- A guide to the limited partnership agreement (LPA)
- What is a limited partnership agreement?
- Why are limited partnership agreements important?
- What are the key economic terms in an LPA?
- Management fees
- Carried interest and distributions
- Capital calls
- Fund term
- Fundraising period
- Investment period
- GP commitment
- Recycling
- Default
- Fund expenses
- What governance provisions does an LPA include?
- GP clawback
- Key person provisions
- Indemnification
- What LP rights are included in an LPA?
- Co-investments
- Limited partner advisory committee
- Side letters
- GP removal
- Conflicts of interest
- Additional LP rights
- Why the LPA matters for fund operations
- Frequently asked questions about limited partnership agreements
So, you’ve decided to launch a new fund. You’ve got an investment thesis, a management team, advisors, deal flow, and some first close investors lined up who love your ideas and your team. Now you just need to convert these prospective investors into actual investors.
This is no easy feat, as not only do you need to convince them that you will invest their money wisely, but you also need to convince them that the limited partnership agreement (LPA) is fair for both parties and standard for a private fund.
What is a limited partnership agreement?
An LPA is the legally binding contract between the general partner (GP) and the limited partners (LP) that governs how a fund operates—from the economic relationship between the GP and LPs to the governance rules that protect both sides. The LPA is the foundational document for any fund that defines every party's rights, obligations, and economic relationship. It establishes the rules before any capital is called or investments are made, and every decision the GP makes during the fund's life traces back to the authority granted in this agreement.
The LPA covers three broad categories of terms. Economic provisions determine how money flows into and out of the fund. Governance provisions establish who has authority, how conflicts are handled, and what oversight mechanisms exist. Operational terms address the fund's duration, reporting requirements, and restrictions on transferring LP interests.
Why are limited partnership agreements important?
The LPA protects both sides of the relationship by defining expectations upfront. For GPs, it provides the legal authority to manage the fund within agreed parameters. For LPs, it offers transparency into how their capital will be managed and legal recourse if the GP acts outside the agreed terms.
LPA terms also play a significant role during fundraising. Market-standard terms build LP confidence and signal that the GP operates within established norms. Non-standard or GP-favorable terms can slow fundraising or deter institutional investors entirely. This is especially true for emerging managers raising a first fund, where LPs scrutinize every provision closely before committing capital.
This video gives an overview of how LPs work in private funds as part of Carta’s free VC 101 curriculum.
Below is a summary of the key terms of a venture capital (VC) fund LPA, along with best practices and market norms for each. Remember, the terms of your fund can vary from the terms described below, so long as they are reasonable and within market norms.
What are the key economic terms in an LPA?
The economic provisions form the financial framework of the fund. They determine how capital flows in, how the GP is compensated, and how profits are returned to investors.
Management fees
The management fee compensates the GP for running your fund. It covers operating expenses such as salaries, office costs, travel, and other overhead. Typically, the management fee is paid in advance and amounts to 2% of the aggregate commitments during the investment period. According to Carta’s 2025 Fund Economics Report, the median management fee during the investment period is two percent of committed capital, typically paid quarterly in advance. Buyout funds have seen more fee compression, with the average rate falling to 1.6% in 2025, down 20% from the traditional two-percent level.
After the investment period ends, the management fee often steps down. Common step-down structures include reducing the percentage rate or switching the calculation basis from committed capital to invested capital (also called net invested capital). Committed capital is the total amount LPs have pledged to the fund. Invested capital is the portion that has actually been deployed into portfolio companies. The management fee is generally offset by any other fees received by the principals, the investment manager, the GP, or their affiliates from the portfolio companies.
Carried interest and distributions
Carried interest, commonly called "carry," is the GP's share of fund profits. The standard carry rate is 20% of gains, but the GP only earns it after LPs have received their capital back.
How profits flow from the fund back to you and your investors depends on the distribution waterfall structure defined in the LPA. The two common models are:
Whole-of-fund waterfall (European): All fund proceeds go to LPs first until they receive 100% of their contributed capital. Only after full capital return does the GP begin earning carry. Some funds also include a preferred return (called a hurdle rate), typically 7–8% annually, that LPs must receive before carry is paid.
Deal-by-deal waterfall (American): Carry is calculated on each investment separately. The GP can begin earning carry on profitable exits even if other investments in the portfolio have lost money.
