# VC10X - The Legal Landmines Hiding Inside Your Fund Docs - Yoni Tuchman, Partner, DLA Piper

An episode of [VC10X - Investing, Venture Capital, Asset Management, Family Office, Wealth Management](https://invisiblenetwork.ai/podcast/1632806986), 31 Mar 2026, 44 min.

Audio: https://anchor.fm/s/a453ddd4/podcast/play/117731292/https%3A%2F%2Fd3ctxlq1ktw2nl.cloudfront.net%2Fstaging%2F2026-2-31%2F421107867-44100-2-44e560247033b.mp3

Most fund managers ask for two and twenty and assume the job is done. It isn't. Yoni Tuchman, Fund Formation Partner at DLA Piper, is back on VC10x for his second appearance, and this time he goes clause by clause through the legal landmines hiding inside your fund documents. ⭐ Sponsored by Podcast10x - Podcasting agency for VCs - https://podcast10x.com In this episode: - Why a poorly drafted management fee clause can cost a GP millions over the life of a fund - The three sections of your LPA you actually need to read — and why the waterfall is "the heart of the heart of the heart" of the document - What happens when an LP defaults on a capital call — and why their commitment is essentially an option until they've funded - The real story of a wire that cleared on time and turned out to be stolen money - How to draft a key person clause that actually reflects your team - The ERA exemption most VCs don't know they're already violating If you're an emerging manager, a GP, or building your first fund — this one is not optional. TIMESTAMPS: (00:00) - Preview (01:01) - Introduction to the episode and guest, Yoni Tuchman (01:34) - Sponsor Message: Podcast 10x (02:48) - The 2 and 20 model and management fee traps (03:22) - How management fees work in VC funds (04:42) - Investment vs. Post-Investment Periods and fee step-downs (06:08) - The risks of PE-style management fees (07:05) - Defining "invested capital" for fee calculation (08:24) - The impact of transaction fee offsets on management fees (10:25) - Are fees for services to portfolio companies considered transaction fees? (11:45) - How venture partner compensation can affect management fees (14:14) - Top 3 overlooked clauses in a Limited Partnership Agreement (LPA) (14:45) - Should GPs read the entire 80-page LPA? (16:01) - #1 Overlooked Clause: The Distribution Waterfall (17:17) - #2 Overlooked Clause: The Management Fee (17:45) - #3 Overlooked Clause: Time, Attention, and Conflicts of Interest (19:21) - What happens when a Limited Partner (LP) defaults on a capital call? (19:50) - Standard remedies for a defaulting LP (20:55) - Why remedies are only as strong as the capital already contributed (22:25) - The critical importance of verifying the source of an LP's capital (25:13) - The negotiation dynamic between GPs and LPs on default clauses (28:06) - How to negotiate the key person clause (30:20) - Key questions for drafting a key person clause (34:30) - Accounting for temporary absences (illness, vacation) in the key person clause (35:58) - Triggers for registering as a Registered Investment Advisor (RIA) (36:17) - The Venture Fund and Private Fund Adviser exemptions from registration (37:35) - How a secondary strategy can accidentally disqualify you from the venture exemption (39:55) - The downsides of registering as an RIA (41:22) - The silver lining: Investor confidence in registered advisors (42:19) - Outro and conclusion LINKS: Previous episode with Yoni - https://www.youtube.com/watch?v=6eLPeQDPjCo DLA Piper - https://www.dlapiper.com/en Connect with Yoni - https://www.linkedin.com/in/yoni-tuchman-58153b5/ Connect with Prashant:LinkedIn: https://linkedin.com/in/choubeysahab Subscribe to VC10X newsletter - https://vc10x.beehiiv.com Subscribe on YouTube - https://youtube.com/@VC10X Subscribe on Apple Podcasts - https://podcasts.apple.com/us/podcast/vc10x-investing-venture-capital-asset-management-private/id1632806986 Subscribe on Spotify - https://open.spotify.com/show/7F7KEhXNhTx1bKTBFgzv3k?si=WgQ4ozMiQJ-6nowj6wBgqQ VC10X website - https://vc10x.com For sponsorship queries, reach out to prashantchoubey3@gmail.com Subscribe for more conversations at the intersection of family office investing, private markets, and emerging trends in wealth management.

## Transcript

[0:00] How can poorly drafted management fee clause
[0:02] inadvertently cost the GP millions over the life cycle of
[0:06] a fund? Here's where people mess up.
[0:08] They take documents that worked for 10 other funds and they put
[0:13] their name on it, but they didn't dig into the terms.
[0:17] What are the top 3 clauses they usually gloss over that can
[0:21] actually hurt them significantly down the road?
[0:24] Really want to make sure that the waterfall, which is, I
[0:27] consider it the heart of the heart of the heart of the
[0:31] document. Like, that's key.
[0:32] That's sacrosanct. How should founders negotiate
[0:36] the key person clause? You can't just take the other
[0:38] guy's key person provision and put your name on the document.
[0:41] The other guy was AGP of four partners.
[0:46] You're a solo GP. Very different.
[0:49] Very different dynamic. What specific triggers force the
[0:52] fund to fully register as an RIFS registered Investment
[0:56] advisor with the SEC? I think you want to avoid it
[0:59] like the plague. I would say like the plague.
[1:03] Hey everyone, this is Prashanth and I'll be host for the VC10X
[1:05] podcast and today we have Yoni Testman with us.
[1:09] If you got that first episode with Yoni, you already know how
[1:11] good this is going to be. And if you're new here, you're
[1:14] in for a treat. Yoni is a fund formation partner
[1:17] at DLA Piper, one of the largest law firms in the world, and he
[1:21] specializes in helping emerging managers get their fund
[1:23] structures right. Today, we are going to go deep
[1:26] on the legal side of fund management.
