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with tagLPA
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Fund Operations
LPs LP Operations Capital Calls LPA Cornerstone LPA

What's the most common way to handle defaulting LPs?

Asked by:
Community Member
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Nov 29, 2023

Looking at the Cornerstone LPA for example, I find there's multiple avenues a GP could choose to deal with a defaulting LP. What's, based on industry experience, the rationale for choosing one over the other, and which ones are the most common? - Removing the LP from the partnership by either considering their interest forfeited or selling it at a discount - Using distributions to cover capital calls - Pursuing legal action And when does it make sense for the GP to waive the interest? I imagine many of these decisions are down to the individual relationship with the LP, so I'd love to know the common/best practice here.

Top answer:

Usually, the LP will work to find a buyer for the defaulted position. That is the most common way to manage this. 

 -  Mike Suprovici
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3
Venture Legal
Termination LPA

Cornerstone LPA 2.0 agreement specifies that the fund can be dissolved, liquidated, and terminated by the election of the general partner. What are the typical cases making GP to make such a decision? Isn't it too risky for LP leaving it possible to have the fund terminated for any reason by the GP?

Asked by:
Community Member
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Nov 28, 2023

I wonder what are the provisions in the Cornerstone LPA 2.0 that will protect the LP from unjustified termination, such as LP approval of termination and what is the best industry practice to protect LP rights.

Top answer:

For the General Partner to unilaterally decide to wind up a fund is an edge-case - there aren't "typical" types of cases to speak of here. However as one example, a pending SEC investigation (which could implicate the General Partner) co...

 -  Haw Kuo
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3
Accounting & Taxes
clawbacks LPA

Clawbacks and Cornerstone LPA 2.0

Asked by:
Community Member
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Nov 28, 2023

With respect to a Cornerstone LPA 2.0 agreement; under what conditions would partners in a venture capital fund give back up to 20% of distributions to satisfy [fund] obligations?

Top answer:

Clawbacks would be very unusual - here are two examples of situations in which the Fund may need to claw back distributions to satisfy the Fund's obligations (but this is by no means all-inclusive): • If proceeds have been over-distribut...

 -  Haw Kuo
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