VC10X
VC10X - The Legal Landmines Hiding Inside Your Fund Docs - Yoni Tuchman, Partner, DLA Piper
Why It Matters
Fund formation errors can erode a GP’s earnings and even force unwanted regulatory scrutiny, directly impacting the returns delivered to limited partners. By understanding these legal landmines, emerging managers can protect their economics, maintain control, and launch funds that are both investor‑friendly and compliant—critical in today’s competitive VC landscape.
Key Takeaways
- •Misdefining fee base (committed vs invested) can cost millions
- •Waterfall clause governs carried interest; must match intended economics
- •Review management fee, waterfall, and GP conflict provisions first
- •Transaction fee offsets may unintentionally lower management fees
- •Capital call defaults need strong remedies, limited without contributed capital
Pulse Analysis
The episode dives into how a seemingly simple management‑fee clause can become a multi‑million‑dollar liability. Yoni explains that the fee is calculated as a percentage of a defined base—either total committed capital or invested capital. Confusing these terms changes the fee amount dramatically, especially when the fund shifts from the investment period to the post‑investment period. He also warns that PE‑style fee structures, which tie fees to deployed capital, require crystal‑clear definitions to avoid unintended reductions. For emerging managers, getting this language right protects cash flow throughout the fund’s life.
According to Tuchman, the distribution waterfall is the ‘heart of the heart’ of any limited partnership agreement. Whether a fund uses an American or European waterfall, preferred‑return calculations, or graduated carry, the clause must mirror the economic model the GP has modeled. He advises first‑time GPs to zero in on three sections: the waterfall, the management‑fee schedule, and the GP‑level obligations that govern time, attention, and conflict‑of‑interest restrictions. Skipping these areas can create hidden liabilities or limit the GP’s ability to act decisively.
The conversation also highlights two often‑overlooked traps. Transaction‑fee offsets, if drafted without nuance, can automatically reduce management fees whenever a GP earns board or monitoring fees from portfolio companies. Yoni stresses drafting explicit carve‑outs for arm‑length services. Likewise, capital‑call default provisions must be robust, yet they only matter after an LP has actually contributed capital. Strong remedies—seizing contributed amounts, interest, or equity penalties—protect the fund, but they are ineffective against a non‑paying investor with zero contribution. Careful clause wording safeguards both GP revenue and fund stability.
Episode Description
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:
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Why a poorly drafted management fee clause can cost a GP millions over the life of a fund
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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
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What happens when an LP defaults on a capital call — and why their commitment is essentially an option until they've funded
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The real story of a wire that cleared on time and turned out to be stolen money
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How to draft a key person clause that actually reflects your team
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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
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