[1:28] The clauses GPS gloss over the management fee traps that
[1:32] quietly cost millions. And this is the exemptions you
[1:35] can accidentally kill before your first one even launches.
[1:39] So without wasting any time, let's dive straight in.
[1:41] This episode is brought to you by Podcast Enix, my podcasting
[1:45] agency for VCs. We help VCs start and run
[1:49] branded podcast that can serve as their entire content engine.
[1:53] Turn the conversations you're already having into a Machine 1
[1:57] recording becomes your presence on LinkedIn, Spotify, YouTube,
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[2:03] firm, build a firm that can stand out to LP's and one that
[2:07] hundreds can brag about having you on their cap table.
[2:11] Check out our services at Podcast ten-x.com.
[2:14] I'll put the link in the description below.
[2:16] Now enjoy the episode. Hey Yoani, so good to have you
[2:19] back on VC10X again. How have you been and how are
[2:23] you doing? Things are great, precious.
[2:24] Thank you so much for having me. I, I, I loved our last
[2:27] conversation. I'm excited to talk more.
[2:30] Absolutely, I loved it too and was just waiting to have you
[2:33] back on and picking back up. You know this can be its own
[2:38] stand alone conversation. So if people who have not tuned
[2:40] into the first episode with Yoni, it's completely fine if
[2:44] you're tuning in now. But if you want more info of the
[2:47] kind of stuff we are going to talk about today, then you might
[2:51] as well go and check out our previous episode with Yoni,
[2:54] which is again very insightful if you are the fund managers GP,
[2:58] right? A link to the previous episode
[3:00] in this show notes and descriptions so you can easily
[3:02] find it. Now to this one.
[3:05] Now everyone knows that standard to win 20 model that we follow
[3:08] in in the VC space, but where do managers legally trip up here,
[3:13] right? Specifically, how can poorly
[3:16] drafted management fee clause inadvertently cost the GP
[3:20] millions over life cycle of a fund?
[3:23] Yeah, Well, how can your lawyer screw up?
[3:25] It's going to cost you millions. It's a good question.
[3:29] The good news is that in venture capital funds, it's kind of hard
[3:34] to screw up like that. But if you have.
[3:37] But let's talk about how management fees work in VC
[3:40] funds, in most VC funds, not all, and then how they work in
[3:46] other funds mostly. And sometimes you have VC funds
[3:49] that have water management fees that are not what I consider
[3:52] classic. So let's break it down.
[3:55] How your lawyer can screw up and cost you millions.
[3:57] That's a great, I, I love that. That's, that's, that's actually,
[4:00] it's actually very true. What is a management fee?
[4:03] What is a management fee? It's a function of two things.
[4:08] It's a percentage of something. You have to define the
[4:12] percentage. That's pretty hard to screw up,
[4:16] right? What's the percentage like just
[4:18] put a percent in and then it's of something that's where you
[4:22] can screw up. That's where you, that's where
[4:24] your lawyer can, can, can make a mistake.
[4:26] Define that thing that you're taking a percentage of to
[4:30] calculate your fee every year, right?
[4:34] The reason I say it's pretty hard to mess up in venture funds
[4:36] is because majority of venture funds calculate the fee as a
[4:42] percentage of total committed capital.
[4:47] Total committed capital is really hard to mess up like it
[4:51] is the total commence of the fund, right.
[4:54] If you raise $100 million fund, even if you have not called down
[4:59] 1 penny of that $100 million, you're taking a percentage every
[5:04] year of that full $100 million, OK.
[5:10] It's very hard that you see I said it's very hard to mess that
[5:12] up. Now even in venture funds the
[5:16] fee typically doesn't remain constant for the full life of
[5:20] the fund, let's say for 10 plus years.
[5:23] It's not let's say 2 and 20 like you said in the question 2 and
[5:27] 20, right? Is it 2% in my example of 100
[5:31] million for let's say a 10 year fund for 10 years, So every year
[5:37] for 10 years the GP is collecting $2,000,000 of fees.
[5:42] Very rarely does it work that way.
[5:45] Much more frequently the way it works is during the you split
[5:49] the funds life into two periods. The investment period where
[5:53] you're actively looking to deploy the capital and the post
[5:57] investment period where you're still deploying capital somewhat
[6:01] follow on rounds but you're not and you're still paying
[6:05] expenses. You still have an audit wherever
[6:07] expenses, but you're not sourcing brand new deals in the
[6:11] second-half roughly of the fund's life.
[6:13] So divide your fun life into two periods, investment period, post
[6:16] investment period, OK, the fee during that first roughly half
[6:22] of the fund's life during the investment period.
[6:24] It's as simple as I, as I said a minute ago, 2% every year of the
[6:29] full $100 million commitments in my example, $2,000,000 a year,
[6:33] call it for five years, $10 million in the second-half of
[6:37] the fund's life post investment period, it's typically the same
[6:41] base. So it's still a percentage of
[6:44] $100 million, but it's a smaller percentage than the original 2.
[6:50] And that's just a, that's just a question of, of, of terms and,
[6:53] and negotiations and budgeting. Sorry, I must fix my camera.
[6:57] But what the what, what the fee ought to be in that post
[7:01] investment period, half of the fund's life, a lot of times it
[7:05] steps down by 10 basis points a year.
[7:09] So it goes to 2% of 100 million for five years roughly to 1.9%
[7:14] of 100 million to 1.8% usually to some floor, call it 1 1/2% of
[7:20] the 100 million. That's very typical.