In almost every waterfall, 100% of the proceeds available for distribution are first distributed to the LPs as a return of capital. After the LPs receive a return of capital, there is some variation around how the next tranche(s) of proceeds are distributed. LPs generally prefer the whole-of-fund approach because it ensures they receive their full capital back before the GP shares in profits.
Capital calls
Your LPs do not invest their full commitment on day one. Instead, you issue capital calls over time as investments are identified and fund expenses arise. A capital call is a formal request from the GP to LPs to transfer a portion of their committed capital to the fund. The LPA specifies the minimum notice period for these calls, typically at least 10 business days, though the first capital call after the initial closing may be on less than 10 days’ notice.
Many GPs use capital call lines of credit to bridge the gap between making an investment and collecting capital from LPs. These credit facilities allow the fund to move quickly on time-sensitive deals without waiting for LP wire transfers by drawing from the line to make an investment or pay a fund expense and then calls capital from investors to replenish the line. The LPA should contain language that banks need to see in order to provide a capital call line to the fund.
Fund term
The fund term is the total lifespan of the partnership commencing the day it begins operations and ending when it is dissolved. For VC and PE funds, this is typically eight to ten years while smaller or newer funds may have a shorter term, as they have less capital to deploy. In practice, many funds use extensions—average holding periods at exit have drifted toward seven years, and buyout funds are sitting on a record $3.8 trillion in unrealized value. Most LPAs permit the GP to extend the term by one or two additional years, usually in one-year increments, to maximize value from remaining portfolio investments before final liquidation at the end of the term.
Fundraising period
This is the period during which the GP can admit investors as LPs to the fund. The fundraising period typically starts with the fund’s initial closing and ends with its final closing. A fund may have several closings in between. In most cases, the final closing occurs within 12 months of the initial closing.
Investors at each subsequent closing will generally contribute capital—and be treated—as though they came in at the initial closing and participate in all of the fund’s investments that haven’t been previously disposed of. Accordingly, the existing investors’ proportionate share of the fund is diluted each time new investors are admitted to the fund.
In order to make this more fair for the fund’s existing investors, the subsequent close investors typically pay a subsequent closing fee to the existing investors, which is calculated like interest (e.g., at five to seven percent per annum) on the subsequent close investors’ capital contributions from the date of the initial closing to the date of the applicable subsequent closing.
Investment period
The investment period is the window during which the GP can deploy capital into new investments. It typically spans the first three to five years of the fund's life, or until 70–75% of committed capital has been deployed. After the investment period ends, the GP can generally only make follow-on investments in existing portfolio companies, not back new deals.
GP commitment
The GP commitment is the capital that the GP's principals invest alongside LPs. It typically ranges from one to two percent of total fund commitments and is often called "skin in the game”—a signal that the GP's own capital is at risk alongside yours.
A meaningful GP commitment aligns your incentives with those of your investors because you profit and lose alongside them. Institutional LPs view the size of this commitment as a signal of confidence and alignment. Some GPs satisfy part of their commitment through management fee waivers, a cashless contribution structure where the GP forgoes fees in exchange for an equivalent ownership stake in the fund, or contribute “warehoused” investments to the fund to satisfy a portion of their commitments.
Recycling
If there’s an exit of a portfolio company (e.g., an IPO or acquisition) during the investment period, rather than distributing the capital to investors, the GP can recycle or reinvest some or all of the proceeds. Typically, only an amount equal to the cost basis of the investment is recycled. LPs like recycling because during the investment period, the management fees are based on committed capital, so they are getting a discount on the management fee with investments made with recycled capital. It’s also good for GPs, as they can earn extra carried interest on the additional investments made with recycled capital.
Default
The LPA should have mechanisms in place to discourage LPs from defaulting on their capital contribution obligation. The default provisions can seem a bit draconian (e.g., a forfeiture of a portion of the capital account balance, forfeiture of future profits, forcing a sale of the LP’s interest, etc.), but harsh penalties can help limit defaults (which typically adversely impact the fund).
Fund expenses
The fund pays for all of its expenses, which are generally categorized as “organizational expenses” and “operating expenses.”
Organizational expenses include fees, costs, and expenses related to forming the fund, preparing the offering documents, and raising capital. Operating expenses include all other fund expenses.
Generally, LPs like to see a cap on organizational expenses so that they know the GP isn’t spending too much of the fund’s assets on setting up the fund and bringing in investors. If the cap is exceeded, the GP or its affiliates are responsible for the excess fees, costs, and expenses. There really isn’t a rule of thumb regarding what the cap should be, but the lower the cap the better.
