Reference
VC & Fund Management Glossary
54 terms every fund manager should know, defined in plain language with real-world context. Not textbook definitions — the way these terms actually come up in practice.
Anchor LP
The first institutional LP to commit to a fund, typically committing 15-25% of the target fund size. The anchor LP's commitment signals credibility and often accelerates fundraising by giving other LPs confidence to commit.
"We closed our anchor LP at $2.5M, which gave us the momentum to fill the rest of our $10M fund in under 6 months."
AUM
Assets Under Management. The total market value of all assets that a fund manager oversees on behalf of investors. For VC funds, this includes both the invested portfolio (at current fair market value) and uninvested committed capital.
"Our AUM across Fund I and Fund II is $28M, though only $19M is currently deployed."
Blind Pool
A fund structure where LPs commit capital without knowing exactly which companies the GP will invest in. Most VC funds are blind pools, with the GP's thesis, track record, and LPA governing investment decisions.
"LPs are trusting your judgment with a blind pool, which is why your thesis and track record matter so much during fundraising."
Capital Call
A formal request from the GP to LPs to contribute a portion of their committed capital. Capital calls are issued when the fund needs cash for a new investment, follow-on, or to cover expenses. LPs typically have 10-15 business days to wire funds.
"We sent our third capital call last week — $400K across 12 LPs for our investment in the Series A of a fintech company."
Carried Interest (Carry)
The share of fund profits (typically 20%) that the GP earns as performance-based compensation. Carry is only paid after LPs have received their committed capital back plus any preferred return (hurdle rate). This is the primary way GPs make money.
"On a $10M fund that returns $30M, the 20% carry on $20M of profit is $4M to the GP — but only after LPs get their $10M back plus the hurdle."
Catch-up
A provision in the fund waterfall that allows the GP to receive a disproportionate share of profits (often 100%) after LPs have received their preferred return, until the GP has received their full carry percentage of total profits.
"With a full catch-up provision, once LPs hit their 8% preferred return, 100% of the next distributions go to the GP until we've caught up to our 20% carry share."
Clawback
A provision requiring the GP to return excess carried interest to LPs if later fund performance doesn't justify the carry already paid. Protects LPs from scenarios where early exits look great but later investments underperform.
"We took carry after our first exit returned 10x, but the clawback provision means we may need to return some of it if the rest of the portfolio doesn't perform."
Co-invest
An opportunity for LPs to invest directly alongside the fund in a specific deal, typically on a no-fee, no-carry basis. Co-invest rights are a major LP incentive, especially for larger LPs who want more exposure to specific companies.
"Our largest LP asked for co-invest rights on any deal over $500K. We offered $200K of co-invest on our last deal and they took it immediately."
Commitment
The total amount of capital an LP pledges to invest in a fund over its lifetime. This is not paid upfront — it's drawn down over 3-5 years via capital calls as the GP deploys capital.
"She committed $500K to the fund, and so far we've called 60% of that commitment across four capital calls."
Commitment Period
The window (typically 3-5 years) during which the GP can make new investments. After the commitment period ends, the GP can only make follow-on investments in existing portfolio companies, not new deals.
"We're in year 4 of our 5-year commitment period, so we need to deploy the remaining capital or adjust our reserve strategy."
Crossover Fund
A fund that invests across both private and public markets, or across multiple stages (e.g., late-stage venture and public equities). Tiger Global and Coatue are well-known crossover investors.
"Crossover funds drove up late-stage valuations in 2021 by applying public market multiples to private companies."
Deal Flow
The stream of potential investment opportunities a GP evaluates. Quality deal flow comes from referral networks, other VCs, accelerators, cold outbound, and inbound from founders who know your brand.
"We review about 60 deals per month. About 15 get a first meeting, 3-4 get to diligence, and we invest in 1-2 per quarter."
Dilution
The reduction in an investor's ownership percentage when a company issues new shares (typically in a new funding round). Pro rata rights allow existing investors to maintain their ownership by participating in new rounds.
"We owned 8% after our seed investment, but got diluted to 5.5% in the Series A because we didn't exercise our pro rata."
