🛠️ Investment Fund Key Terms, Part 4

🎉 Happy Friday, funds family!

Today, we have Part 4 in our many-part series walking through each term in an investment fund term sheet in detail.

Last week, we discussed 🛠️ fund size. 

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

Today, we'll learn about a LP minimum check size.

Fund and syndications typically have a “minimum commitment” amount. Basically, the fund will reject check sizes lower than the minimum. 💸

Except…that’s not what really happens. Many fund documents say something like this:

In other words, there’s often no real legal minimum check size. And many funds will accept at least a few investors below the minimum threshold. Friends, family, and advisors are examples of people who might squeeze through with smaller investments.

However, the General Partner doesn’t want to accept checks of all sizes. They need to draw the line somewhere.

Why?

🙀 Herding cats.

Dealing with 100 LPs is a lot more work than dealing with 10 LPs. Each LP needs K-1s, financial statements, and calls letting them know they’re important. Imagine quarterly calls with 100 LPs…that’s 400 calls a year. Plus, some funds have hundreds or even thousands of investors. That may be fine if you’re managing $2 billion, but it would be unsustainable if your fund is $2 million.

⚖️Regulatory.

Many types of funds and syndications (those relying on the 3(c)(1) exemption from the Investment Company Act) are capped at 100 investors. You don’t want to fill up your golden 100 slots with tiny checks. Have some standards!

Note: Some small venture capital funds can have more than 100 investors - see our article on ⚖️ Deregulation of Investment Funds on the Horizon.

🫣 What’s the most ridiculous check size I’ve ever seen? When raising a VC fund a couple of years ago, an LP tried to commit $2,000 to a $50 million fund. Alas, the GP declined to accept such an investment.

The last thing to note is that many LPs will invest the minimum. If you’re on the fence between two potential minimum thresholds, choose the higher one. Remember, you can always waive it.

🗓️ Next up in Part 5, we’ll discuss GP commitments.

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.