What governance provisions does an LPA include?
Governance provisions are the safeguards that protect LP interests and establish boundaries on GP authority. These provisions matter most when problems arise: a key GP departs, the fund underperforms, or a conflict of interest surfaces.
GP clawback
The GP clawback requires the GP to return excess carried interest upon final liquidation of the fund back to the fund for distribution to the LPs. This situation can arise when early exits generate profits and trigger carry payments, but later investments produce losses that reduce total fund performance below the carry threshold. The clawback ensures the GP does not retain carry it did not ultimately earn over the life of the fund. It is a standard LP protection, and most LPAs include it.
To ensure that the GP is able to satisfy this clawback obligation, the principals will either enter into personal guarantees to fulfill their respective obligations or the GP will set up an escrow account and deposit an amount typically equal to at least 25% of any carried interest distributions into the account. LPs tend to prefer having an escrow over a personal guarantee.
Key person provisions
Key person clauses identify the individuals at the GP whose involvement is essential to the fund's strategy and success. These are usually the founding or senior partners who led the fundraise and whose track record LPs relied on when committing capital. If a key person event is triggered, meaning a named individual departs, dies, or becomes disabled, the investment period is typically suspended.
A key person provision is almost always in the LPA and is usually triggered when one or more key persons sell their equity in the general partnership or fail to devote substantially all of their time to the general partnership for 180 consecutive days. If a key person event occurs during the investment period, normally no new investments may be made by the fund until the key person is replaced. The LPAC, as defined below, is typically involved in approving the new key person or resolving the key person event. This provision ensures that LPs' capital is not deployed by a team they did not evaluate or endorse.
Indemnification
If the principals, the GP, the investment manager, or their agents and affiliates (“covered persons”) are sued as a result of something they did or didn’t do for the fund, the LPA will typically indemnify the Covered Persons for any and all liabilities, costs, and expenses unless the Covered Persons’ liability arose from the Covered Persons’ gross negligence, bad faith, willful misconduct, or material breach of the LPA or applicable law.
Many LPAs have an “LP clawback” provision, which requires the LPs to return a portion of the distributions they received from the fund if needed to satisfy the fund’s indemnification obligations to the Covered Persons. Typically, the LPA will have limits on the LP clawback (e.g., it does not apply after two to three years from the fund’s dissolution and no more than 25% of distributions may be clawed back).
What LP rights are included in an LPA?
LPs have more influence than their passive role might suggest. Embedded throughout the LPA are a set of carefully negotiated LP rights that govern their economic participation, governance input, and access to preferential terms. These rights typically span co-investment opportunities, advisory committee participation, and individually negotiated side letter arrangements that can modify or supplement the standard fund terms.
Co-investments
Many funds offer co-investment rights to LPs and third parties. For example, if the GP has arranged to acquire more shares of a portfolio company than the fund needs, the GP can allocate some or all of the additional shares to LPs that invest over a certain amount in the fund to incentivize LPs to invest more into the fund. The investment manager should have an investment allocation policy to determine how investments are allocated among the fund, other funds with investment strategies that overlap with the fund’s, and investors with co-investment rights.
Limited partner advisory committee
The LP advisory committee (LPAC) is a group of LP representatives, typically the fund's largest investors, which is formed to address conflicts of interest, approve valuation methods, extend time periods, approve investments that would otherwise be restricted, review key person events, and other matters requiring independent oversight. The LPAC is for fund governance and does not get involved in fund investments or have management authority. Their role is advisory, and their input helps the GP navigate situations where its interests may diverge from those of the fund. Members of the LPAC are selected by the GP and the LPAC typically consists of three to five LPs (or their representatives).
Side letters
The terms of the LPA may be modified by side letters or agreements with certain LPs. They are negotiated during fundraising and sit alongside the LPA. Typically, side letters are only entered into with the fund’s larger investors or early investors.
Common side letter provisions include fee discounts for large commitments, co-investment rights, enhanced reporting, and regulatory accommodations. Most-favored-nation (MFN) clauses allow other LPs to elect to receive the same terms granted to any single LP through a side letter, with certain exceptions such as fee-specific or regulatory-specific provisions. MFN clauses encourage transparency and reduce the risk that one investor receives significantly better terms than the rest of the fund. We recommend considering a “dollar-weighted” MFN so an investor can only see and elect into the side letters of other investors who have committed at least as much as the investor.
