Sophisticated LPs insist on several structural protections. Key person provisions suspend or end the investment period if designated senior professionals leave; removal-for-cause and supermajority no-fault removal let LPs remove the GP in extreme cases; and no-fault dissolution lets a supermajority wind the fund down even without misconduct. LPAC rights over conflict transactions are a floor, not a ceiling — I advise GPs to provide clear conflict procedures rather than resist them, since ambiguity creates more risk than the provisions do. Excuse and exclusion rights, letting LPs opt out of problematic investments, are also standard.
A well-negotiated LPA contains several structural protections that sophisticated LPs will insist upon. Key person provisions suspend or terminate the investment period if one or more designated senior investment professionals depart the fund, giving LPs a governance lever in the event of management disruption. Removal-for-cause provisions — and no-fault removal with a supermajority LP vote — allow LPs to remove the GP in extreme circumstances, with for-cause removal typically carrying severe economic consequences for the departing GP. No-fault dissolution provisions, negotiated separately, allow a specified percentage of LPs (often 75–80% by commitment) to wind down the fund even absent GP misconduct. LPAC rights to approve or ratify conflict transactions are a floor, not a ceiling — Gurpreet Bal advises GPs to provide clear, workable conflict procedures rather than resist them, as ambiguity in this area creates more long-term risk than the provisions themselves. Excuse and exclusion rights allow individual LPs to opt out of specific investments that would cause legal, tax, or regulatory problems for that LP, and are standard in institutional fund formation.
Most-favored-nation clauses let an LP claim any more favorable term granted to a comparable LP, and in their broadest form they are automatic — a new side letter term triggers an election right for every MFN-holder. I advise GPs to narrow them carefully: limit them to economic terms, carve out FOIA and regulatory accommodations, tier them by commitment size, and explicitly exclude bespoke items like an LPAC seat. Left unmanaged, a fee discount or co-investment right promised to one large LP can silently cascade across much of the fund. Tracking it all in a structured side letter matrix is essential discipline.
Most-favored-nation clauses entitle an LP to receive any more favorable terms granted to other LPs of a comparable class or commitment size. In their broadest form, MFN provisions are bilateral and automatic — when a new side letter grants a term to one LP, every MFN-holder is entitled to elect that term for themselves within a defined notice period. Gurpreet S. Bal advises GPs to narrow MFN provisions carefully: limiting them to economic terms (rather than all terms), carving out FOIA provisions and regulatory accommodations that are LP-specific, tiering MFN rights by commitment size, and ensuring that certain bespoke terms — such as a commitment to seat an LP on the LPAC — are explicitly excluded from MFN eligibility. Failure to manage MFN triggers can result in fee discounts or co-investment rights promised to a single large LP silently cascading to a far larger portion of the fund, materially affecting GP economics and operational burden. Tracking side letters and MFN triggers in a structured side letter matrix is essential discipline for any GP closing more than a handful of institutional investors.
Co-investment rights — letting LPs invest alongside the fund in specific companies, usually with no fee and no carry — are among the most actively negotiated side letter terms, especially demanded by large institutions and family offices. I advise GPs to grant them as a best-efforts obligation rather than an absolute right, and to retain sole discretion over whether capacity exists in any deal. Information rights side letters typically require quarterly financials, annual audited statements, capital call and distribution schedules, and portfolio updates. Government LPs subject to FOIA often seek confidential-treatment provisions, which the GP should accommodate with appropriate liability carveouts.
Co-investment rights — which allow LPs to invest alongside the fund in specific portfolio companies on a pro-rata or dollar-amount basis — are among the most actively negotiated side letter provisions. Large institutional LPs and family offices frequently demand co-investment rights as a condition of a significant commitment, viewing them as a mechanism to access deal flow at favorable economics (typically no management fee and no carry on co-invest capital). Gurpreet Bal advises GPs to grant co-investment rights as a best-efforts obligation rather than an absolute right, and to specify that the GP has sole discretion to determine whether co-investment capacity exists in any given deal. Information rights side letters typically require the GP to provide quarterly financial statements, annual audited financials, capital call and distribution schedules, and portfolio company updates in a specified format. Government LPs subject to FOIA disclosure requirements often request provisions allowing them to seek confidential treatment for GP-provided materials, a request the GP should accommodate with appropriate limitation-of-liability carveouts.
As funds grow, side letter proliferation becomes a real operational and legal risk — a fund with thirty-plus institutional LPs may carry dozens of overlapping, sometimes conflicting side letters. I advise managers to treat side letter management as an ongoing compliance function, not a one-time formation exercise: maintain a current matrix of every LP-specific obligation, designate a point person for notice deadlines and MFN elections, and build review into the annual compliance calendar. ERISA-regulated investors need special attention — if benefit plan investors hold 25% or more of a class, the fund's assets become plan assets, so keeping that threshold below 25% is a structural obligation throughout the fund's life.
As fund sizes grow and LP rosters diversify, side letter proliferation becomes a material operational and legal risk. A fund closing with thirty or more institutional LPs may carry dozens of side letters with overlapping, sometimes conflicting, provisions. Gurpreet S. Bal advises fund managers to approach side letter management as an ongoing compliance function, not just a formation-stage exercise. Best practices include maintaining a current side letter matrix mapping every LP-specific obligation, designating a point person responsible for tracking notice deadlines, MFN elections, and reporting obligations, and building side letter review into the GP's annual compliance calendar. ERISA-regulated investors — pension funds and endowments subject to the Employee Retirement Income Security Act — require special attention: if "benefit plan investors" hold 25% or more of any class of fund interests, the fund's assets become "plan assets" subject to ERISA's fiduciary standards, dramatically increasing the GP's compliance exposure. Maintaining the benefit plan investor threshold below 25% is a structural fund management obligation that begins at first close and continues throughout the fund's life.
Gurpreet S. Bal is a Partner at Foley and Lardner LLP in Silicon Valley, where he advises venture funds, fund managers, founders, and investors on fund formation, venture financings, M&A, and corporate governance. He has represented clients in hundreds of transactions with aggregate deal value exceeding $60 billion across AI, semiconductors, fintech, and emerging technology.