Making things clear between LP & GP: LP Agreement

Hector Shibata
4 min readMar 9, 2021


“In business a reputation for keeping absolutely to the letter and spirit of an agreement, even when it is unfavorable, is the most precious of assets, although it is not entered in the balance sheet” Oliver Lyttelton

Have you seen business relationships where everything is going well and suddenly an unfavorable situation like a pandemic results in a series of catastrophic events for the company? Usually the relationship breaks down and becomes an unpleasant conflict if you do not have the legal framework governing the relationship.

Let’s remember the story of Long Term Capital Management (LTCM), Hedge Fund founded in 1994 by John Meriwether which included Myron Scholes and Robert Merton, Nobel Economics Laureates in 1997. Initially the fund had returns close to 40%, but in 1998 it lost USD$4.6tn in less than four months due to its high leverage and exposure to the Asian and Russian market who went into crisis in 1997 and 1998, respectively. This led to its liquidation and dissolution in early 2000. The relationship between fund managers and Limited Partners can become very complicated in the face of events such as LTCM. In this way, it is imperative to regulate this relationship and one element to do this is the Limited Partnership Agreement.

The Limited Partnership Agreement (LPA) is an agreement between two or more partners that defines the relationship between the General Partner who manages the business and the Limited Partners that primarily contribute capital to the firm.

The General Partner (GP) usually has limited liability and the Limited Partner is limited to the contribution of his participation. The main elements of the LPA are:

  1. Name, Purpose and main office of the partnership

It includes the name of the vehicle, the purpose of its existence and the registration of the address of its main office.

In Venture Capital the purpose is to make investments in equity related instruments in specific geographies.

2. Term and dissolution

The duration of the vehicle is set, in Venture Capital it is usually ten years and can be extended twice in additional periods of one year each. In addition, the dissolution of the vehicle may be given by a vote from the Limited Partners, which must represent more than two thirds of the total or 75%. Sometimes, it is also given if the provision of the “Key man” (the fund administrator required to develop the vehicle’s objective) is breached. Suspension can also be given for a defined period until the cause of the suspension is resolved.

3. Contributions to capital

It establishes the initial and subsequent contribution by the Limited Partners and regulates the process of not complying with that obligation. It also grants the fund manager the right to develop alternative investment structures if they are more efficient for investors.

4. Capital Calls and Allocation

It regulates the establishment of capital accounts to be kept on the books in favor of each partner, as well as the fiscal year and quarter. In addition, it sets the percentage of distribution that the fund manager will receive, usually 20%.

5. Management Fees and expenses

Sets and regulates the Management Fees. It is usually 2–3% annually during the first five years of investment and during the disinvestment or exit period it can decrease to 1 or 1.5%. The Management Fees cover the salaries, office rent and spending of the teams occupied by the administrator. The Partnership must pay costs and expenses related to investment, taxes, legal audit or custody expenses. It also pays for organizational costs; In general all expenses related to the investment vehicle.

6. Distributions

It states that no interest will be paid to any partner and determines a member’s capital outflow. In addition, it establishes the distribution of taxes. It also sets the waterfall of payments for discretionary distributions. First, Limited Partners receive their capital contribution and remnants are distributed 80%to Limited Partners and 20% to General Partners.

7. Administration, responsibilities and restrictions

Defines the responsibilities of the General Partner who has the sole and absolute control of the association on behalf of the Limited Partners. LPsdo not have the ability to control or manage the affairs of society nor authority to represent it.

8. Partnership liquidation

It establishes the process for the partnership’s dissolution once the period of the relationship is over It also establishes the final distributions and the responsibility of the GP to return the remaining distributions.

9. Accounting and support

The GP is responsible for preparing financial and fiscal statements. This item establishes the temporality of the information, its content and the framework of confidentiality.

10. Other provisions

Considers specific topics that are important to the partnership, so they may vary. Some common issues are the ruling law, remedies in case of non-compliance, indemnification, taxes, ERISA, among others.

11. Definitions

Definitions of the concepts addressed throughout the document are established.

Relevant clauses will be made for each of them throughout the negotiation between the fund manager and the Limited Partner. The LPA is a standard document that will regulate the relationship of partners in good times and especially in hard times.

Source: Capitalize on the private markets guide.

Hector Shibata Salazar, adjunct Professor at EGADE Business School and Director of Investments and Portfolio at AC Ventures Fund

Ana Maury Aguilar, VC Investor at AC Ventures

ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.

Stay updated about Venture Capital, innovation, entrepreneurship and more! Sign up for AC Venture’s monthly Newsletter.

Follow us on LinkedIn: ACV_VC

Follow us on Twitter: acv_vc

Follow us on Spotify: ACV_VC



Hector Shibata

Investor in VC/growth/PE supporting startups and VC funds in the US, Latam, Europe, India and Israel. Also, Fintech entrepreneur, IB, board member and speaker.