[7:23] You just have to be careful that you're drafting the reductions
[7:27] in the percentage to align with the business case and your
[7:31] budget. That's that's why it's pretty
[7:33] easy in most venture funds, but not all venture funds.
[7:36] I mean, some venture funds have management fees that are more
[7:40] aligned with what I consider a more PE style management fee,
[7:46] which really can get you into trouble if you're not drafting
[7:48] it carefully. That's where you could really
[7:50] get into more likely trouble because in that style fee, it's
[7:54] not a percentage of the full commitments throughout the life
[7:58] of the fund with a percentage getting smaller, you know, at
[8:01] intervals in the second-half of the fund's life, it's a
[8:04] percentage of a different thing. So in the first half of the
[8:08] fund's life, it's a percentage of the fully committed capital,
[8:11] $100 million in my example. But in the second-half of the
[8:14] fund's life, it's a percentage, typically the same percentage to
[8:17] call it 2% of a different thing, not the $100 million committed,
[8:22] but whatever amount has been deployed at that point in time
[8:26] that you're calculating the fee. So every, let's say if you pay
[8:30] the fee quarterly in advance, you look at that quarterly
[8:34] payment date and you'll do a new calculation every quarter and
[8:37] you'll say we're charging 2% of something.
[8:40] Define that something. It's invested capital.
[8:43] What is invested capital mean? It can mean a lot of different
[8:46] things. Committed capital means only one
[8:48] thing. It means the commitments made to
[8:50] the fund, no matter what's happened to them at that point.
[8:52] But invested capital can mean what called capital.
[8:56] What about called capital for fees and expenses?
[8:59] I call capital for fees and expenses.
[9:01] Is that part of my invested capital?
[9:04] That's what investors would call fees on fees.
[9:06] Am I capitating the fee on the money that I called to pay the
[9:09] fee? And what about expenses?
[9:13] Usually that's not included in invested capital.
[9:15] But if you intend to call that, you got to draft it correctly.
[9:18] What about what about monies that you called deployed and
[9:24] then the deal died, right? It's a write off, let's say.
[9:30] It's a write down, but not a write off yet, right?
[9:33] Let's say it's a, you're, it's struggling, you have to write it
[9:35] down, but you're still working hard on it, let's say.
[9:42] Well, let's take, let's take those couple examples.
[9:45] You, you have to draft the definition of your invested
[9:47] capital very precisely. So you include what you intend
[9:51] to include, for example, and, and you don't and you don't
[9:55] include what's intended to be excluded.
[9:58] So typically write downs, if it's a complete permanent write
[10:03] down that would be off the books of the fund and you would it
[10:07] reduces the, the fee or write but a, but a write down that's
[10:12] that's maybe temporary, that's struggling.
[10:14] We're not going to write there. You have to be careful how you,
[10:16] how you, how you draft that. Here's something else to think
[10:19] about. What about transaction fees?
[10:23] Many funds, including VC, say at the behest of their investors,
[10:29] that if the manager is going to go and collect transaction fees
[10:34] from portfolio companies, the amount of those fees paid
[10:38] directly by the portco to the manager should be paid to the
[10:43] fund. How do you do that in a tax
[10:46] efficient way? You let the manager keep that
[10:50] $100, for example, but then you reduce the management fee by
[10:55] $100, assuming a 100% offset. You have to be, you have to be
[10:59] very careful how you write those, those offsets.
[11:02] If you have that provision to begin with.
[11:05] Maybe you don't. But by the way, if you don't
[11:07] intend to have that provision, you better not have that in
[11:10] their documents. Here's where people mess up.
[11:13] They take documents that worked for 10 other funds and they put
[11:18] their name on it, but they didn't dig into the terms, the
[11:22] details of the fee because they tell the lawyer, I want a 2 and
[11:25] 20. And the lawyer says, great, I've
[11:28] done a 2 and 2010 times. Here's a 2 and 20.
[11:31] But then three years into the fund's life, you say, wait a
[11:35] second, I don't want to be reducing my management fee by
[11:38] transaction fees. I'm sitting on the board of a
[11:41] company. They pay me 20 grand a year.
[11:44] I have to reduce my management by 20 grand, as an example.
[11:48] Look, that's what the docs say. But wait a second.
[11:51] I just wanted a 2 and 20. I gave you a 2 and 20, but you
[11:54] didn't ask me about transaction fee offsets, right?
[11:58] I'll give you another example. Let's say you have a transaction
[12:01] fee offset because your investors asked for it.
[12:03] So you say, great, I'll offset the management fee by
[12:05] transaction fees. OK.
[12:09] Let's say you provide a service to a portfolio company, an arm's
[12:13] length service. The portfolio company would have
[12:15] paid a third party and you have a tech stack that you're going
[12:19] to provide to this portfolio company and they're going to pay
[12:22] you for it. Is that a transaction fee that
[12:25] offsets and reduces your management fee?
[12:28] It shouldn't be, but it's a transaction fee and transaction
[12:32] fees reduce management fees in my in my fund.
[12:35] Yeah, that's when I'm milking the portfolio company for like,
[12:39] you know, monitoring fees, brokerage fees, board fees.
[12:44] That's not when I'm actually providing an arm's length
[12:47] service that you would have paid a third party.
[12:49] That shouldn't reduce my management fee, right?
[12:52] That's another example. Let's say the portfolio company
[12:54] reimburses you for your expenses, the management company
[12:59] or they're paying you. Does that, does that count as a
[13:02] transaction fee that reduces your management fee?
