When your fund invests in another fund or acquires private market securities, the documents you sign determine your rights, restrictions, and risk exposure for years. The subscription agreement you execute, the LPA you are bound by, the purchase agreement you negotiate: these are not formalities. They are the terms you will live with through capital calls, distributions, exits, and everything in between.
This guide walks through the core documents across three common transaction types, covering what to look for, what to negotiate, and where fund managers most commonly encounter issues.
The Document Overview
Not every fund investment involves the same paperwork. The documents you review depend on how you are entering the deal. There are three primary transaction types, each with its own document set.
You commit capital as a limited partner. You review the LPA, subscription agreement, and any side letters. The GP controls the fund; your rights are defined by these documents.
You invest directly in a company, typically in a venture or growth equity round. You negotiate a stock purchase agreement, review the charter, and may sign investor agreements covering information rights, co-sale, and voting.
You buy an existing interest from a current holder, whether an LP interest in a fund or shares in a private company. You negotiate a purchase agreement with the seller and review the underlying governance documents to understand what you are acquiring.
Each transaction type has its own risks and its own documents. The sections below cover each in detail.
Fund Investment Documents
When you commit capital to a fund as an LP, the limited partnership agreement is the governing document. Everything else, including the subscription agreement and any side letters, operates within or alongside the LPA. Understanding the LPA is the foundation for understanding your investment.
Economic Terms
The economics of your fund investment are set by four core provisions. Each one affects your net returns, and each one varies more than most LPs expect.
Management Fee
Most funds charge 1.5% to 2.0% annually on committed capital during the investment period, then shift to a lower rate on invested capital (or net invested capital) after the investment period ends. Pay attention to the base, the rate, and any offsets. Some GPs offset 100% of transaction fees and monitoring fees; others offset less. The fee base matters as much as the rate: a 2% fee on committed capital costs significantly more than 2% on invested capital in a fund that deploys slowly.
Carried Interest
The standard is 20% of profits above the preferred return, but the details matter. Is carry calculated on a deal-by-deal basis or on a whole-fund (aggregate) basis? Deal-by-deal carry means the GP earns carry as individual investments are realized, even if the overall fund has not returned capital. Whole-fund carry means the GP earns carry only after all contributed capital and the preferred return have been returned to LPs. Most institutional LPs prefer whole-fund carry.
Distribution Waterfall
The waterfall sets the order in which cash flows from realized investments. A typical structure returns contributed capital first, then the preferred return (usually 7-8%), then a GP catch-up (where the GP receives distributions until it has received its carry percentage of total profits), then a split of remaining profits. European-style waterfalls return all capital before any carry; American-style waterfalls allow deal-by-deal carry. The waterfall and the carry methodology should be read together.
GP Clawback
If the GP receives carry on early exits but the fund underperforms overall, the clawback requires the GP to return excess carry. This is your protection against a fund that has one good early exit and then poor performance. Check whether the clawback is net of taxes (most GPs negotiate this), whether it is joint and several among the GP principals, and what the enforcement mechanism looks like. A clawback that cannot realistically be collected is not worth much.
Governance and Control
As an LP, you have limited control by design. But the LPA should give you specific rights in defined situations. These provisions matter most when things go wrong.
- GP Removal. Under what circumstances can LPs remove the GP? This typically requires a supermajority vote (75-80% of interests) and is limited to "cause" events. The definition of "cause" matters: does it include regulatory action, criminal conviction, fraud, or breach of the LPA? The narrower the definition, the harder removal becomes.
- Key Person Provisions. If the named investment professionals leave or reduce their time commitment, the fund may enter a suspension period where new investments are paused. Check who the key persons are, what triggers the provision (death, departure, reduced time), and what happens during suspension. Some LPAs allow the key person event to be cured; others give LPs a vote to terminate the investment period.
