Private Fund Toolkit: Term Sheets, LPA Provisions, and Side Letter Management

Document type: Toolkit Practice area: Corporate — Investment Funds Jurisdiction: United States (federal and state) Last reviewed: 5 September 2026

How to use this toolkit

Every item below is a starting point. Fund terms are negotiated against a specific strategy, a specific investor base, and a specific track record, and language that is correct for one fund is wrong for the next. Read the alternatives, pick the one that matches your position, and then read it again as the other side will.

Statutory references are to the Investment Company Act exclusions, 15 U.S.C. § 80a-3, the Advisers Act registration provision, 15 U.S.C. § 80b-3, and the antifraud and fiduciary provision, 15 U.S.C. § 80b-6.

Tool 1: Fund term sheet skeleton

FUND: [Name] [Delaware limited partnership] GENERAL PARTNER: [Name] LLC MANAGER: [Name] Management LLC TARGET SIZE / HARD CAP: $[] / $[] GP COMMITMENT: []% of aggregate commitments, in cash [and/or through management fee waiver — note the tax considerations] MINIMUM COMMITMENT: $[_], subject to GP discretion STRATEGY: [Asset class, geography, instrument, check size, control or minority, target hold]

TERM: [10] years from final closing, subject to [two] one-year extensions — the first with advisory committee consent, the second with [majority] investor consent INVESTMENT PERIOD: [5] years from final closing MANAGEMENT FEE: [2.0]% of commitments during the investment period; [1.5]% of invested capital in unrealized investments thereafter FEE OFFSET: [100]% of Transaction Fees, applied against the management fee PREFERRED RETURN: [8]% per annum, compounded annually CARRIED INTEREST: [20]% DISTRIBUTIONS: [Deal-by-deal with return of all contributed capital and preferred return / whole-fund] CATCH-UP: [100 / 80-20]% CLAWBACK: Yes; [30]% escrow of distributed carry; several guarantees by the Principals; computed net of taxes actually paid KEY PERSONS: [Names]; investment period suspends automatically on a Key Person Event; reinstatement on [majority in interest] vote within [180] days REMOVAL: For Cause on [majority in interest]; without cause on [75]% in interest, with carried interest [reduced to % / retained on investments made] ADVISORY COMMITTEE: [5–9] members from the largest investors; approves conflicts and valuation matters SUCCESSOR FUND: No successor fund with substantially similar strategy until the earlier of the end of the Investment Period and [75]% of commitments invested, committed, or reserved SUBSCRIPTION FACILITY: Permitted up to []% of unfunded commitments; borrowings outstanding no more than [180] days REPORTING: Quarterly unaudited within [45] days; annual audited within [90] days; K-1s by [] EXPENSES: Organizational expenses capped at $[_]; Fund bears [enumerated list]; Manager bears [enumerated list] ERISA: Benefit plan investor participation limited to less than [25]% of each class EXCLUSION: [3(c)(7)] — qualified purchasers only PLACEMENT AGENT: [Name], registered broker-dealer; fees borne by [Manager / Fund, and offset against the management fee]

Tool 2: Clause library — the provisions that get negotiated

2.1 Fee offset definition

The point. A narrow definition lets compensation reach the manager under a different label. Draft it broadly and offset it fully.

"Transaction Fee" means any fee, compensation, or other consideration of any kind, however denominated — including without limitation any transaction, closing, advisory, consulting, monitoring, management, board, director, oversight, break-up, termination, or similar fee — received by the General Partner, the Manager, or any of their respective Affiliates or personnel from or in respect of any Portfolio Company or any prospective Portfolio Company, or from any third party in connection with any actual or proposed Portfolio Investment. Transaction Fees include amounts received in the form of securities, valued at fair market value on receipt, and amounts received on an accelerated basis in connection with a termination of a monitoring or similar arrangement.

Offset. The Management Fee otherwise payable for any period shall be reduced by one hundred percent (100%) of the Fund's Allocable Share of Transaction Fees received during such period, net only of reasonable third-party out-of-pocket expenses actually incurred in generating such Transaction Fees and not otherwise reimbursed. Any excess offset shall carry forward.

Note the two traps closed here: consideration in securities, and monitoring fee acceleration on exit.

