I tell every first-time GP the same thing: your Limited Partnership Agreement is the most important document you will produce during fund formation. It is not boilerplate. It is not a formality that your lawyer drafts while you focus on fundraising. The LPA defines the rights and obligations of the GP and every LP for the full life of the fund, typically ten years or more. It governs how capital is called, how profits are distributed, how conflicts are handled, when and how the GP can be removed, and what happens when things go wrong. Institutional LPs will read it carefully before committing a dollar, and the provisions you agree to in Fund I will shape the terms you can negotiate in Fund II.
The core economics: management fee and carried interest
The economic provisions of the LPA define how the GP gets paid. Standard terms for emerging venture capital and private equity funds have been stable for years, but there is real variation and everything is negotiable [20].
Management fee is typically 2% to 2.5% of committed capital during the investment period, stepping down to a percentage of invested capital or net asset value after the investment period ends [20]. For smaller funds (say under $30 million), I regularly see managers negotiate higher fees of 3% to 4% during the investment period to ensure they can keep the lights on. This is accepted practice for sub-scale funds, but you should expect LPs to push back as your fund size grows.
Carried interest is the GP's share of profits above a preferred return. The industry standard is 20%, and for a first fund you should think carefully before deviating from that number [20]. Some emerging managers offer reduced carry (15-17%) or higher hurdle rates to attract early LPs. That can work as a fundraising tool, but it sets a precedent that is hard to walk back in Fund II. Other managers ask for 25% or 30% carry, which is a tough sell unless you have a track record that justifies the premium.
The distribution waterfall
The waterfall governs the order in which fund proceeds are distributed. Getting this right matters because it directly determines when the GP starts earning carry and how LPs recover their capital. The standard venture capital waterfall typically operates in four tiers [35]:
- Return of capital: LPs receive distributions first until they have recovered their total invested capital (and in many funds, all called capital including recycled amounts and expenses).
- Preferred return: LPs receive an additional return, typically 7-8% annually for venture funds, on their unreturned capital [35].
- GP catch-up: The GP receives 100% of distributions until the GP's cumulative distributions equal 20% of the total profits distributed (this "catches up" the GP to the agreed carry percentage).
- Residual split: All remaining proceeds are split 80/20 between LPs and the GP.
An important distinction here: "deal-by-deal" (American) vs. "whole-fund" (European) waterfalls. In a deal-by-deal waterfall, the GP receives carry on each profitable exit as it occurs, even if the fund as a whole has not yet returned all capital to LPs. In a whole-fund waterfall, the GP does not receive carry until LPs have received back their entire capital contribution plus the preferred return across the full portfolio. Most US venture funds use a modified whole-fund approach, but the specifics vary and this is one of the most negotiated provisions in any LPA.
Organizational expenses and fee caps
The SEC expects private fund offering documents to clearly disclose all fees and expenses [2][25]. Organizational expenses, in particular, get scrutiny from emerging managers' LPs and the SEC alike. These are the costs of forming the fund: legal fees, filing fees, accounting setup, regulatory filings, and similar one-time expenses.
Standard practice is to cap organizational expenses in the LPA, with the GP absorbing anything above the cap. Common caps range from $250,000 to $500,000 depending on fund size [35]. Exceeding the cap without GP absorption is viewed negatively by the SEC and by institutional LPs, who see uncapped organizational expenses as a sign that the GP is not managing costs responsibly.
Operating expenses (ongoing costs like audit fees, tax preparation, legal fees, fund administration, and insurance) are typically charged to the fund and disclosed in the PPM. The LPA should enumerate what qualifies as a fund expense vs. a GP expense. A common dispute area: whether the GP's travel, office space, and technology costs are fund expenses or GP expenses that should be covered by the management fee. Be explicit in the LPA. Ambiguity here creates friction with LPs down the road.
Governance and LP protections
The LPA has to balance the GP's operational discretion with protections for LPs who are handing over capital with limited control over how it gets deployed. Key governance provisions include [9]:
- Investment restrictions: Limits on concentration (e.g., no more than 15-20% of committed capital in a single investment), restrictions on asset classes, geographic constraints, and stage restrictions.
- Key person provisions: If a named key person (usually the lead GP) is no longer devoting substantially all of their business time to the fund, the investment period is suspended until the LPs vote on how to proceed.
- GP removal: Conditions under which LPs can remove the GP, typically requiring a supermajority vote (75-80%) and distinguishing between "for cause" (fraud, criminal conduct, material breach) and "no fault" removal.
- Extension terms: The GP's ability to extend the fund's term or investment period, usually subject to LP advisory committee approval or a majority LP vote.
- Conflict-of-interest procedures: How the GP handles situations where it has a conflict, such as subsequent fund launches, co-investments alongside the fund, and transactions involving GP affiliates.
The LP Advisory Committee
Most venture fund LPAs establish a Limited Partner Advisory Committee (LPAC) of 3-5 LPs [35]. The LPAC's role is typically advisory rather than controlling, but it does real work: reviewing valuations, approving conflict-of-interest transactions, giving input on investment period extensions, and sometimes approving GP expense allocations that fall outside standard parameters.
For a first fund, the LPAC composition usually reflects your largest LPs plus one or two LPs with relevant operational expertise. The LPA should specify how LPAC members are selected, what decisions require LPAC review, and whether LPAC approval is binding or advisory. Do not leave these questions unaddressed. Disputes about LPAC authority are messy and can damage GP-LP relationships.
Side letters
Side letters are supplemental agreements between the fund and individual LPs that modify the terms of the main LPA [19]. They are standard practice now, particularly for larger or early investors who use their commitment size to negotiate special terms. Common side letter provisions include:
- Most-favored-nation (MFN) rights: The LP can elect to receive any more favorable terms negotiated with other investors [19].
- Enhanced reporting: More detailed or more frequent reporting than what the LPA requires.
- Co-investment rights: The right to participate in co-investment opportunities alongside the fund.
- Excused participation: The LP can opt out of specific investments that conflict with their own policies (e.g., a university endowment that cannot invest in certain sectors).
For emerging managers, side letters create real operational complexity. You need to track which LPs have which rights, ensure consistent treatment where MFN provisions apply, and manage the administrative burden of different reporting schedules for different investors. Keep the side letter universe as small as possible in Fund I. Each concession becomes a baseline expectation in Fund II.
The Private Placement Memorandum
The PPM is the fund's other core document. Where the LPA governs the operational relationship, the PPM provides the investment disclosures required under securities law: fund strategy, risk factors, conflicts of interest, fee and expense descriptions, biographies of key persons, and regulatory information [25]. The SEC requires that all material information be clearly disclosed. Omitting material risks or conflicts is the fastest way to create liability exposure for the GP.
For a first fund, do not treat the PPM as a marketing document. It is a legal disclosure document. The risk factors section should be thorough and honest. LPs and their counsel read it knowing that anything not disclosed becomes a potential claim against you if things go wrong.
How we support fund documentation at Infra One
We work alongside your fund counsel to ensure the operational provisions of your LPA align with how we administer the fund. Our fund administration platform handles capital call calculations, waterfall distributions, investor reporting, and expense tracking based on the specific terms in your LPA, including different reporting obligations for side-lettered LPs. We have seen hundreds of LPAs and can flag provisions that create administrative problems before you finalize the documents.
If you are in the process of drafting fund documentation and want operational input, get in touch.
DISCLOSURE: This communication is on behalf of Infra One GmbH ("Infra One"). This communication is for informational purposes only, and contains general information only. Infra One is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Infra One does not assume any liability for reliance on the information provided herein. © 2026 Infra One GmbH All rights reserved. Reproduction prohibited.