[13:04] It shouldn't. Should be careful how you write
[13:06] it and you draft it so it doesn't reduce your management
[13:08] fee. One other example, you're AVC,
[13:11] you have venture partners. They don't work for your
[13:14] management company. They're not employees, they're
[13:17] not on payroll, but they're scouts, they're consultants.
[13:21] You pay them and we could talk about how you pay them also.
[13:25] Then they also go in moonlight for a portfolio company.
[13:29] That's great. You want that they're adding
[13:31] value in the penalty to the portfolio company and they get
[13:34] paid. Is that a transaction fee?
[13:36] Does that reduce your management fee?
[13:38] Be careful how you write it. It could.
[13:40] So there's a lot of, a lot of details how it how, how you
[13:44] could end up losing management fees if the, if your LPA is not
[13:47] drafted, you know thoughtfully with intention for your fund as
[13:51] opposed to the 10 other funds that were two and 20.
[13:55] Absolutely. That's quite interesting of how
[13:58] much detail there is in all these legal documents that there
[14:02] are. And a lot of times what most GPS
[14:05] or VCs do is just hand it off to maybe a legal firm and like you
[14:09] said, do a 2 and 20 and they're going to do a 2 and 20.
[14:12] But then you still don't know the details inside that.
[14:15] And like it said, the devil is in the details.
[14:18] So that's why it's so, so important to for the GPS and
[14:22] fund managers to know of these legal complexities and these
[14:25] terminologies. And that's why we're doing these
[14:28] episodes as well. And now to the next question.
[14:31] If a first time fund manager is reviewing their draft Limited
[14:36] partnership agreement LBA right, what are the top 3 clauses they
[14:40] usually gloss over that can actually hurt them significantly
[14:44] down the road? I would start answering that
[14:46] question by saying, I tell all my clients you don't have to
[14:50] read the documents. That's number one.
[14:52] I mean that, that that's why they're that's why they're
[14:54] hiring, you know, a law firm to like, and this, these documents
[14:58] are dense and unless you read them all the time, it's, it's
[15:02] going to be fairly easy to get lost in them.
[15:04] So I would start by saying, if you're AGP, are you actually
[15:08] reading the documents? Hats off to you if you are, you
[15:12] know, a plus because I think a lot of your peers are not with
[15:15] justification. I think if you're going to read
[15:19] the docs and you should, they think the three things to focus
[15:23] on are the probably the most focus on the most important
[15:26] pieces of the document. What are they?
[15:30] What are the most important pieces of a document?
[15:32] Let's say it's an 80 page partnership agreement.
[15:35] What are the three sections as AGP you want to focus on?
[15:41] Well, I think it gets back to the conversation we had a minute
[15:43] ago. You're here for the economics of
[15:48] it, not for the fun of it. Maybe also it's fun for you, but
[15:51] you're here for the economics. Focus on those.
[15:55] That's two things. Focus on the distribution
[15:57] waterfall. Make sure it's drafted exactly
[16:02] as you intended. Now, 9 times out of 10,
[16:05] especially for a venture fund, that's going to be easy because
[16:08] nine times out of 10A venture fund is going to have a very
[16:11] straightforward waterfall and it's going to be hard to mess up
[16:14] that waterfall. Same way as very often a venture
[16:17] fund has a very shape or management fee.
[16:20] It's hard to mess up, but make sure you're getting that
[16:23] straightforward waterfall that you intend or even more
[16:28] importantly, if you intend somewhat of a unique waterfall,
[16:33] maybe you have a graduated carry, maybe you're paying a
[16:37] preferred return, which would be not typical, but it's possible
[16:40] in the venture fund. Maybe you have an American
[16:42] waterfall and not European waterfall.
[16:44] Again, minority of venture funds, but it's possible.
[16:47] You really want to make sure that the waterfall, which is, I
[16:51] consider it, the heart of the heart of the heart of the
[16:54] document. Like that's key, that's
[16:56] sacrosanct. Read the waterfall.
[17:00] By the way, if there are defined terms that bear upon how the
[17:06] waterfall works, read those two, right?
[17:10] A definition of preferred return, for example, if you have
[17:14] a preferred return, read how that's, read, how that preferred
[17:16] return is calculated. So I would say #1 those
[17:22] distribution waterfall, most important section of the whole
[17:25] partnership agreement #2 management fee, like we talked
[17:30] about a minute ago, those are the two pieces of economics for
[17:33] AGP distribution waterfalls. You get your carry interest and
[17:37] the management fee. So you keep your lights on every
[17:39] year. Read those, make sure they work
[17:42] the way you intend and the way you modelled, right?
[17:45] And the third piece I would throw in is not economic.
[17:48] Know your time and attention requirements and conflicts of
[17:53] interest, and I'll kind of throw those together.
[17:56] The obligations on you as the GP, if you have an 80 page
[18:01] partnership agreement, so much of it are rights that you have
[18:06] as AGP, because after all, you're the active partner, your
[18:11] investor. Investors are passive, right?
[18:15] And a lot of the LPA, majority of the LPA are just outlining
[18:21] how you can exercise your rights as general partner, OK.
[18:26] But then there are going to be a couple of sections usually
[18:29] grouped together that actually have obligations on you.
[18:35] This is how much time you will spend on this fund.
[18:39] This is what you will do when you find an investment
[18:41] opportunity. This is how you'll allocate that
[18:43] investment right opportunity. This is what you will not permit
[18:49] the fund to do in terms of, for example, investing in a company
[18:53] in which one of your former funds or you yourself as AGP or
[18:56] an affiliate has already invested in what you as AGP
[19:01] cannot personally invest in if the fund is already invested,
[19:05] for example. So I would say concentrate on
[19:08] the economics, which is 2 parts, the waterfall and the management
[19:11] fee, and concentrate on the restrictions and obligations on
[19:14] you, namely time and attention complex of interest.
