The Legal Landmines Hiding in Your Fund Docs - Yoni Tuchman, Partner, DLA Piper

Most fund managers sign their LPA, hand it to a lawyer, and assume two-and-twenty means two-and-twenty. It doesn't. In Yoni's second appearance on VC10X, he breaks down exactly where GPs lose money they never knew they were losing — buried in clauses they didn't write, definitions they didn't read, and provisions they copied from someone else's fund docs.

This is not theoretical. The mistakes Yoni describes have cost managers millions across the lifecycle of real funds.

A management fee is a function of two things: a percentage, and the thing you apply that percentage to. The percentage is almost impossible to get wrong. The base — what you're calculating against — is where the damage happens.

In standard venture funds, the base is total committed capital. If you raise a $100M fund, you collect two percent of that $100M every year, regardless of how much has actually been deployed. Hard to mess up.

But plenty of VC funds structure fees more like private equity — where the base shifts in the second half of the fund's life from committed capital to invested capital. And "invested capital" is not a clean term. It requires a precise definition: does it include capital called for fees and expenses? Does it include write-downs on struggling portfolio companies, or only permanent write-offs? What happens when a portfolio company reimburses the management company for expenses — does that count as a transaction fee that offsets your fee?

Transaction fee offsets are a particularly common trap. If your LPA says transaction fees get offset against management fees, that provision will apply to everything — including arm's-length services you provide to portfolio companies, board stipends paid to venture partners, even expense reimbursements — unless you've drafted it not to.

The underlying issue: GPs tell their lawyer "I want two and twenty." The lawyer has done two-and-twenty ten times, pastes the template, and puts your name on it. Three years into the fund, you're reducing your management fee by $20K a year because a board seat you sit on technically counts as a transaction fee — and nothing in the docs says it shouldn't.

Yoni's first piece of advice: don't feel obligated to read the full eighty-page LPA. That's your lawyer's job. But if you're going to focus on anything, focus on three things:

1. The Distribution Waterfall

This is the heart of the document. It governs when and how you get paid your carry. Venture fund waterfalls are typically straightforward — but if you have a graduated carry, a preferred return, or an American-style (deal-by-deal) waterfall instead of a European (whole-fund) waterfall, you need to read it carefully. Any defined terms that feed into the waterfall calculation — like how preferred return is calculated — should be read alongside it.

2. The Management Fee

As covered above, the percentage is only half the equation. The base, any step-down schedule, and any offset provisions all need to align with how you've actually modeled your fund economics. If you haven't verified this, you don't actually know what your fee is.

3. Time, Attention, and Conflicts of Interest

The vast majority of an LPA describes rights you have as GP. The obligations on you are clustered in a few sections — and those are the ones that can get you in trouble. How much time must you devote to this fund? What are the rules around allocating deal opportunities between funds? What can and can't you invest in personally if the fund has already invested? These provisions define the actual constraints on your behavior as a manager.

Your fund documents should give you every available remedy against a defaulting LP — including the ability to seize all capital they've contributed to date. But here's the nuance: your remedies are only as powerful as the leverage you hold, and your leverage is the capital they've already sent you.

If an LP commits $20M, you call $1M, and they ghost — there's essentially nothing you can do. The relationship is broken from the start, and the legal cost of enforcement would exceed any realistic recovery. Until an LP has meaningful capital in your fund, their commitment is functionally an option they can walk away from.

The more actionable lesson: make sure capital calls are being wired from the correct bank account. Yoni described a real case where an LP wired capital on time and in full — but from the personal account of the investor rather than the fund entity listed in the subscription agreement. Months later, the investor turned out to be running a Ponzi scheme. The bankruptcy trustee successfully clawed back the funds, because the money hadn't come from the entity that signed the subscription agreement. The GP had no recourse.

It matters where the money comes from, not just that it arrived.

Less than you'd expect. Yoni's view, from both sides of the table: when he's representing an LP reviewing a partnership agreement, he doesn't try to water down default provisions. A serious LP has no intention of defaulting — and strong remedies protect them against other investors who might. The only thing he negotiates on behalf of LPs is a notice-and-cure period: a window to fix a wire error before formally triggering a default.

The default provisions are there to protect compliant investors. If you're a GP drafting them, make them strong. If you're an LP reviewing them, don't fight them.

Unlike management fees — where different funds arrive at similar structures — no two key person provisions should look the same. The clause is too specific to each sponsor's actual team dynamics to be templated.

Yoni outlines four questions every GP needs to answer before drafting it:

Taking someone else's key person clause and putting your name on it is the equivalent of taking their org chart. It won't reflect your fund.

Two exemptions keep most emerging managers out of full SEC registration as a Registered Investment Advisor:

The Venture Fund Exemption

If you advise only funds that meet the U.S. Securities and Exchange Commission definition of venture capital funds, you don’t need to register as a Registered Investment Adviser, regardless of AUM. You still file as an Exempt Reporting Adviser.

The definition is strict: funds must primarily invest in direct (primary) startup investments. Limited non-qualifying investments (including secondaries) are allowed—generally up to ~20%—but a strategy focused on secondaries won’t qualify.

A key risk: if you previously advised a vehicle (e.g., an SPV) that doesn’t meet the venture definition, you may no longer be considered as solely advising venture funds, which can jeopardize the exemption depending on structure and facts.

The $150M AUM Exemption

Even if your funds don’t qualify as venture capital funds, you can operate as an Exempt Reporting Adviser if your private fund AUM remains below $150M. This reduces regulatory burden, particularly for emerging managers—but it’s typically a transitional advantage, not a long-term strategy.

Some managers may pace fundraising to stay under the threshold early on, but artificially limiting AUM can constrain growth. In most cases, it’s more rational to raise capital based on opportunity and register when required.

On registration, it does increase setup and ongoing compliance costs. However, it can also provide benefits—especially for managers targeting institutional capital—including greater credibility, access to larger LPs, and stronger governance frameworks. For many funds, crossing the $150M threshold is less a burden and more a natural step in scaling.

Key Takeaways

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Yoni Tuchman and Prashant Choubey

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