This is the last in our series of 10 frequently asked questions from investors in venture capital partnerships.

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

Question: I’ve read that some GPs are suing LPs for not making capital calls. The LPs claim that they are cash constrained and/or the VC fund has not performed. Why throw more money their way? Do you see a trend here of broken contracts?

Answer: First, it would appear that the reports of numerous LP  defaults exceed the reality. Based upon discussions with industry  participants, most institutional LPs have, in fact, met their  obligations to make capital calls. Second,  the decision of a GP to sue an LP over a default is most often the absolute  last resort. The GPs are not in business to institute litigation — this a  distraction for the GP and added publicity that neither GPs nor LPs desire.  When the LP Agreement is executed, all of the parties enter into a contract  with the expectation that both LPs and GPs will honor their respective  commitments. The GPs have committed their time, and have built an organization  to implement an investment strategy and program for the fund. They should be  entitled to rely on the contractual obligations of those sophisticated  investors who agreed to support this program over the long  term.

Related posts:

1. VC Governance FAQ: (8) How can a limited partner exit from a VC fund?
2. VC Governance FAQ: (5) How are VC funds governed differently from the governance standards applied to their portfolio companies?
3. VC Governance FAQ: (6) Are contract terms in partnership agreements shifting in favor of institutional Limited Partners?
4. VC Governance FAQ: (1) How much information are limited partners (pensions, endowments, foundations, etc.) entitled to receive from a VC fund?
5. VC Governance FAQ: (2) Especially now, when transparency is so important, why is limited financial information available from a private company?

This entry was posted on Friday, March 19th, 2010 at 8:00 am and is filed under Adult Education, Corporate Governance, Entrepreneur, Leadership Profiles, 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.