- LPAC Authority. The Limited Partner Advisory Committee handles conflicts of interest, approves certain related-party transactions, and may provide consent on other matters. Know whether your fund size entitles you to a seat, what the LPAC can and cannot approve, and whether LPAC approval substitutes for full LP consent.
- Fund Term and Extensions. Most funds have a 10-year term with two one-year extensions at the GP's discretion. After that, further extensions typically require LP consent. Check whether the GP can extend unilaterally, whether extensions require a vote, and what the wind-down process looks like.
- Amendments. How can the LPA be amended? Most require the consent of a majority or supermajority of LPs, but many LPAs carve out "immaterial" amendments that the GP can make unilaterally. The definition of "immaterial" can be broad. Review this carefully.
Restrictions on You
The LPA does not just define your rights. It also limits what you can do with your interest.
- Transfer Restrictions. Most LPAs prohibit transfers without GP consent. Some allow transfers to affiliates. If you may want to sell your interest on the secondary market, understand the restrictions before you commit. Consent requirements, rights of first refusal, and minimum transfer sizes can all complicate a future sale.
- Default Provisions. If you fail to fund a capital call, the LPA defines the consequences. These are deliberately punitive: forfeiture of a portion of your interest (typically 25-50%), loss of voting rights, forced sale at a discount, or all three. Know the cure period and the penalty structure before you commit.
- Confidentiality. Most LPAs include broad confidentiality provisions that restrict your ability to share fund information. If you are a registered investment adviser with reporting obligations, or if your own investors need transparency, make sure the confidentiality provisions accommodate your disclosure requirements. This is a common side letter negotiation point.
Subscription Agreement
The subscription agreement is the contract by which you commit capital to the fund. It includes your representations about eligibility (qualified purchaser, accredited investor status), your commitment amount, and your agreement to be bound by the LPA.
Key items to verify: your correct legal entity name, the commitment amount, any conditions on your commitment, and the representations you are making. The representations are legally binding. If you represent that you are a qualified purchaser and you are not, you have a problem that goes beyond the fund investment.
Side Letters and Most Favored Nation
Side letters modify the LPA terms for specific investors. Common provisions include fee reductions, co-investment rights, enhanced reporting, excuse rights for certain investments, and regulatory accommodations. If you have the commitment size and negotiating position to request a side letter, do so before closing.
Most favored nation (MFN) provisions give you the right to elect any side letter term granted to another LP of equal or smaller commitment size. MFN elections typically happen after the final close, when the GP circulates a summary of all side letter terms. Review the MFN provision carefully: some exclude certain categories of terms, and the election window is usually short.
For a deeper discussion of side letter terms, process, and management, see our Side Letters: What Fund Managers Need to Know guide.
Primary Purchase Documents
When your fund invests directly in a company, typically in a priced equity round, the core transaction document is the stock purchase agreement (SPA) or the series purchase agreement. This sets the price, the structure, and the legal framework for the investment.
Price and Structure
Confirm the per-share price, the class of stock being purchased (preferred vs. common), the total round size, and your allocation. Check the capitalization table for accuracy. Understand the pre-money and post-money valuation and how the option pool is treated (is it included in the pre-money or carved out?). These structural details directly affect your ownership percentage and your downside protection.
Representations and Warranties
The company makes representations about its legal standing, capitalization, intellectual property, material contracts, litigation, and compliance with law. Read the disclosure schedules carefully. The representations themselves are standard; the exceptions and qualifications in the schedules are where real risks are disclosed. A heavily qualified IP representation, for example, may signal unresolved ownership issues.
Indemnification
In private equity and later-stage deals, the SPA may include indemnification provisions where the company or the sellers indemnify you against losses arising from breaches of representations. In venture rounds, indemnification is less common. When it exists, check the survival period (how long after closing you can bring a claim), any basket or deductible, and the cap on indemnification liability.
Charter (Certificate of Incorporation)
The company's charter, typically an amended and restated certificate of incorporation filed in Delaware, defines the rights of each class of stock. This is where your economic and governance protections as a preferred stockholder live.
