The Cornerstone LPA, the easy-to-use limited partner agreement for venture capital funds, has been upgraded to Version 2.
Version 1 and Version 1.1 of Cornerstone have been used by hundreds of funds around the world, reviewed by dozens of fund formation attorneys and signed by hundreds of limited partners. The agreement has also been localized to multiple fund domiciles.
The widespread adoption of the Cornerstone has provided feedback and ideas to improve the core agreement template. Each week, a diverse team of formation professionals and attorneys discuss the feedback and ideas to validate their merits, ultimately drafting any viable enhancements. Version 2 captures most of these improvements.
The following contains an outline of the improvements, instructions to upgrade from previous versions, a detailed change log and the Agreement itself. The agreement is free to use by anyone, and we encourage general partners and law firms to localize it for common fund domiciles.
Overall, the language in Version 2 has been further refined and simplified across the entire Agreement. Whenever there is an opportunity to make something clearer and in plain English, an improvement is made. The other big items include:
- American Waterfall: The Cornerstone LPA utilizes an American waterfall structure to distribute capital to the General Partners and Limited Partners. The language in the Agreement has been updated to reflect the ILPA (International Limited Partner Association) standard for the American waterfall, making it easier for Limited partners to accept.
- Exceptions: A Schedule of Exceptions has been added where any modifications to the Agreement can be added. This allows lawyers to edit the Agreement without having to modify the template, which prevents a common practice of editing templates to hide terms.
- Limited Partner Defaults: The Cornerstone LPA has been enhanced to provide the General Partner with a wide variety of remedies in the case of a default by a Limited Partner to meet a capital call. There are many reasons why a Limited Partner may default on a capital call, and the General Partner now has more tools available in these circumstances.
- Side Letters: The Cornerstone LPA now explicitly allows the General Partner to enter into side letters with Limited Partners to provide custom terms for an individual or group of investors.
- Key Individuals: In the case where all Key Individuals are incapacitated, the fund now automatically enters Limited Operations Mode, saving a step of the Limited Partners having to vote.
- SPVs: Special Purpose Vehicles (SPVs) are now automatically approved to make co-investments and follow-on investments.
- Capital Commitment: The General Partner Capital Commitment may now be satisfied through an affiliate of the General Partner, and it has been clarified that the Capital Commitments are not subject to Management Fees.
- Management Fees: The definition of Management Fee has been updated to include multiple methods of calculating the fees, including an annual schedule.
- Power of Attorney: A limited Power of Attorney has been added to allow the General Partner to conduct the business of the fund, including adding Limited Partners and dissolving the fund.
- Regulation S: Representations for Regulation S have been added to simplify adding Limited Partners from outside the United States of America.
- Bad Actors: Representation that the Limited Partners are not “bad actors” under United States securities laws has been added.
- There have been a number of financial enhancements, allowing the fund to enter into short term loans and having the fund provide GAAP financials, which will be required by banks and some Limited Partners.
- Language has been moved around in the agreement and schedules for clarity, including placing Limited Operations Mode and subscription language in the body of Agreement.
- The Agreement has clarifying language about paying Management Fees, which are now explicitly excluded from Fund Duration Extensions and suspended during Limited Operations Mode.
- The Agreement now has an added obligation for Partners to give back up to 20% of distributions to satisfy Fund obligations, if needed.
Cornerstone Upgrade Instructions
It is recommended that funds upgrade their Cornerstone Agreement with each major version release, such as Version 2. The Cornerstone is designed to be upgraded, with each release capturing industry best practices, changes in the law, changes in the tax code and other enhancements.
For funds using Cornerstone v1 or v1.1, the instructions to upgrade are simple. Either secure Approval by the Limited Partners, or set up a Limited Partner Advisory Committee (LPAC) and have the LPAC approve the change.
For funds on other Limited Partner Agreements, there are a couple of options. First, you may consult with your fund formation attorney about switching, although most attorneys prefer to work with their longer and more complex agreements. Alternatively, you can work with one of our select legal partners to manage the transition at a reasonable rate.