2.2 Distribution waterfall — hybrid model

Distributable Proceeds attributable to a Portfolio Investment shall be apportioned among the Partners pro rata in accordance with their respective Capital Contributions to such Portfolio Investment, and each Limited Partner's share shall be distributed:

First, one hundred percent (100%) to such Limited Partner until it has received cumulative distributions equal to (a) its Capital Contributions in respect of all Realized Investments and all Written-Down Investments, plus (b) its Capital Contributions in respect of Management Fees and Fund Expenses;

Second, one hundred percent (100%) to such Limited Partner until it has received the Preferred Return on the amounts described in clause First, compounded annually;

Third, [one hundred percent (100%) / eighty percent (80%)] to the General Partner until the General Partner has received an amount equal to twenty percent (20%) of the sum of the amounts distributed under clause Second and this clause Third; and

Thereafter, eighty percent (80%) to such Limited Partner and twenty percent (20%) to the General Partner.

Written-Down Investment means any Portfolio Investment that has been held for at least [two] years and whose Fair Value is less than [seventy-five percent (75%)] of its Capital Contribution cost basis, treated as realized at Fair Value solely for purposes of this Section.

Investor-favorable alternative for clause First: require return of all Capital Contributions, whether or not attributable to realized investments — the whole-fund model.

Interim clawback holdback:

Prior to any distribution to the General Partner under clauses Third or Thereafter, the General Partner shall compute the amount that would be distributable to it if all remaining Portfolio Investments were sold at Fair Value and the Fund were liquidated. If such amount is less than the aggregate amount theretofore distributed to the General Partner, no further distribution shall be made to the General Partner until the deficiency is eliminated.

2.3 Clawback

Manager-favorable. Upon dissolution, the General Partner shall return to the Fund the amount, if any, by which cumulative Carried Interest distributions exceed twenty percent (20%) of cumulative Net Profits, provided that such obligation shall not exceed the after-tax amount actually retained by the General Partner, computed using the highest marginal combined federal, state, and local rates applicable to an individual resident in [jurisdiction].

Investor-favorable. [As above], and further provided that (a) thirty percent (30%) of each Carried Interest distribution shall be deposited into an escrow account with [escrow agent] and released only upon final determination of the Clawback Amount; (b) each Principal shall severally guarantee its proportionate share of the Clawback Amount, up to an aggregate amount equal to the Carried Interest distributions received by such Principal; (c) such guarantees shall survive the death, disability, withdrawal, or removal of any Principal and shall be secured by [__]; and (d) an interim clawback shall be computed and settled at the end of the Investment Period and every [two] years thereafter.

Middle position most funds reach: escrow at twenty-five to forty percent, several guarantees, after-tax computation, interim test at the end of the investment period.

2.4 Key person

Key Person Event. A Key Person Event occurs if, at any time during the Investment Period, fewer than [three] of the Key Persons devote substantially all of their business time to the affairs of the Fund, the Manager, and the Predecessor Funds.

Automatic suspension. Upon a Key Person Event, the Investment Period shall be automatically suspended without any action by any Partner. During a suspension, the Fund may (a) complete Portfolio Investments for which a binding written agreement was executed prior to the Key Person Event, (b) make follow-on investments in existing Portfolio Companies not exceeding [__]% of Commitments in the aggregate, and (c) pay Management Fees and Fund Expenses.

Reinstatement. The Investment Period shall resume if, within one hundred eighty (180) days, Limited Partners holding a [majority] in interest approve the resumption, which approval may be conditioned upon the identity of replacement Key Persons. If no such approval is obtained, the Investment Period shall terminate.

Drafting note. Automatic suspension with an affirmative vote to resume is the investor-protective architecture. The reverse — suspension only upon an investor vote — is materially weaker because it imposes the coordination cost on a dispersed group that lacks information.

2.5 Removal

For Cause. Upon a final, non-appealable determination by a court of competent jurisdiction or arbitral tribunal that the General Partner or a Principal has committed fraud, willful misconduct, or gross negligence in respect of the Fund, or a material breach of this Agreement that remains uncured for [thirty] days after notice, Limited Partners holding a [majority] in interest may remove the General Partner. Upon such removal, the General Partner shall [forfeit all unvested Carried Interest and retain Carried Interest in respect of Portfolio Investments made prior to removal, reduced by fifty percent (50%)].

