Cornerstone LPA v3.0

The Cornerstone LPA, the easy-to-use limited partner agreement for venture capital funds, has been upgraded to Version 3. 

Version 3 of the Cornerstone LPA incorporates the latest SEC regulation changes and supports both American and European waterfall structures. The upgrades reflect extensive feedback, enhancing the core agreement to meet evolving industry standards. It is recommended that everyone upgrade.

Having gained widespread acclaim and adoption, the Cornerstone LPA is fast becoming the standard agreement for emerging fund managers and has been reviewed by leading fund formation attorneys and endorsed by numerous limited partners.

As regulatory and market circumstances change, the Cornerstone is continuously updated to reflect best practices for managers and limited partners alike.

Cornerstone Improvements

The Cornerstone LPA has been updated to include options for distribution methods, compliance with the latest SEC regulations, and other changes required by managers. The overview of changes is below:

Major Enhancements

• Distribution Method Choice: Added a choice between Deal-by-Deal (American) or Whole-of-Fund Distribution (European) methods in Section 3.2.
• Majority of Interest Clarification (SEC related): Excluded conflicted Limited Partners in “Majority of Interest” for conflict of interest matters, aligning with SEC concerns and governance practices.
• Conflict of Interest Approval Change (SEC related): Shifted approval for conflict of interest matters from the Advisory Committee to Majority in Interest of Limited Partners in Section 4.3.3.
• Report Delivery Frequency (SEC related): Provided a quarterly report option, aligning with new SEC rules in Section 4.12.
• Side Letter Limitations (SEC related): Imposed restrictions on Side Letters granting favorable treatment to certain Limited Partners in Section 8.3.
• Amendment Authority for General Partner (SEC related): Authorized General Partner to amend non-material ministerial matters in Section 8.9.
• Reporting Requirement Definition: Introduced “Reporting Requirement” definition to specify quarterly or annual financial reporting.

Secondary Enhancements

• Advisory Committee Definition Revision: Removed naming members in the “Advisory Committee” definition to allow flexibility in establishing committees post-documentation.
• Mediation Location Addition: Added “Mediation Location” definition due to new mediation step in dispute resolution.
• Exceptions to Cornerstone Adjustment: Included an optional clause for additional interest payment by new Limited Partners post-Capital Calls for clarity.
• Management Fee Adjustment: Clarified downward adjustment of Management Fees on defaulted Capital Commitments in Section 4.9.2.
• Limited Operations Mode Specification: Defined “Material Breach” and outlined a two-thirds Limited Partners vote requirement for entering Limited Operations Mode in Section 4.4.
• General Partner Removal Procedure: Detailed procedures and consequences for removing a General Partner, including cases of incapacitation, in Section 5.2.
• Dispute Resolution Enhancement: Added discussion and meditation requirements before court adjudication in Section 8.12.
• Fund Expenses Definition: Included General Partner organizational existence expenses in “Fund Expenses” definition. General operating expenses excluded.

Cornerstone Change Log

Term	Change	Reasons for Change
Key Terms	Removed naming the members in the definition of “Advisory Committee.”	Many funds establish their advisory committees after the completion of the documentation.
Key Terms	Clarified “Majority of Interest” of the Limited Partners excludes Limited Partners that have a conflict of interest on the matter being considered for approval.	In its commentary on the rule changes in September 2023, the SEC noted that they are concerned about fund practice in dealing with conflict of interest matters and that there are issues with clearing such matters with an advisory committee that may itself have conflicts.  In addition, this is consistent with good governance practice.
Key Terms	Added definition of “Mediation Location.”	Added definition due to the additional meditation step added to the dispute resolution provision (see below).
Key Terms	Added definition of “Reporting Requirement.”	This definition makes clear whether the Fund will provide financial reports on a quarterly or annual basis.
Exceptions to Cornerstone	Added an optional provision that provides for an additional interest payment to be made by new Limited Partners who invest in the Fund after Capital Calls have already been made by the Fund.	Some funds have requested further clarity on this issue rather than leaving this to the sole discretion of the General Partner.
Section 3.2	Added choice of provision for Deal-by-Deal Distribution or Whole-of-Fund Distribution.	Also known as American waterfall and European waterfall, the addition of the Whole-of-Fund (European) Distribution provision provides for an additional choice in the allocation of distributions.
Section 4.3.3 (Conflicts of Interest)	Cornerstone now requires conflicts of interest matters to be approved by a Majority in Interest of the Limited Partners as opposed to the Advisory Committee.	This change was made based on SEC commentary in their rule changes which criticized the practice of clearing conflicts with an advisory committee as these committees can also be conflicted.
Section 4.4 (Limited Operations Mode)	Clarified that a two-thirds vote of the Limited Partners (excluding those that have a conflict of interest) can cause the Fund to enter Limited Operations Mode, and the circumstances in which this can occur through the addition of definition of “Material Breach.”	The prior Cornerstone lacked specificity on what constituted a material breach.
Section 4.9.2 (Management Fee)	Clarified that Management Fees shall be subject to downward adjustment based on defaulted Capital Commitments.	In order to prevent the overpayment of Management Fees for Capital Commitments that are in default, the Cornerstone now makes clear that Management Fees will not be paid on Capital Commitments in default.
Section 4.12 (Delivery of Records; Reports)	With addition of the definition or “Reporting Requirements” (see above), the Cornerstone now provides an option for the Fund to be required to provide quarterly reports.	The new SEC rule requires registered advisers to provide quarterly reports.  While this is not required for exempt reporting advisers, quarterly reports can be helpful to provide Limited Partners with greater visibility into the operations and performance of the Fund.
Section 5.2 (Removal)	The Cornerstone now provides more specificity on the procedures and consequences in removing a General Partner and includes removal in the case all the Key Individuals are Incapacitated.	For funds that have a single Key Individual managing the Fund, this provides further clarity on the removal of the General Partner.
Section 8.3 (Side Letters)	The Cornerstone now provides limitations on the ability of the General Partner to enter into Side Letters that give favorable treatment to certain Limited Partners.	This change was made in response to the new SEC rules adopted in September 2023 which limits the ability of funds to provide preferential treatment to certain limited partners through side letters.
Section 8.9 (Amendments)	Added language to give the General partner to make amendments to the Cornerstone for non-material ministerial matters.	Change gives the General Partner authority to make minor changes to the Cornerstone without delay and incurrence of legal expenses.
Section 8.12 (Dispute Resolution)	Added additional procedures requiring discussion and meditation to resolve disputes prior to adjudication in Delaware courts.	Change was made to simplify the process of resolving disputes.
Definitions	Definition of “Fund Expenses” includes the expense of maintaining the organizational existence of General Partner.	This makes clear that certain expenses such as Delaware franchise fees for the General Partner are included in Fund Expenses.  General operating expenses of the General Partner remain excluded.

Cornerstone Upgrade

It is recommended that funds upgrade their Cornerstone Agreement with each major version release, such as Version 3. The Cornerstone is designed to be upgraded, with each release capturing industry best practices, changes in the law and other enhancements.

A significant upgrade or change of the LPA will require a Majority in Interest of limited partners to approve the changes. Given the fact that the changes are driven by regulatory requirements, securing approval should be largely procedural. 

Conclusion

Cornerstone LPA Version 3 represents a significant step towards more transparent, equitable, and compliant fund management practices. These updates reflect a responsive approach to regulatory changes and stakeholder expectations, positioning the Cornerstone LPA as a robust framework for modern venture capital operations. Fund managers are encouraged to adopt this updated version to ensure alignment with current industry standards and regulatory requirements.

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