwithstanding the foregoing restrictions, to the extent an investment opportunity, together with amounts reasonably reserved for follow-on investments in such portfolio company, would exceed [10]% of total capital commitments to the Fund, the General Partner may allocate the excess amount of such investment opportunity to a special purpose vehicle (“SPV”) formed, sponsored, advised or syndicated by the General Partner or its affiliates.  Until the Substantial Investment Date, each Limited Partner whose capital commitment constitutes at least [2]% of the aggregate capital commitments to the Fund shall be afforded an opportunity to subscribe for a pro rata portion of the interests of any SPV.

If you find a deal which is hot shite and you have an allocation which is more than the fund can cover (You can’t invest more than 10% of the fund in one deal), you can do magic to invest. You create an SPV to invest (side care investment) by raising money. Until that ‘Substantial Investment Date’, mainly 70% of the fund invested, if LPs have 2% of the fund or more than can do a pro rata investment in the SPV.

If the GP finds a compelling investment opportunity that is larger than the fund’s concentration limit allows it to fully pursue, they can offer LPs the chance to invest additional capital directly into that specific deal alongside the main fund. This is done through an SPV (often called a “co-investment”). LPs typically appreciate this as it allows them to increase exposure to promising companies, often with lower fees and carry than their main fund commitment. The LPA usually outlines the process for offering and allocating these co-investment opportunities.

Advisory Committee:

The Fund shall have an Advisory Committee consisting of [three to five] members selected by the General Partner.  The Advisory Committee will review certain conflict of interest matters.

We have mentioned the advisory committee many times. These guys really need to have the back of the LPs. Ironically the GP picks 3-5 of their buddies.

The LP Advisory Committee (LPAC) acts as a representative body for the LPs. While selected by the GP, its members are LPs. The LPAC doesn’t manage the fund but provides oversight and consents on specific issues outlined in the LPA, particularly those involving potential conflicts of interest or deviations from standard operating procedures. It’s a key governance mechanism.

Formation of a New Fund:

Without the approval of a majority in interest of the Limited Partners, the managing member of the General Partner will not call down capital from any other investment fund with similar objectives and operations (a “Successor Fund”) until the earlier of (i) such time as at least [70]% of the Fund’s capital commitments have been invested in portfolio companies, used to pay expenses or reserved for future expenses or follow-on investments in portfolio companies, (ii) the expiration of the [fourth] anniversary of the initial closing date of the Fund, or (iii) [6] months after the commencement of a Suspension Period that has not earlier been terminated (the earliest of such dates, the “Substantial Investment Date”).

Until such time, the managing members of the General Partner shall devote substantially all of their business time to the affairs of the General Partner, the Fund and SPVs.

Now we deal with launching new funds.

The GP will not raise for another fund with a similar mandate before:

• 70% of the fund has been invested
• The 4 year investment period is over
• 6 months after a suspension period has started

Otherwise, generally, the GPs need to work their cute little ass off to make the LPs money.

LPs want assurance that the GP team is focused on deploying their capital and managing the current fund before turning significant attention to raising the next one. This clause restricts the GP from actively raising or deploying capital for a follow-on fund until the current fund is substantially invested (e.g., 70-80% deployed or reserved) or its Investment Period has ended. It also reinforces the GP team’s time commitment to the current fund.

Indemnification:

The Fund will indemnify the General Partner, its members, employees, agents and affiliates, and the members of the Advisory Committee against claims, liabilities, costs and expenses (including legal fees, judgments and amounts paid in settlement) as incurred, in connection with their activities on behalf of, or their association with, the Fund; provided that the person seeking such indemnification has acted in good faith and did not engage in gross negligence, recklessness, or willful malfeasance.

Again, GPs cover their ass. The GPs and Advisory Committee are covered from all nasty shizzle. That is unless they did something stupid.

This protects the GP, its team, and the LPAC members from personal liability for actions taken in good faith on behalf of the fund. The fund itself (meaning, ultimately, the LPs’ capital) covers legal costs and potential damages arising from lawsuits related to fund activities. However, this protection does *not* extend to bad acts like fraud, gross negligence, or intentional wrongdoing.

Reports and Meetings:

Limited Partners will receive within [120] days following the end of each year audited financial statements of the Fund. Summary financial information will be provided within [45] days of the close of each of the first three quarters of each calendar year.  In addition, each Limited Partner will be provided annually with an IRS Schedule K-1 and such other information as may reasonably be requested by such Limited Partner as necessary for the completion of federal income tax returns.  The Fund will hold an annual meeting of Limited Partners (which may be held telephonically) to review and discuss the Fund’s investment activities.

Who does love some boring ass accountability? Each year within 120 days there will be audited financial statements. Because, who doesn’t love a sneak peek, within 45 days of the end of the third quarter there will be a summary of the financials.

Each year the LPs will get the information they need to file their taxes.

The Schedule K-1 is an IRS tax form issued annually for an investment in partnership interests. The purpose of the Schedule K-1 is to report each partner’s share of the partnership’s earnings, losses, deductions, and credits.

Finally, each year there will be an annual LP meeting.

Defines the reporting obligations of the GP to the LPs. Standard reporting includes audited annual financials, unaudited quarterly updates, tax information (K-1s are crucial for US LPs), and regular capital account statements. An annual LP meeting is also standard practice for providing updates and fostering communication.

Legal Counsel:

[LEGAL FIRM NAME], LLP

Who is the legal firm you are using?

Identifies the primary law firm representing the Fund and the GP in the fund formation and ongoing operations. LPs often consider the reputation and experience of fund counsel as part of their diligence.

Conclusion on the Indication of Interest template

Wasn’t that fun! Now you know what might be in your indication of interest to get investors to start committing to investing in your new venture capital fund.

Every fund is different, so whilst this Indication of Interest template might have been the highlight of your week, you will need to blow cash on lawyers. There just aren’t enough VC funds to make the whole process cheaper.