Without Cause. Limited Partners holding [seventy-five percent (75%)] in interest may (a) terminate the Investment Period or (b) remove the General Partner, in each case without cause and without any determination of fault, upon [ninety] days' notice. Upon a no-fault removal, the General Partner shall retain Carried Interest in respect of Portfolio Investments made prior to removal, the Management Fee shall cease, and a successor general partner shall be appointed by Limited Partners holding a [majority] in interest.

Practice note. The "final, non-appealable determination" condition is the single most contested clause in the removal section, because it can defer the remedy for five years. A workable compromise: removal on a lower showing, with the carry consequence held in escrow pending final determination.

2.6 Advisory committee

The Advisory Committee shall consist of [five] to [nine] representatives of Limited Partners designated by the General Partner. The Advisory Committee shall (a) review and approve or disapprove transactions and matters involving actual or potential conflicts of interest that are submitted to it by the General Partner, (b) review valuations, and (c) consider such other matters as the General Partner submits.

The Advisory Committee shall have no authority to manage or control the Fund, to bind the Fund, or to direct the General Partner in the making or disposition of Portfolio Investments. No member of the Advisory Committee, and no Limited Partner designating a member, shall owe any fiduciary or other duty to the Fund or to any other Partner by reason of such service, and each shall be entitled to act in its own interest, including the interest of the Limited Partner that designated it.

Approval by the Advisory Committee of a transaction disclosed to it in reasonable detail shall constitute consent of the Partners for purposes of [applicable fiduciary duty and conflicts provisions].

2.7 Expenses

Fund Expenses. The Fund shall bear: organizational and offering expenses up to $[___] (with the excess borne by the Manager); expenses of identifying, evaluating, acquiring, holding, and disposing of Portfolio Investments, including expenses of unconsummated transactions; financing costs and interest; custody, administration, audit, tax preparation, and valuation fees; insurance premiums allocable to the Fund; legal expenses; taxes and governmental charges; expenses of the Advisory Committee and annual investor meeting; indemnification obligations; and liquidation expenses.

Manager Expenses. The Manager shall bear out of the Management Fee: compensation and benefits of the Manager's personnel, including operating partners, senior advisors, and executives in residence; office rent and utilities; general overhead; the Manager's own information technology and communications; the Manager's compliance program and the compensation of its chief compliance officer; and expenses of marketing the Fund and any successor fund.

Broken deal expenses shall be allocated among the Fund, any Parallel Fund, and any co-investment vehicle or prospective co-investor that had been offered or had committed to participate in the relevant transaction, pro rata in proportion to the participation each would have had.

Drafting note. The broken deal allocation sentence and the express placement of operating partner compensation on the manager's side of the line are two of the most examined items in the industry. Say what you mean and then do it.

Tool 3: Numeric waterfall worksheet

Run every draft waterfall through these four scenarios before the LPA is final. Circulate to the administrator and the auditor.

Assumptions. $100M commitments; $90M invested across three deals; $10M cumulative fees and expenses; 8% preferred return; 20% carry; 100% catch-up; hybrid model with return of all contributed capital.

For each scenario, compute and record:

1. Cumulative contributions at each distribution date
2. Amount distributed under clause First (return of capital) at each date
3. Preferred return accrued and paid at each date
4. Catch-up amount at each date
5. Residual split at each date
6. Interim clawback test result at each date
7. Final clawback amount at dissolution
8. Escrow balance at each date and whether it covers the final clawback

Scenario 1 is the one that matters. It is where deal-by-deal carry creates a clawback, where the interim test either works or does not, and where the escrow percentage gets validated. If two people compute Scenario 1 differently, the drafting is ambiguous — fix it now.

Tool 4: Side letter matrix

Build this at the first side letter. One row per investor; one column per obligation. Assign a named owner.

Operating rules.

1. The matrix is updated at execution, not at final close.
2. Every dated obligation is copied into the compliance calendar the same day.
3. Before every investment committee decision, the excuse rights column is checked.
4. Before every co-investment allocation, the co-investment column is checked.
5. The matrix is reviewed annually and after every transfer.

Tool 5: MFN circulation and election package

Cover letter skeleton.

Re: Most Favored Nation Election — [Fund Name]

Pursuant to Section [] of your side letter dated [], we enclose copies of the side letters entered into by the Fund with Limited Partners whose Commitments are equal to or less than $[___] (your MFN Tier), redacted as to investor identity as permitted.