[19:18] I would say focus on those three if you're going to read the
[19:21] document. Absolutely, yeah, that's going
[19:23] to be super valuable for our GPS because like I said, it's very
[19:27] lengthy documents, how to read all of it.
[19:29] So when they know what to focus on and where the things that
[19:33] matter are, then they can focus on those.
[19:36] Now to the next one. Legally speaking, what happens
[19:39] when a limited partner goes to capital court?
[19:42] What standard remedies should AGP insured are in the documents
[19:46] to protect the fund and other LP's from a defaulting investor?
[19:52] It's interesting how you phrase that and I appreciate how you
[19:55] phrase that in terms of protective fund and the other
[19:57] investors, right AGP in this predicament, if they have a an
[20:01] investor who hasn't respected a capital call is is bound is it's
[20:07] a fiduciary to protect the fund and the other investors.
[20:10] It's not a matter of being a nice guy.
[20:13] Protecting the other investors may not mean hitting this
[20:16] defaulting investor with a hammer.
[20:18] It may mean working through it with this defaulting investor
[20:21] for the better of the whole fund.
[20:24] Your fund document should have every hammer available, right?
[20:28] They they should be super strong to allow the GP to really hurt
[20:34] an investor who fails to respect the capital call.
[20:39] But then that's a power that the that the GP has to use wisely.
[20:43] But in our documents, I'm I'm virtually always having the
[20:47] right to seize all of the capital that the investor has
[20:51] contributed to date plus whatever other remedies are
[20:55] available at law or an equity. But I think that points to what
[21:00] I consider the most important point about defaulting
[21:03] investors. Your default remedies, your
[21:07] default provisions are only as strong as the amount of capital
[21:13] that the defaulting investor already contributed to your
[21:16] fund. Imagine a scenario where your
[21:19] investor signs up for a $20 million commitment and you
[21:23] issued the First Capital call for $1 million and the investor
[21:28] never respond. They just ghost on you.
[21:30] So they defaulted. Technically, they defaulted.
[21:34] What are you going to do about that?
[21:36] I've actually seen this happen. I've seen this happen.
[21:39] There's nothing you're going to do about that.
[21:41] Even if you have all the remedies available to you, all
[21:45] the hammers, as I call them under the partnership agreement,
[21:49] there's, there's there's no use for them because you have 0
[21:52] leverage. You're not holding any of the
[21:54] cards. Your investor just hasn't sent
[21:56] you 1 nickel, 1 dime. So you're not going to go sue
[21:59] them to enforce the contract. It's never, it's never going to
[22:02] happen. It's not worth your time and
[22:03] money. The relationship is going to be
[22:05] broken from day one and ends up they just walk away until
[22:09] they've funded into your fund, until they've contributed
[22:12] capital. It's essentially an option on
[22:14] their part to fund. Once they've contributed
[22:16] capital, if they default later, then you have that capital of
[22:20] there is already in your control, then you can use as
[22:23] leverage and you can they can forfeit that.
[22:26] So you should have all the powers to take everything
[22:29] they've given you already, but short of their having
[22:32] contributed capital or if they've only contributed a
[22:34] little bit, it's not going to be very valuable.
[22:38] The second is, really is a really, it's a nuanced point and
[22:42] it gets super important, doesn't come up much.
[22:44] Hopefully it's not about so much defaulting investors as much as
[22:48] making sure that an investor who does respect the capital call is
[22:54] funding from the right bank accounts.
[22:58] If you have an investor and you issue them a capital call for
[23:02] $100,000 and they wire you the full $100,000 on time, but they
[23:09] send it from a different bank account than the one that they
[23:14] subscribe that they wrote in their subscription agreement,
[23:17] which is where they're going to be sending their wires from.
[23:20] You have to be very suspect. I would even go so far as don't
[23:25] take that money and make sure it comes from the right bank
[23:27] account. Why isn't all money green?
[23:30] Why do I care what bank account they sent it from?
[23:33] So I'll tell you a real life scenario that happened to one of
[23:36] my clients and this is how I learned this lesson.
[23:40] The investor sent the whole wire, client was happy, but then
[23:44] we found out months later that the investor was actually a
[23:50] crook. Sometimes it happens the
[23:53] investor had raised all this money through a Ponzi scheme and
[24:00] instead of wiring money to our clients, our fund from from the
[24:06] bank account that the investor entity had written in the
[24:11] subscription agreement, it wired money from the account of the
[24:15] owner of the guy who was the crook.
[24:18] Where's that money come from? It turns out we've stolen money,
[24:22] right? So when this guy claimed
[24:24] bankruptcy and the bankruptcy trustee is trying to claw back
[24:28] every dollar that they could find of the stolen money, they
[24:33] were able to come after my clients say, look, you took
[24:36] money from a bank account that was not the bank account of the
[24:40] entity that signed your subscription agreement, right?
[24:45] It was all related money. It was the same guy at the top.
[24:47] It was all his money. But we found out six months
[24:50] later it actually wasn't his money, and that made all the
[24:54] difference. So make sure that you know which
[24:56] bank account the money's coming from, even if they're respecting
[24:59] the the capital call. Absolutely.
[25:02] That's crazy inside for them. I think eye opening for so many
[25:05] fund managers out there. I don't think they pay so close
[25:09] attention and the money's in. They're happy with that, right?
[25:11] OK. Exactly.
[25:12] They're happy. Exactly.