Distribution
Cash or stock returned to LPs from a fund, typically from exits (acquisition or IPO), dividends, or other liquidity events. Distributions are the ultimate measure of fund performance — DPI is what LPs can actually spend.
"We distributed $1.2M to LPs from the acqui-hire of our portfolio company, representing a 1.8x return on that investment."
Down Round
A financing round where the company raises capital at a lower valuation than its previous round. Down rounds are painful for existing investors (they get diluted at a lower price) and often include structural protections for new investors.
"The company raised a down round at $15M after their previous round was at $40M. We got diluted significantly, but the alternative was running out of cash."
DPI
Distributions to Paid-In capital. Measures actual cash returned to LPs relative to their invested capital. A DPI of 1.0x means LPs have been returned their full investment. This is the metric LPs care about most because it represents real, realized returns.
"Our Fund I DPI is 0.8x in year 5 — we've returned 80% of called capital with several companies still in portfolio."
Drawdown
The process of calling and receiving committed capital from LPs. Also refers to the cumulative percentage of commitments that have been called. A fund that has called 70% of commitments has a 70% drawdown ratio.
"We've drawn down 45% of commitments through year 3, which is on pace for our 5-year deployment schedule."
Dry Powder
Committed but uncalled capital available for future investments. High dry powder means the GP has capital to deploy. At the industry level, high dry powder can signal competition for deals.
"We still have $3M of dry powder, which gives us plenty of room for 2-3 more initial checks and follow-on reserves."
Due Diligence
The comprehensive investigation of a potential investment, covering the team, market, product, technology, financials, legal, and competitive landscape. For LPs evaluating a fund, due diligence covers the GP's track record, strategy, operations, and terms.
"Our diligence process takes 3-4 weeks and includes 8-10 customer calls, a deep financial model review, and background checks on the founding team."
Escrow
A holding account where funds are deposited and held by a third party until specific conditions are met. In venture, escrow is commonly used during M&A transactions to hold a portion of the purchase price pending earn-outs or indemnification claims.
"10% of the acquisition price went into escrow for 18 months. We won't know our final distribution until the escrow period closes."
Follow-on
An additional investment in an existing portfolio company, typically in a later funding round. Follow-on strategy is a critical part of portfolio construction — reserve enough capital for your winners.
"We led their seed and followed on with $200K of our pro rata in the Series A. We reserve 25% of the fund for follow-ons."
Fund Admin
A third-party service provider that handles fund accounting, financial reporting, capital call processing, distribution calculations, and K-1 preparation. Essential for any institutional-quality fund.
"Our fund admin handles quarterly NAV calculations, capital call notices, and K-1 preparation. It costs about $30-50K per year for a small fund."
Fund of Funds
An investment vehicle that allocates capital across multiple VC funds rather than directly into startups. Provides diversification across managers, vintages, stages, and strategies. Common entry point for institutional investors new to VC.
"The fund of funds committed $1M to our Fund I. They invest in 15-20 emerging managers per vintage year."
General Partner (GP)
The managing partner of a fund who makes investment decisions, manages portfolio companies, handles fund operations, and has unlimited liability. The GP earns management fees and carried interest.
"As the GP, I'm responsible for everything — sourcing deals, managing LPs, supporting portfolio companies, and running fund operations."
GP Clawback
A specific type of clawback where the GP must return previously distributed carry if the fund's overall performance at liquidation doesn't justify the carry received from early exits.
"We set aside 30% of our carry distributions in a reserve account in case the GP clawback gets triggered at fund liquidation."
GP Commitment
The amount of capital the GP personally invests in their own fund, typically 1-3% of total fund size. Demonstrates alignment of interests with LPs — the GP has skin in the game.
"I put in 2% of the fund as my GP commitment — $200K on a $10M fund. Some LPs wanted 3%, but 2% is standard for emerging managers."
Harvesting Period
The period after the commitment period ends (typically years 6-10) during which the GP manages existing investments toward exit rather than making new ones. The GP works to generate liquidity events and return capital to LPs.
"We're in the harvesting period for Fund I now — focused on helping our top 5 companies get to exits over the next 2-3 years."
Hurdle Rate
The minimum annual return (typically 8%) that must be delivered to LPs before the GP earns carried interest. Also called the preferred return. Ensures LPs get a baseline return before the GP shares in profits.
