Key Person Clause in a Fund LPA: Triggers and What Happens

A key person clause in a fund LPA names the individuals whose departure, death, disability, or loss of time-and-attention pauses new investments. The trigger is contractual. So is the remedy: notice, an automatic suspension of the commitment period, then LP or LPAC consent to a remediation plan — or the investment period ends.

This is general information, not legal, tax, employment, or investment advice. The LPA controls. A key-person clause is not an employment agreement and does not, by itself, fire anyone.

What a key person clause in a fund LPA actually does

Emerging managers raise on a named team. LPs underwrite that team, not the GP LLC. The key person clause is how the LPA converts that underwriting into a pause button.

Two documents get confused here. The SPV operating agreement vs LPA split is which governing contract you signed. A key-person clause lives in the fund LPA (and sometimes in a parallel management-company agreement). A single-deal SPV operating agreement often omits it, because the only investment is already made.

SEC exam staff have treated the clause as a disclosure the adviser must follow. The January 27, 2022 Division of Examinations risk alert records advisers that did not adhere to the LPA "key person" process after principals left, and advisers that did not give investors accurate information about the status of previously employed portfolio managers. That is an Advisers Act issue (fiduciary duty to the fund client; Rule 206(4)-8 as to investors) layered on a contract issue. It is not a separate SEC "key person rule."

Typical triggers

The LPA defines a "Key Person Event." Drafting varies. Recurring elements:

Named people. The clause lists individuals, not job titles. A two-partner first fund often names both. A larger partnership names a subset and then a formula: "X of Y" cease to devote the required time.

Time and attention. During the commitment period, the named people must devote a stated level of business time to the fund, the GP, the manager, and sometimes prior funds and alternative vehicles. "Substantially all" and "a majority of business time" are different tests. The LPA has to pick one. Time spent on a successor fund is a separate exclusivity / successor-fund clause; do not assume the key-person test covers it.

Cessation events. Death, disability, resignation, termination, and a prolonged failure to perform the time-and-attention covenant. Some drafts also treat a regulatory bar that stops the person from doing the job as a trigger. That last item can overlap Rule 506(d) bad actor disqualification without being the same clause.

Change of control. Many drafts fire the clause if the key persons cease to control the GP or the manager, or if they cease to own a stated share of the carried interest. The percentage is whatever the LPA fills in. Do not import a number from another fund.

When it applies. The time-and-attention test is usually limited to the commitment period. After the fund is done investing, LPs still care who is harvesting, but the automatic pause on new deals has less work to do. Harvest-period covenants, if any, are a different paragraph.

None of the above is employment law. Removing someone from the key-person list, or replacing them, is an LPA amendment plus whatever the GP's internal agreement says about vesting and economics.

What happens after a trigger

A well-drafted clause runs a sequence, not a slogan.

Notice. The GP notifies the LPs (and often the LPAC) that a Key Person Event has occurred. Silence is the failure SEC staff described.

Automatic suspension of the commitment period. New investment activity stops. Drawdowns are typically limited to fund expenses, deals the fund is already legally bound to complete, and repayment of indebtedness incurred before the suspension. The LPA should say that in words, including whether a signed term sheet is "legally bound."

Remediation window. LPs — in many drafts a majority in interest, in some drafts the limited partner advisory committee (LPAC) — then either approve a written remediation plan (a replacement hire, a reallocation of time, a new named person) or waive the suspension, generally or for specified deals. If they do neither inside the stated period, the commitment period terminates.

Fee consequences. Some LPAs step the management-fee base from commitments down to invested capital during a suspension, the same shift SEC staff describe for the ordinary post-commitment period (EXAMS risk alert, January 27, 2022, n.7). That is a fee clause sitting next to the key-person clause. If the LPA is silent, the fee may keep running on commitments while you cannot deploy. LPs will notice.

What it does not do by itself. It does not remove the GP. Removal for cause, removal without cause, and dissolution are separate votes with separate thresholds. A key-person event can be evidence in a for-cause process if the LPA wrote it that way. Most do not collapse the two.

How emerging managers draft it

How to launch a venture capital fund is the formation path. The key-person clause is one of the LPA pages institutional LPs will markup.

On a two-person GP, "either person" as the trigger is LP-friendly and operationally brittle: one parental leave, one health event, or one partner walking out pauses the fund. "Both persons" as the trigger is GP-friendly and gives LPs almost no protection. "Either, unless a named replacement is already in the LPA" is a compromise only if the replacement is real.

Name the people who actually source and decide. Do not name a venture partner who will not be on the investment committee, and do not omit a founder who will. If carry will vest over the fund term, say what happens to unvested carry on a departure; that is a GP-side agreement, but LPs will ask because it affects who is still incentivized to harvest.

Successor funds and time-and-attention fight each other. If the LPA lets you raise Fund II once a stated portion of Fund I is invested, the key-person test on Fund I still has to be satisfiable while Fund II exists. Write both clauses against the same calendar.

SPVs used as a first vehicle usually skip a key-person clause. The deal is identified. The manager's job is to close and hold it. If the same people later raise a blind pool, that is when the clause earns its keep.

Key person versus cause removal

Keep the vocabulary straight:

A single departure can trip more than one row. Process them separately. Do not use a key-person waiver as a silent for-cause release.

Who is a "key person" in a first-time fund?

Whoever the LPA names. There is no statutory list. On an emerging-manager vehicle that is usually the founding partners who will source and decide. Titles in a PPM are not a substitute for names in the clause.

Does a key-person event automatically dissolve the fund?

No, unless the LPA says so. The ordinary design is a suspension of the commitment period, then an LP (or LPAC) decision to remediate, waive, or let the investment period expire. Existing portfolio companies stay in the fund. Harvest continues under the GP unless a separate removal vote lands.

Do SPVs use a key person clause?

A single-asset SPV usually does not. The investment is already chosen, so pausing "new investments" has nothing to pause. Member consent for replacing the manager, if you want that protection, belongs in the operating agreement as a removal clause, not as a key-person event.