[25:14] Awesome. And when if you're drafting
[25:16] these agreements LPA, it's more or less a two way thing.
[25:21] The GP has to agree and the LP also has to agree.
[25:24] So how much of A negotiation there is or of the LP requesting
[25:29] the these clause or things to be in their favor versus being in
[25:33] the GPS favor, how much of that happens and how does that go?
[25:38] It's a good, it's a, it's a great question.
[25:40] I and I'll answer it from where I usually I'm wearing a hat
[25:43] that's AGP hat because I'm representing GPS.
[25:47] I also have a few clients that represent.
[25:49] Whenever I take off my GP hat, I put on my LP hat.
[25:51] I'm representing investors. When I'm reviewing A partnership
[25:55] agreement on behalf of an investor and I get to the
[25:59] default provision, do you think I'm looking to water it down?
[26:04] Do you think I'm looking to say, hey, I don't want this GP to
[26:08] have this hammer. I don't want to be able to hurt
[26:11] you if you default. I'm not saying that.
[26:16] I'm not saying that you know why?
[26:19] Because my client's not going to be the defaulting investor.
[26:22] My client is responsible. They're serious.
[26:27] But I want that the fund that my client is investing into, I want
[26:33] that fund to have really strong remedies that they could use
[26:37] that hammer against the non serious investor, right?
[26:41] Against the guy who ends up defaulting to the detriment of
[26:44] my LP client, right? So I don't there's one thing I
[26:51] look for basically representing investors when I wear my
[26:55] investor hat in the fund. And that is I want to make sure
[26:58] there's a notice and cure period before my client can be put into
[27:04] default in a fund. Make sure there's no foot
[27:06] faults. Make sure that 10 minutes, you
[27:09] know, the the clock strikes midnight and all of a sudden
[27:12] you're in default because there was a screw up with the wire,
[27:15] right? No, there needs to be a notice
[27:17] and cure, right. But once that's happened, rake
[27:21] me over the coals, you know, because we're not going to be
[27:24] the one defaulting. So that's that that's these are
[27:27] that's my way of saying these are tip.
[27:29] Not everyone takes my view. You will have some investors at
[27:33] review docs and say like, Hey, these default provisions are
[27:37] very draconian. They're very onerous and to
[27:41] which I'll add, well, don't you want them to be?
[27:44] Is it, are you going to be the one defaulting?
[27:46] I hope not. I hope not.
[27:47] You're you're not anticipating defaulting.
[27:49] You should want the very onerous and draconian provisions to
[27:52] protect you as the respectful, loyal non defaulting investor
[27:58] and giving the GP the power to, you know, to benefit you at the
[28:02] expense of the defaulting investor.
[28:04] So they're not typically negotiated very much.
[28:06] Absolutely. I got to learn that.
[28:08] And how should founders negotiate the key person clause
[28:12] if one partner leaves or has a health crisis?
[28:15] How do you prevent the fund from automatically triggering the
[28:18] suspension period or winding down?
[28:21] So all of this I want, I'll go back to something I said a few
[28:26] minutes ago. I said I don't expect my clients
[28:29] to read the documents. That's what they hire me for,
[28:31] right? I stand by that.
[28:32] That's true. But what I meant is they don't,
[28:34] I don't expect them to read the 80 page partnership agreement,
[28:37] but what I do expect them to read and what I'll make sure
[28:40] they read because I'll read it with them on the phone, right on
[28:43] a call is the summary of terms. When you're designing the terms
[28:48] of your fund and you're encapsulating and enshrining
[28:52] that intention in a brief, in a short summary, you really need
[28:59] to have the, your GP client, or if you're the GP, you need to
[29:02] focus on, on, on those terms. Now, once you've locked and
[29:07] loaded that term sheet, that summary of terms, I don't think
[29:11] you have to read the long form because you're, you're, you're
[29:14] paying your lawyer to make sure that that long form accurately
[29:17] reflects the summary that you all read together and vetted.
[29:21] Why do I mention that here? You ask about the key person
[29:24] provision. This is one of those provisions
[29:27] that's so important. You know, it's so important
[29:30] because it's so it's so dependent on the particular
[29:34] sponsor. You say we talked a few minutes
[29:37] ago about the 2 and 20 fund and I made it all complicated that
[29:42] like 2 and 20 really has a lot of different meanings, even just
[29:46] the two-part of the two and 20, even just the management fee 2%,
[29:50] all kinds of questions. Doug, you know, within that two,
[29:55] right? Which is true, but at the end of
[29:57] the day, you still see 2%. A key person provision is is not
[30:02] like that a key person provision.
[30:05] No2 funds really ought to have the same key person provision.
[30:09] Even if 100 funds may have a two and twenty set of economics with
[30:13] differences around the margins, you can't just take the other
[30:17] guy's key person provision and put your name on the document.
[30:21] The other guy was AGP of four partners, right?
[30:27] You're a solo GP, Very different, very different
[30:31] dynamic. For example, So when you're
[30:35] designing your font and you're at the summary of term stage and
[30:40] you're thinking through your key person terms, there's a list of
[30:44] questions you have to ask and answer.
[30:48] Number one, who are the key people?
[30:50] Identify them. Is it one person?
[30:53] Is it four people? Is it, who are they put their
[30:56] names down #2 are they all treated equally or no?
[31:03] Are they calibrate to each of those key people the appropriate
[31:09] time and attention requirement that he or she will have to this
[31:13] fund and to your firm. Sometimes you have GPS that have
[31:19] two partners in them, right? The two founders and they're
[31:24] both key persons, but one of them is really fully in, you
[31:29] know, day-to-day running the show.