GP removal
Most LPAs allow the LPs to remove the GP for “cause” (e.g., if the principals or GP engage in embezzlement, fraud, or bad faith). Usually, removing the GP for cause requires the vote of at least 66.6% in interest of the LPs.
While it’s less common for an LPA to permit the LPs to remove the GP without cause, some institutional LPs require or expect to see this in the LPA. Normally, removing the GP without cause requires the vote of at least 75% in interest of the LPs.
Conflicts of interest
There are likely going to be several potential or actual conflicts of interest (e.g., the investment manager providing advice to multiple funds, the principals having interests in portfolio companies, etc.). In most cases, disclosing the conflicts of interest and/or having the LPAC approve of transactions involving a conflict of interest addresses any potential issues caused by the conflict of interest.
Although the list above doesn’t cover every concept or term of an LPA, it does cover some of the most common terms for a VC fund and the best practices and market norms for these terms.
Additional LP rights
The LPA also grants LPs certain standard rights:
Quarterly and annual financial reporting: LPs receive regular updates on fund performance, portfolio valuations, and financial statements.
Transfer restrictions: LPs cannot transfer their fund interests without GP consent, which protects the fund's investor base and regulatory standing.
Fund dissolution rights: LPs can vote to dissolve the fund under specific circumstances, such as GP misconduct or prolonged underperformance.
Why the LPA matters for fund operations
The LPA is not a document that sits in a drawer after fund closing. It governs almost every operational decision throughout the fund's life. When the GP executes a capital call, it must follow the notice periods and default provisions specified in the LPA. When the fund distributes proceeds, the calculation must conform to the waterfall structure and preferred return terms defined in the agreement.
LP reporting obligations, including their content, frequency, and format, derive directly from the LPA and any applicable side letters. This is a core part of effective investor relations. Decisions about fund extensions, follow-on investments, and capital recycling all require LPA authorization. Even edge cases like LP defaults, GP removal, or early fund termination are governed by specific LPA provisions.
A well-structured LPA reduces operational friction by providing clear rules for both routine workflows and exceptional situations. When the terms are precise and market-standard, you spend less time resolving disputes and more time managing the portfolio.
Fund administration platforms can automate many LPA-governed workflows, including capital call processing, distribution waterfall calculations, and investor reporting. Automation reduces the risk of manual errors and helps ensure compliance with the specific terms of your LPA across every transaction.
If you are ready to streamline the operational side of fund management, request a demo to see how Carta can help.
Frequently asked questions about limited partnership agreements
What is the purpose of a limited partnership agreement?
An LPA defines the rights, obligations, and economic terms between the GP and LPs, providing the legal framework that governs how the fund operates from formation through liquidation.
What are the disadvantages of a limited partnership?
For GPs, unlimited personal liability for fund obligations is the primary risk. For LPs, the main drawback is limited control over investment decisions and fund management despite having significant capital at stake.
What is the difference between an LPA and an operating agreement?
An LPA governs a limited partnership, which is common for VC and PE funds, while an operating agreement governs an LLC business structure. In a limited partnership, LPs have limited liability but no management role, whereas LLC members may participate in management while still retaining limited liability.
Can limited partnership agreement terms be negotiated?
Yes. While LPA terms should fall within market norms, LPs, especially institutional investors, routinely negotiate terms through side letters or direct LPA amendments during the fundraising process.
What happens if a limited partner defaults on a capital call?
The LPA typically includes default provisions with significant penalties, such as forfeiture of a portion of the defaulting LP's capital account, loss of future profit participation, or forced sale of the LP's interest at a discount.
What is the difference between an LPA and a private placement memorandum (PPM)?
A PPM is a marketing document used to pitch the fund to potential investors during the fundraising process. In contrast, the limited partnership agreement is the binding legal contract that investors actually sign at closing.
Who drafts the limited partnership agreement?
The fund's legal counsel drafts the agreement in collaboration with the GP to ensure it reflects the firm's investment strategy. However, fund administrators should always review the terms prior to closing to ensure the specific clauses can be successfully operationalized.
Can an LPA be amended?
An amendment is a formal change made to an existing legal document. This means agreements can be modified after the fund closes, but doing so typically requires a formal vote that demands approval from a supermajority of the LPs or the LPAC.
DISCLOSURE: This publication contains general information only and eShares, Inc. dba Carta, Inc. (“Carta”) is not, by means of this publication, 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. Carta does not assume any liability for reliance on the information provided herein.