"With an 8% hurdle compounded annually, LPs need to receive about 1.47x their money back over 5 years before we start earning carry."
Investment Period
Synonymous with commitment period. The window during which the GP actively deploys capital into new investments. Typically the first 3-5 years of a fund's 10-year life.
"We have 18 months left in our investment period and $2M to deploy. We're targeting 4-5 more initial checks."
IRR
Internal Rate of Return. The annualized return on investment that accounts for the timing and magnitude of cash flows. IRR rewards early exits — a 3x return in 3 years has a much higher IRR than a 3x return in 7 years.
"Our Fund I gross IRR is 28% driven by an early exit in year 2. Net IRR to LPs is about 22% after fees and carry."
J-Curve
The typical pattern of fund returns where early years show negative performance (due to management fees and unrealized investments at cost) before turning positive as portfolio companies mature and valuations increase.
"Don't panic when your fund shows negative returns in years 1-3. That's the J-curve — you're paying fees and your investments haven't had time to appreciate yet."
K-1
The tax form (Schedule K-1 of IRS Form 1065) that reports each LP's share of the fund's income, deductions, and credits. Must be distributed to LPs annually for their personal tax filings. Fund admins typically prepare these.
"K-1s are due to LPs by March 15, but most funds file for an extension and deliver them by September. Late K-1s frustrate LPs more than almost anything."
Key Person Clause
An LPA provision that pauses the fund's investment activity if a key GP departs or is unable to fulfill their duties. Protects LPs from having their capital managed by someone they didn't underwrite.
"As a solo GP, my key person clause gives LPs the right to suspend investment activity if I'm unable to manage the fund for 90+ consecutive days."
Limited Partner (LP)
An investor in a fund who provides capital but has limited liability and no role in day-to-day fund management. LPs include high-net-worth individuals, family offices, endowments, pension funds, and fund-of-funds.
"We have 18 LPs in Fund I — mostly HNWIs and two family offices. Our average commitment is about $550K."
LPA
Limited Partnership Agreement. The primary legal document governing the fund, defining terms, fees, carry, GP authority, LP rights, investment restrictions, and fund lifecycle. Negotiated during fundraising and typically 80-120 pages.
"The LPA took 3 months to negotiate with our anchor LP's lawyer. It covers everything from management fees to what happens if I get hit by a bus."
LPAC
Limited Partner Advisory Committee. A committee of LP representatives (typically 3-5 members) that advises the GP on conflicts of interest, valuation matters, and fund extensions. Common in institutional-quality funds.
"We convene our LPAC quarterly. They review any conflicts of interest and approve related-party transactions."
Management Fee
An annual fee (typically 2% of committed capital during the investment period, stepping down to 1.5-2% of invested capital during the harvesting period) charged by the GP to cover fund operating expenses.
"Our 2% management fee on a $10M fund generates $200K per year. That covers my salary, a part-time associate, fund admin, legal, and travel."
Mark-to-Market
The practice of valuing portfolio investments at their current fair market value rather than their historical cost. Required for quarterly NAV calculations and LP reporting.
"After the Series A closed at a $30M valuation, we marked up our position from our $8M entry — a 3.75x unrealized return on paper."
MOIC
Multiple on Invested Capital. The total value (realized + unrealized) relative to the total amount invested. A 3x MOIC means $3 of value for every $1 invested. Unlike IRR, MOIC doesn't account for the time it took to generate returns.
"Our best investment is tracking at 12x MOIC after 3 years. If they exit at that multiple, it would return 40% of the fund by itself."
NAV
Net Asset Value. The total value of a fund's assets (fair market value of unrealized investments plus cash) minus liabilities. NAV per unit tells each LP what their stake is currently worth on paper.
"Our fund NAV is $14.2M on $8M of called capital, giving us a 1.78x TVPI. But NAV is paper value — DPI is what matters."
No-Fault Divorce
An LPA provision allowing a supermajority of LPs (typically 75-80%) to remove the GP and wind down the fund without cause. A nuclear option that LPs rarely exercise but provides important governance protection.
"The no-fault divorce clause requires 80% of LP interests to vote for GP removal. It's never been triggered, but LPs want to know it's there."