[31:32] And the other is a big name who being who big who brings
[31:36] gravitas and a lot of investing acumen and and and skill to the
[31:41] fund. But everyone understands it's
[31:43] not running a day-to-day. You want to calibrate even if
[31:47] they're both key persons, you want to make sure that you don't
[31:50] have the same time and attention requirement for both of them.
[31:53] Because key person A who is usually, let's say the younger
[31:58] one of the two was fully invested running this day by
[32:00] day, he or she is going to have a very high time and attention
[32:04] requirement. They're going to be covenant
[32:07] with your investors to devote substantially all their business
[32:09] time to the to the endeavour. But key person B who's maybe a
[32:15] retired Titan of, you know, of industry technology, they're
[32:20] going to have a lesser role to play, equally important, but
[32:26] lesser in time. And for them, you want to have
[32:31] something, they'll remain actively involved, they'll pay
[32:35] attention to the fund, right? But they're not full on, right?
[32:39] And therefore you want to calibrate that.
[32:41] So question number one, who are the key persons?
[32:44] Name them, how many are there? Who are they?
[32:46] Question number 2, are they all playing the same role in the
[32:48] firm or some have more time consuming roles?
[32:52] Calibrate your, your, your time obligations to those roles #3
[33:00] what if there's one LP? If there's one partner is 1 GP,
[33:04] This question doesn't. This question goes away if that
[33:06] one guy leaves or that one lady leaves.
[33:08] There's a key person provision. But if you have more than one GP
[33:12] owner, it could be two, it could be 10.
[33:16] How many of those people must cease devoting his or her
[33:22] requisite time to the fund in order to trigger a key person
[33:29] suspension, right? It could be, it could be there's
[33:32] two people or three people or four people and you just right,
[33:36] if a majority leave, right? But it could be some other mix,
[33:40] right? So those are like the three
[33:42] questions you got to think of in order to craft or keep person
[33:45] provision, which you see now why that's not just like vanilla
[33:50] whatever. What was good for Oh, I want a
[33:52] key person. Oh, the last one, I had one.
[33:54] I'll take the same thing. No, it doesn't work that way.
[33:57] Who are your key people? How much time are they each
[34:00] respectively devoting? And what makes of those people
[34:03] leaving or ceasing is going to trip the is going to trip the
[34:07] key person, you know, trip wire. And that's really how you have
[34:11] to go about thinking of it. I'll give you, I'll give you
[34:13] another point about this. You know, let's say, let's say,
[34:17] let's say you have a solo GP even and he gets sick.
[34:21] OK, let's say he's going skiing and he breaks his leg badly,
[34:27] right? God forbid he's holed up in the
[34:29] hospital on morphine for like, you know, a month, you know, is
[34:35] that a key person trigger? Like, like the, the 4th
[34:41] question, I guess I'll add is who, who are your LP's?
[34:44] Question? Who are your, who are your key
[34:45] persons? Question number one, you know,
[34:47] what are their time obligations #2 how many of them have to
[34:50] leave in order to trigger a key person event #3 and question #4
[34:55] is what circumstances would allow one of your GP folks who
[35:00] is a key person to take their foot off the gas for a period of
[35:04] time and not accidentally trigger a key person provision?
[35:08] So that's like another thing also to think about, you know,
[35:12] and it that, that that should be the same across all funds
[35:15] because it's not like, oh, this GP is an habit skier.
[35:18] He's more likely to have an accident.
[35:20] We have to think about that for him.
[35:21] The other guy's like a wallflower.
[35:23] He doesn't leave his house. So we have to less, we're less
[35:26] concerned about him. We this should this should all
[35:28] be this should all this is something that all your docs, no
[35:31] matter who who your GPS are, should deal with.
[35:34] You should have the ability to take vacations right?
[35:38] To like to get sick without triggering a key person that
[35:41] that should be considered also. That's quite interesting.
[35:44] So you can have your weird hobbies still.
[35:47] I'm not saying that skiing is a weird hobby, but there are other
[35:50] weird things that people do as hobbies which can be in your
[35:54] documents and can be accounted for.
[35:56] Right, right. Exactly.
[35:59] Moving on, most emerging managers operate as ERAS exempt
[36:03] reporting advisors. What specific triggers force the
[36:07] fund to fully register as an RIE that is registered Investment
[36:11] advisor with the SEC and what are the operational downsides of
[36:15] crossing that line too early? There are basically 2 exemptions
[36:20] to keep in mind as AGP. OK #1 if you're a venture fund,
[36:28] if you're a venture fund manager and you're only managing venture
[36:31] capital funds, that's a great exemption.
[36:36] And you never have to register as, as a registered investment
[36:39] advisor in the US, never. You can have a trillion dollars
[36:42] of AUM. You can have 1000 funds and SP
[36:46] VS if all of those vehicles qualify as VC funds, you're
[36:51] never registering. You're what we call an exempt
[36:55] reporting advisor an ERA. There is a shorter ADB you have
[36:59] to file, but the headache of being registered will largely
[37:05] you'll you'll largely avoid. Now there's definitions.
[37:09] What does a venture fund mean? You can't just you can't just
[37:12] open up a real estate fund or a buyout fund.
[37:14] Call yourself a venture adventure to the name and say
[37:16] we're a venture fund. We have this exemption, right?
[37:18] We can get into that. That's one exemption.
[37:23] The second exemption applies even if you're not exclusively
[37:26] venture. And by the way, you can consider
[37:28] yourself AVC firm and not be what the SEC considered a
[37:33] venture firm. It happens actually with some
[37:37] frequency. I talked to someone a week or
[37:40] two ago. They're looking to form a
[37:42] venture fund, OK, Their first venture fund.