- Liquidation Preference. In a sale or liquidation, preferred stockholders receive their liquidation preference before common stockholders receive anything. Confirm whether the preference is 1x non-participating (you get your money back or convert to common, whichever is greater) or participating (you get your money back plus your pro rata share of remaining proceeds). Participating preferred is more investor-friendly but less common in current venture terms.
- Anti-Dilution. If the company issues stock at a lower price than you paid, anti-dilution provisions adjust your conversion ratio to protect your economic interest. Broad-based weighted average is the standard; full ratchet is more protective but rare. Check the formula, the excluded issuances, and whether the provision applies to all future rounds or has carve-outs.
- Protective Provisions. These give your class of preferred stock the right to veto certain actions: issuing senior stock, changing the charter, increasing the option pool, taking on debt above a threshold, selling the company, or changing the board size. The scope of protective provisions varies significantly. More protective provisions give you more control but may be resisted by the company and other investors.
Investor Agreements
In addition to the purchase agreement and charter, venture deals typically include a set of investor agreements that define ongoing rights and obligations.
Investors' Rights Agreement (IRA)
Covers information rights (quarterly and annual financials), registration rights (the ability to participate in a future IPO), pro rata rights (the right to maintain your ownership percentage in future rounds), and sometimes board observation rights. The IRA also typically includes a market standoff (lockup) provision that restricts your ability to sell shares after an IPO.
Right of First Refusal and Co-Sale Agreement (ROFR/Co-Sale)
Gives the company and then the investors a right to purchase shares that a founder or employee wants to sell. If neither the company nor investors exercise, the co-sale right lets you sell a proportional amount alongside the selling stockholder, on the same terms. This protects against founders selling shares privately at attractive prices without giving you the same opportunity.
Voting Agreement
Defines how the board is composed, typically giving designated seats to the founders, investors, and sometimes a mutually agreed independent director. The voting agreement also may address drag-along rights, where a majority of stockholders can force all stockholders to participate in a sale of the company.
Secondary Purchase Documents
When you acquire an existing interest, whether an LP interest in a fund or shares in a private company, you are buying from a current holder. The document review has a different focus: you need to understand what the seller actually owns, what you are acquiring, and what approvals are required to complete the transfer.
Seller Representations
The seller represents that it owns the interest free of liens and encumbrances, that it has authority to sell, and that the interest has not been previously transferred or pledged. In fund secondaries, the seller also typically represents the unfunded commitment amount, the most recent NAV, and any known pending distributions or capital calls. Verify these independently where possible. A seller's representations are only as good as your ability to enforce them after closing.
Company Consent and Right of First Refusal
Most fund LPAs and company governance documents require consent from the GP or the company for transfers. Many also include a right of first refusal (ROFR) that allows existing holders to purchase the interest on the same terms before a third-party sale can proceed. Build the ROFR timeline into your deal timeline. A 30-day ROFR period is common, and the clock does not start until proper notice is given.
What Transfers
Not everything transfers automatically. In a fund secondary, confirm whether the purchase includes all of the seller's rights under any side letters (some side letters are non-transferable). In a direct secondary, confirm whether the purchase includes pro rata rights, information rights, board seats, or registration rights. Some of these rights are personal to the original holder and do not transfer to a buyer.
Governance Documents
In any secondary transaction, review the underlying governance documents as if you were a new investor. You will be bound by the LPA, the charter, the investor agreements, or whatever governance framework exists. If you would not accept these terms in a primary investment, you should not accept them in a secondary, because you are inheriting them without the ability to negotiate changes.
This article is for informational purposes only and does not constitute legal, tax, or investment advice. The content reflects general principles and may not apply to your specific situation. Consult qualified legal and financial advisors before making investment decisions or negotiating fund documents. Capital Company provides fund administration and operational support services; we do not provide legal or investment advisory services.