Pari Passu
Latin for "on equal footing." In fund terms, it means all LPs of the same class are treated equally in capital calls, distributions, and other fund activities, proportional to their commitments.
"All LPs participate pari passu in capital calls and distributions — no LP gets preferential treatment on economics, though side letters may grant certain other rights."
Portfolio Construction
The strategic framework for deploying capital across investments, including target check sizes, number of investments, sector/stage allocation, reserve ratios, and concentration limits.
"Our portfolio construction targets 15 initial checks at $400K each, with 25% reserved for follow-ons in our top 5 performers."
Preferred Return
The minimum return LPs must receive before the GP earns carried interest. Identical to the hurdle rate in most fund structures. Typically 8% per annum, sometimes compounded.
"Our 8% preferred return is compounded annually. On $10M called over 5 years, LPs need to receive about $14.7M before we earn any carry."
Pro Rata
The proportional right of an existing investor to participate in a company's future financing rounds to maintain their ownership percentage. Also used in fund context for LP capital calls and distributions.
"We have pro rata rights to invest $150K in the Series A to maintain our 6% ownership. We're using follow-on reserves to take the full allocation."
Recallable Distributions
A provision allowing the GP to recall previously distributed capital from LPs, up to a specified limit, to cover fund expenses or new investments. Typically limited to the lesser of 20-30% of commitments or amounts previously distributed.
"We recalled $200K of previously distributed capital to fund an unexpected follow-on opportunity. LPs weren't thrilled, but it was within our LPA provisions."
Reserve Ratio
The percentage of total fund capital set aside for follow-on investments in existing portfolio companies. Typical reserve ratios range from 20-40% depending on the fund's follow-on strategy.
"We reserve 30% of the fund for follow-ons. Under-reserving is the #1 regret of first-time fund managers — you need capital for your winners."
RVPI
Residual Value to Paid-In capital. Measures the unrealized value remaining in the fund relative to total capital called. RVPI = (NAV - cumulative distributions) / total capital called.
"Our RVPI is 1.4x, meaning we're holding $1.40 of unrealized value for every dollar called. Combined with our 0.3x DPI, total TVPI is 1.7x."
Side Letter
A separate agreement between the GP and a specific LP granting special terms not in the main LPA, such as fee discounts, co-invest rights, reporting requirements, or most-favored-nation (MFN) clauses.
"Our anchor LP's side letter gives them a 25% management fee discount and quarterly co-invest rights on deals over $400K."
Subscription Agreement
The legal document an LP signs to commit capital to a fund. It includes the commitment amount, LP representations and warranties, and acknowledgment of the LPA terms. Essentially the LP's application to invest.
"We received the signed subscription agreement and wire confirmation yesterday — they're officially in the fund for $250K."
TVPI
Total Value to Paid-In capital. The sum of DPI (realized) and RVPI (unrealized), representing total fund performance relative to invested capital. TVPI of 2.0x means the fund has generated $2 of total value for every $1 called.
"Our Fund I TVPI is 2.3x in year 6 — 0.5x from realized exits and 1.8x from unrealized portfolio value. Strong, but we need DPI to validate it."
Venture Debt
Debt financing (loans) extended to venture-backed startups, typically by specialized lenders like SVB, Hercules, or Western Technology Investment. Usually comes with warrants and is used to extend runway between equity rounds.
"The company took $2M in venture debt after their Series A to extend runway by 6 months without additional dilution. The debt came with warrant coverage of 0.5%."
Vintage Year
The year a fund makes its first investment, used to compare performance across funds that started investing in similar market conditions. A 2021 vintage fund faces different market dynamics than a 2023 vintage fund.
"Our Fund I is vintage 2024. When LPs compare our performance, they'll benchmark us against other 2024 vintage seed funds, not all seed funds ever."
Waterfall
The contractual order in which fund profits are distributed between LPs and GP. The typical VC waterfall: (1) return of called capital to LPs, (2) preferred return to LPs, (3) GP catch-up, (4) 80/20 split of remaining profits.
"Understanding your waterfall is critical for modeling carry. On a $10M fund returning $25M, the waterfall determines whether the GP takes home $2M or $3M."
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