Using credit lines can help GPs avoid potential issues around time sensitivity or capital call limits. Later, at a more appropriate time, the GPs can issue a capital call and use the proceeds to repay the credit line. GPs use these credit lines to pay fund expenses and make investments upfront. For this reason, venture capital funds sometimes use "capital call lines." These are short-term credit lines from a financial institution secured against the LPs' uncalled capital. This can put stress on the relationship between the GP and LPs. A poorly timed capital call can put LPs in a bind by forcing them to part with their money when they may not have been ready. In particular, GPs must consider how capital calls will impact their relationships with LPs. However, the GP is likely to take into account additional considerations when timing capital calls. The simple answer is that GPs call capital whenever they think the fund needs it. Once you’ve sent your full $100k, you have fulfilled your commitment to the fund. And three months after that, you receive a final capital call for the remaining 20%. Seven months later, you get another capital call for 30% of all committed capital. Your uncalled capital now stands at $50k. Because you committed $100k, you must send $20k. Since that’s 20% of the fund’s committed capital, LPs must send 20% of their initial committed capital within ten days (or whatever time frame the LPA specifies) of the capital call notice. Six months after the initial drawdown, the GP decides to call another $20M. The GP invests the initial $30M drawdown from all LPs in several early-stage companies. The LPA states that the initial drawdown is 30%-that is, you must contribute $30k to the fund now and hold onto your remaining $70k until it's called. Here’s an example of how a capital call works. These are known as "default provisions" (more on this later). Penalties and remedies if an LP fails to meet a capital call.For instance, an LPA might state that a GP may not call additional capital after the deployment period for investment purposes but can still call uncalled capital for fund expenses. Any limitations on calling capital after the deployment period ends.The fund’s deployment period, during which the fund will make all its investments (typically the first 2-3 years of the fund’s life).For example, an LPA might restrict a GP from calling more than half of all committed capital in a year. The maximum amount GPs can request via capital calls during a specified time period. How quickly an LP must pay after receiving a capital call notice (typically 10-20 days).The portion of all committed capital called,Ĭapital calls are legally enforceable and generally follow the rules outlined in the fund's Limited Partnership Agreement (LPA).While there is no standard format for a capital call notice, a typical capital call notice includes: Capital calls are how the GPs convert uncalled capital into paid-in capital. The difference between committed capital and paid-in capital is called uncalled capital-the amount that LPs still “owe” the fund. Paid-in capital is how much money the LPs have put into the fund. There is no set amount for this initial drawdown-it can vary widely depending on GP preferences, fund needs, and deals negotiated with individual LPs. LPs put up only a portion of their committed capital at the beginning of the fund’s life. That $100M represents the total amount LPs collectively commit to paying over the fund's life. If a GP raises a $100M fund, it doesn't mean the fund has $100M sitting in a bank account. Some common phrases you might hear when a GP does a capital call are “committed capital” and “paid-in capital.”Ĭommitted capital is the total amount that the fund’s investors (also known as limited partners or “LPs”) commit to invest in a fund. Capital calls usually happen when a fund plans to make a new investment or needs to pay expenses. GPs make a capital call when the fund needs more money. What Is a Capital Call?Ī capital call is how a GP collects capital from their fund's LPs. This guide will review what capital calls are, how they work, and why they're used. At some point in the future, the GP will “call” the remaining capital. You can hold onto the remaining $75k for the time being. Right now, you have to pay only a portion of that amount-in this case, perhaps, $25k-as mandated by the fund manager (also known as the general partner or "GP"). Picture this: you just invested in your first venture fund on AngelList. LPs who default on capital calls risk penalties and legal action.Capital calls are legally enforceable and typically follow the rules set out in the fund's limited partnership agreement.A capital call is the process by which a fund manager asks the fund investors to contribute their pro rata portion of their fund commitments.
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