This is the sixth in our series of ten frequently asked questions from investors in venture capital partnerships.

Susan Mangiero, CEO of Investment Governance’s Fiduciary X, asked me the following:

Question: You had some thoughts about contract terms. Do you think the trend is shifting in favor of institutional LPs to receive better terms?

Answer: Certainly as the sources of capital have become more  selective and scarce, the GPs have had to become more aware of LP concerns over terms. While  the GPs in top tier funds will still be able to maintain favorable terms (and  LPs will always want to get into their funds), even these GPs have made some  concessions to maintain a supportive investor base. For example, recent press  reports have indicated that at least two prominent funds had lowered their  ”premium” carry structures, and made the payment of a 30% carry rate subject  to the return of a multiple of the investors’ capital. For those other funds  that are not oversubscribed, there will undoubtedly be some pressure on  terms. Though there has been a lot of talk about the terms suggested in the  recent guidelines published by the ILPA, these guidelines have not fully  caught hold (and some proposed terms –like joint and several liability  on clawbacks — may be seen as too extreme). Still, in the current fundraising  environment, there will certainly be some movement to provide an  alignment of interests between LPs and GPs, while trying to maintain the  appropriate incentives for the GPs.

Related posts:

1. VC Governance FAQ: (7) How should institutional investors contact VC funds?
2. VC Governance FAQ: (1) How much information are limited partners (pensions, endowments, foundations, etc.) entitled to receive from a VC fund?
3. VC Governance FAQ: (5) How are VC funds governed differently from the governance standards applied to their portfolio companies?
4. VC Governance FAQ: (10) Are limited partner defaults on capital commitments triggering a wave of lawsuits in the venture industry?
5. VC Governance FAQ: (8) How can a limited partner exit from a VC fund?

This entry was posted on Monday, March 15th, 2010 at 8:00 am and is filed under Adult Education, Corporate Governance, Leadership Profiles, Uncategorized, VC Board Best Practices, Venture Board Governance White Papers, Venture Capital, Web/Tech, Working Group on Director Accountability. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.