Cornerstone Change Log
|Term||Change||Reasons for Change|
|Definitions||A number of definitions were revised to clarify language.“Financial Statements”: Fund statements will be in accordance with GAAP.“Management Fee”: Fees are specified for two periods, during Investment Period and during Post-Investment Period.||Some LPs requested GAAP financials as well as banks that may be providing credit facilities to the Fund.Change to definition of Management Fee makes it easier to have different fee schedules based on the two different periods.|
Exceptions to Cornerstone
|Added schedule to highlight differences and additional language for the agreement that are not provided in the form document.Includes sample language for Warehoused Investments, Conflicts of Interest, Special Purpose Vehicles, Accelerator.||The addition of a schedule provides the ability to maintain a form document while allowing for certain changes that can be more easily reviewed.|
|Section 2.1. |
GP Capital Commitments
|GP’s Capital Commitment may be satisfied through affiliates of GP which will become Limited Partner Interests not subject to Management Fee.||This can simplify the process of fulfilling the GP commitment.|
|Section added to provide remedies for Fund in case of default by Limited Partner to make a Capital Commitment, including providing for a default interest rate, forfeiture of LP’s interest, forced sale of LP’s interest at 50% of the lesser of Capital Contributions and Fair Value of Interest.||This provides the Fund customary remedies in dealing with defaulting LPs.|
|Section 3.2. |
|Waterfall provides distributions first to Partners until it equals Capital Contribution Value for Investments and Non-Investments, and now provides Fund Expenses and Realized Investments will also be subject to this preference prior to payment of Carried Interest.||The waterfall change was made to align more with the standard American style waterfall such as provided in the ILPA.|
|Section 4.3.2. |
|If all Key Individuals are Incapacitated, then the Fund shall automatically enter Limited Operations Mode.||LPs have raised this question and this addition clarifies what happens to the Fund in such cases. This could be important with small Funds with one or few Key Individuals.|
|Section 4.3.4. |
Special Purpose Vehicle
|Added ability of GP to set up SPVs for co-investing in a Fund Investment or making follow-on investments.||Investing through SPVs in certain situations is a common practice.|
|Section 4.3.6. |
|Added provision to allow Fund to enter into short term loans.||This change was requested by the bank in order to allow the Fund to borrow funds.|
|Section 4.4. |
Limited Operations Mode
|Moved definition of Limited Operations Mode into body of the agreement.||The prior version had this definition in the back of the document which obscured this definition.|
|Section 4.8.2. |
|Added advancement of expenses for Indemnitees.||This was added to ensure that Indemnitees will not have to bear the burden of expenses when the indemnity is triggered.|
|Section 4.9.2. |
|Added clarifying language on payment of Management Fee including providing no fee during Fund Duration Extension, and suspension during Limited Operations Mode.||Clarification.|
|Section 6.4.3. |
|Added obligation of Partners to give back up to 20% of distributions received to satisfy Fund obligations.||Added this section to maintain the Fund in certain circumstances if the Fund is subject to obligations that it cannot cover.|
|Article 7. |
|Moved subscription language from exhibit to body of agreement.||The prior version had the subscription provision in the back of the document which obscured this provision.|
|Section 8.2. |
Power of Attorney
|Added power of attorney to provide GP the ability to take actions to add Limited Partners and to dissolve the Fund.||The power of attorney smooths out the process for taking these basic actions.|
|Section 8.3. |
|Added ability of GP to enter into side letters with Limited Partners.||Side letters are common for Funds and this makes clear that the GP may enter into such agreements.|
|Exhibit B. |
Representations and Warranties
|Added Regulation S reps pertaining to non U.S. investors to avoid applicability of U.S. securities laws to such investors.Added rep that Limited Partner is not a “bad actor” under U.S. securities laws.||This would apply to overseas investors so that their investment is not subject to certain U.S. securities laws.|
Cornerstone v2 Agreement
Cornerstone v2 is free to use by anyone, and we encourage general partners and law firms to localize it for common fund domiciles.
The Cornerstone Limited Partner Agreement is actively developed by VC Lab, the leading accelerator for venture capital firms worldwide. If you are an emerging manager launching a venture capital fund, then please apply to the free accelerator.