🛠️ Investment Fund Key Terms, Part 13

🎉 Happy Friday, funds family!

Today, we have Part 13 in our many-part series walking through each term in an investment fund term sheet in detail.

Here’s the index of each article in this series (so far):

• Part 1: Naming your entities

• Part 2: Investment objectives

• Part 3: Fund size

• Part 4: LP minimum check size

• Part 5: GP commitment

• Part 6: Fund term

• Part 7: Fundraising period

• Part 8: Investment period

• Part 9: Capital recycling

• Part 10: Investment limitations

• Part 11: Leverage Limitations

• Part 12: LP Withdrawals

This week focuses on Key Person Event. 

What happens if the people running the fund…stop running the fund? That’s where the Key Person clause comes in.

➡️ What is a Key Person Event?

A Key Person Event (previously called a Key Man Event) occurs when one or more of the fund’s designated “key persons” — typically the founders or lead partners — stop devoting sufficient time to the fund.

Here’s what a provision might look like:

When that happens, the fund usually stops making new investments. In some cases, the LPs may be able to vote to shut down the fund entirely.

➡️ What are the components of a Key Person provision?

• Designation: Names of individuals deemed “Key Persons.”

• Trigger: Events such as death, disability, resignation, or failure to devote required time, and the percentage of absent Key Persons required to cause a Key Person Event (e.g., a majority of the Key Persons; any Key Person)

• Consequences: Automatic suspension of the investment period until LP approval (often a majority or supermajority vote). In some cases, the LPs might be able to vote to start selling investments and wind down the fund.

• Cure period: A short window (e.g., 60–90 days) for the GP to replace a Key Person or remedy the situation.

• Reinstatement: LPAC or LP majority may approve continuation after the event.

🗓️ Next up in Part 14: Successor Funds — when and how a GP can start raising the next fund.

Thanks for reading, everyone.

Have a great weekend! 🙌 

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.