Provisions excluded from the MFN, as set out in your side letter, are: (a) advisory committee representation; (b) co-investment allocation and capacity rights; (c) provisions responsive to an investor's specific legal, tax, or regulatory status; and (d) provisions granted to [Anchor Investor] in consideration of its role as anchor investor.

To elect any provision, please return the attached Election Form, identifying by letter and section number each provision elected, no later than [date — 30 days from this letter]. Elections are effective as of the date of your election and are not retroactive. Elections not made by the deadline are waived.

Election form skeleton.

The undersigned Limited Partner elects the following provisions: | Letter ref. | Section | Provision (short description) | Elected (Y/N) | Signed: ______________ Date: ______

Manager's internal tracking. Date circulated · investors circulated to · elections received · elections deemed waived · consolidated terms statement issued · matrix updated.

Tool 6: Capital call notice

[FUND NAME] — CAPITAL CALL NOTICE NO. [__] Date: [] · **Due date: [] (not fewer than [10] business days from the date hereof)**

	Amount
Your Commitment	$
Prior Capital Contributions	$
Amount called hereby	$
Remaining Unfunded Commitment after this call	$

Purpose of this call

Purpose	Amount
Portfolio Investment in [Company]	$
Management Fee for the quarter ending [__]	$
Fund Expenses (see attached schedule)	$
Repayment of Subscription Facility borrowings	$

Wire instructions: [__] · Reference: [Investor name / Call No.]

Please direct questions to [administrator contact]. Failure to fund by the due date may result in the remedies described in Section [__] of the Partnership Agreement.

Never send a call notice that omits the remaining unfunded commitment. It is the number investors actually use.

Tool 7: Internal policies — required contents

7.1 Investment allocation policy

• Scope: which vehicles participate (Fund, Parallel Funds, Predecessor Funds still investing, co-investment vehicles, separate accounts).
• Default rule: pro rata by available capital, adjusted for strategy fit, concentration limits, and legal or tax constraints.
• Exceptions: enumerated, with a documented rationale requirement.
• Co-investment: who is offered, in what order, on what basis, and how side letter priorities are reconciled when they exceed capacity.
• Documentation: contemporaneous memorandum for every allocation decision that departs from the default.
• Review: quarterly by the CCO.

7.2 Valuation policy

• Methodology by asset type, with inputs identified.
• Frequency and as-of dates.
• Roles: preparer, reviewer, approver — three different people.
• Independent valuation provider: when used and for what.
• Documentation standard for inputs, comparables, and deviations.
• Advisory Committee's role.
• Auditor interaction and treatment of proposed audit adjustments.

7.3 Expense allocation policy

• The Fund/Manager line, mapped to the LPA's expense provision clause by clause.
• Shared expense allocation basis among vehicles.
• Broken deal allocation rule including prospective co-investors.
• Travel and entertainment standards.
• Approval thresholds and who approves.
• Quarterly review and annual report to investors.

7.4 Political contributions policy

• Pre-clearance requirement for all covered associates.
• Two-year lookback questionnaire for every new hire before the offer is made.
• De minimis exceptions tracked.
• Prohibition on soliciting or coordinating contributions.
• Prohibition on using unregistered third parties to solicit government entities.
• Quarterly certification.

Tool 8: First-year compliance calendar

Tool 9: Post-NAPFM delivery statement

After National Association of Private Fund Managers v. SEC, 103 F.4th 1097 (5th Cir. 2024), the vacated requirements are not federal mandates. Record deliberately which the fund will deliver anyway, and put the commitment where investors can see it.

Why bother. Institutional investors now ask this question directly, and a manager with a prepared, specific answer looks materially different from one improvising.

Related documents

• Private Fund Formation: LPA Economics, Side Letters, and Adviser Obligations
• Forming a Private Fund: A Practical Guide
• Fund Formation Checklist: A Practical Checklist
• Investment Management Regulatory Toolkit: Advisers, Funds, and Broker-Dealers
• Regulation D Private Placement Checklist: A Practical Checklist
• Equity Compensation: Stock Options, RSUs, Profits Interests, and Section 409A

This toolkit is general information, not legal advice, and does not create an attorney-client relationship. Adapt every provision to the transaction.