A Limited Partner Advisory Committee (LPAC) is a committee that plays an oversight role in the management of a venture capital fund and related entities. The exact roles, responsibilities and authority of a LPAC are defined in the Limited Partners Agreement (LPA) that governs the operations of a fund. The most common function of an LPAC is to resolve potential conflicts of interest and waive certain restrictions in the LPA. The LPAC normally consists of members determined by the General Partner and the Limited Partners of the fund.
Why is the LPAC important?
As a venture capital firm grows, there is an increased likelihood of running into potential conflicts of interest or issues related to fiduciary duties that need approval. The LPAC provides the General Partner with a direct line of communication to get approval necessary to resolve matters and to engage in the activity with more transparency under the LPA. Plus, the LPAC provides the manager with guidance and also reduces the risk of lawsuits by limited partners who might otherwise feel left out.
Who is on the LPAC?
The ideal LPAC has three members that are thoughtful about ethical matters and close to the Limited Partners. Being on the LPAC is seen as a position of prominence for Limited Partners. It also helps the General Partner forge stronger relationships and communications with its Limited Partners.
What is the compensation for LPAC members?
Members of the LPAC are normally close to the manager and serve on the committee without compensation or additional economics. Members are interested in helping the manager and engaging in a venture capital firm, versus seeking compensation. After all, LPAC members are aligned with the Limited Partners for positive investments.
What are some sample matters that the LPAC votes on?
A manager will go to the LPAC for matters that need approval in the LPA, which are commonly conflicts of interest, fiduciary duties and business ethics. Example of issues that frequently get brought to the LPAC include:
- The fund wants to pull out of an investment that it told limited partners that the fund planned to do
- The fund wants to make an investment into a company that a General Partner made a previous investment in or has some material involvement with
- A General Partner wants to invest into a company that the fund passes on
- A General Partner is offered advisory shares in a portfolio company
- A General Partner wants to take a Venture Partner role in another fund
- The General Partner wants to launch an SPV for an unrelated deal to the Thesis
- The General Partner wants to start fundraising for a new fund before the successor fund threshold is reached
- The General Partner wants to amend the LPA
What is sample language in the LPA that governs a LPAC?
The language below relating to the LPAC is from the Cornerstone LPA v2.0.
Approval by the Advisory Committee (LPACT)
“Approval” means the prior affirmative written consent or vote from a majority of the members of the Advisory Committee or, if no Advisory Committee is established or as otherwise expressly required in the Agreement, from a Majority in Interest of the Limited Partners.
Conflicts of Interest and the LPAC
General Partner shall not, and hereby commits that the Fund shall not, directly or indirectly knowingly undertake any conduct constituting an actual or potential conflict of interest between (i) the Fund, any Portfolio Investment or any Portfolio Company on the one hand, and (ii) any Key Individual on the other hand, without Approval. General Partner shall promptly disclose for Approval all actual or material potential conflicts of interest of which it is aware within ten (10) Business Days.
Additional Approvals by the LPAC
Successor Fund; Special Purpose Vehicle. Until the earliest to occur of (i) the termination of the Investment Period, (ii) the date when Successor Fund Threshold has been reached, or (iii) the termination of the Fund, General Partner shall not, and hereby commits that no Key Individual shall, directly or indirectly, (i) accrue any fund management or advisory fees relating to any person, entity, vehicle or account other than with respect to this Fund, or (ii) make, directly or indirectly, outside the Fund any investment in any Securities of any Person in the Fund Thesis, except with Approval. Notwithstanding the foregoing, General Partner and Key Individuals shall not be prohibited from forming a special purpose vehicle formed for the purposes of (i) co-investing alongside the Fund in a Portfolio Investment, or (ii) making a follow-on investment in a Portfolio Investment (each such entity, an “SPV”), provided that, in each instance, if the Fund participates in such special purpose vehicle it shall not be subject to additional management fees or carried interest to the special purpose vehicle in cases where the Fund is already earning fees from such investment.
Details of the Advisory Committee (LPAC)
(a) Establishment. General Partner may in its sole discretion establish an Advisory Committee of the Fund. An Advisory Committee shall provide such advice and opinions to General Partner as requested by General Partner, provided that, the members of any Advisory Committee shall take no part in the management of the Fund. A Majority in Interest of the Limited Partners may choose to elect an individual as one member of the Advisory Committee at any time. General Partner has the sole discretion to change the Advisory Committee members, other than any member appointed by the Limited Partners, upon 30 days’ notice to the Limited Partners.
(b) No Fiduciary Obligation of Advisory Committee or its Members. Each of General Partner and the Limited Partners acknowledges and agrees that, to the fullest extent permitted by applicable law, (i) none of any Advisory Committee, any member of any Advisory Committee nor any Limited Partner that such a member represents shall owe any fiduciary duties to the Fund, General Partner, or any Limited Partner, and (ii) in making any determinations, each member of any Advisory Committee shall be entitled to consider only such interests and factors as such member desires, including the interests of the Limited Partner that such member represents, and shall have no duty or obligation to give any consideration to any interest of or factors affecting the Fund or any other Person.
(c) Meetings of Advisory Committee. Any meeting of the Advisory Committee shall be called by General Partner at any time to consider matters for which the consent, approval, review or waiver of any Advisory Committee is required by this Agreement or is requested by General Partner, provided that General Partner shall call at least one meeting of any Advisory Committee per year; and may be called at any time by any Limited Partner that has a representative member on any Advisory Committee. Any Advisory Committee shall conduct its business in such manner and by such procedures as a majority of its members considers appropriate. Members of any Advisory Committee may participate in a meeting of any Advisory Committee by telephone or similar communications equipment by means of which all Persons participating in the meeting can hear and speak to each other
(d) Actions. All actions taken by any Advisory Committee shall be by a written consent setting forth the action so taken and approved by a majority of the members of any Advisory Committee, which such written consent may be given by email or any other written form. Each member of any Advisory Committee shall have one vote.
(e) Indemnification. Each member of the Advisory Committee shall constitute an “Indemnitee” under this Agreement.
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