[37:46] What's their strategy? They're going to buy secondaries
[37:50] from founders of companies. OK, great.
[37:54] And I told him that's, that's a, that's a great strategy.
[37:57] Just know, like you think of yourself as a venture capital
[38:01] guy, 'cause you're buying shares in hot startups.
[38:06] But none of that is venture. Like none of that that that's 0%
[38:10] venture as the SEC defines A venture fund.
[38:12] Those are all secondaries. Now maybe that will change.
[38:15] Hopefully some of that will change.
[38:17] The law has to change in order for that to change.
[38:20] So, so that's a word to the wise, be all venture or be a
[38:27] fund manager. That's not exclusively venture,
[38:30] but your assets under management in your private funds haven't
[38:34] yet exceeded $150 million. That's not an exempt, that's not
[38:40] an exemption that you're trying to to, to keep, right?
[38:44] That's a short term exemption. You're not looking to, hey,
[38:48] let's keep our AUM low so we don't have to ever register
[38:51] that. That will be the tail wagging
[38:52] the dog like, hey, I don't want to register.
[38:54] I'm going to keep my AUM low. That's not what you want to do.
[38:57] But keep in mind, as long as your assets under management are
[39:01] under 150 million, you're exempt.
[39:04] Reporting advisor with a much lighter regulatory touch with
[39:08] SEC. So those are the two things to
[39:10] keep in mind. Now the trick really is also be
[39:13] aware of is how can you accidentally like that secondary
[39:17] fund I mentioned? How could you accidentally, you
[39:20] know, how can you think you're AVC but actually violate that
[39:26] exemption and actually be managing non VC funds?
[39:31] How could that happen? Like the secondary is like the
[39:33] biggest way that this happens. It's not uncommon at all for
[39:37] venture venture capitalists to do some Angel investing, to do
[39:43] some SPV investing before they launch their, their, their,
[39:47] their blind pool firm. And lo and behold, one, one of
[39:51] those, one of those SP VS was a secondary.
[39:54] Not uncommon at all. Oh, did you, did you, did you
[39:58] just did you kill your exemption before you even you strangle
[40:01] that, that exemption in the in the in the womb.
[40:03] Like you can't even, you didn't even, you didn't even get to
[40:06] fund one and you already lost your exemption cause your cause,
[40:08] your management company is managing an SPV that's a
[40:11] secondary. So that's something to also like
[40:15] talk, talk to your talk to your, you know, lawyer, make your
[40:18] regulatory person, you know, make sure that that all your all
[40:21] your vehicles, historic and current.
[40:23] Are are are are fitting within that exemption?
[40:27] Why do you want to avoid or do you want to avoid registering?
[40:32] I think you want to avoid it like the plague.
[40:34] I would say like the plague. Why?
[40:37] 2 reasons. Number one, it's expensive and
[40:40] it's a hassle to register #2 it's expensive and it's a hassle
[40:48] to maintain registration. OK, there's no upside for you
[40:52] unless look, I'm a big firm and I'm not exclusively venture.
[40:56] So it's a cost of doing business, but I see it as a cost
[40:58] of doing business, not a plus. It's not like a sales point.
[41:03] It's expensive and it's time consuming.
[41:04] OK, if you're a registered investment advisor, we get into
[41:07] why that is, but that that's why I try to avoid it if I can.
[41:10] Now there is a silver lining. I don't want to be all, you
[41:14] know, storm clouds and and, and and Thunder here.
[41:18] The silver lining is if the SE, if you're registered, your
[41:23] investors know that the SEC has their eye on you more so than if
[41:28] you were not registered. And so even though it really is
[41:32] not intended to be like a stamp of approval and it's not a stamp
[41:35] of approval by the SEC merely being registered, it does add
[41:41] some comfort to investors who know well the SEC is checking
[41:45] these guys out. They're examining them
[41:48] periodically. Not that the SEC can't examine
[41:50] and doesn't examine non registered advisors, but with
[41:53] much more frequency are they are they examining in a much deeper
[41:58] way the registered advisor. So there is, there is that
[42:01] silver lining to the registration, but in my view
[42:04] that's not a silver lining that you elect into because it's such
[42:07] a compelling benefit that is worth swallowing and stomaching
[42:11] all the additional costs and headache that registering and in
[42:15] maintaining registration bring. Absolutely, yeah.
[42:21] And one of the reasons I love hosting Johnny on VC10X is that
[42:24] he makes my job so much easier. What is the style of teaching?
[42:28] I would say I think none of our guests explain concepts with
[42:32] such easiness like he does. And these are very complex
[42:36] topics. And the other is that he asked
[42:38] the follow-ups himself. I don't have to do that job.
[42:41] So what's the next question that's going to come out of this
[42:43] answer is going to ask that and and answer that.
[42:45] So thank you for being such an such an amazing guest.
[42:48] Thanks so much Gianni for this time.
[42:51] And I have still so many questions that I want answered
[42:54] from you, and I'll be sure to get those answers from you in in
[42:58] the next conversation that we're going to have.
[43:01] And this time, it's going to be sooner than this one.
[43:04] This one has come after sometime after the first one that we did,
[43:07] but the next one is going to be much sooner.
[43:09] So our audience can expect that. And make sure you subscribe to
[43:12] VC Tenets to stay updated and get to listen to Yoni's
[43:17] beautiful teachings on all legal aspects on here.
[43:22] So thanks so much for making time, Yoni, and looking forward
[43:24] to having you back on very soon. Thank you.
[43:26] Thank you so much, Prashant. Let's make a habit of it.
[43:28] I appreciate it.

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