Talltree Ventures has raised its $250M fund, Talltree Ventures IV, with terms as given in Appendix 2.B of the VC book (see Chapter 2). Construct an example of fund performance where the clawback provision would be triggered. In this example, compute the carried interest paid in each year, and show the total amount that must be paid back by the GPs upon the liquidation of the fund.
Appendix 2.B: Talltree Ventures IV Fund Size $250 million Term Following the tenth anniversary of the initial closing, the term of the partnership will expire on December 31st, unless it is extended for up to two consecutive one-year periods at the discretion of the general partner. This is to permit orderly dissolution, and no management fees will be charged during any such extension. Commitment Period Following the fifth anniversary of the initial closing, all partners will be released from any further obligation with respect to their unfunded commitments on December 31st except to the extent necessary to cover expenses and obligations of the partnership (including management fees) in an aggregate amount not to exceed unfunded commitments. Management Fees The annual contributions will equal 2 percent of com- mitted capital for the first 10 years of the fund. These contributions will be paid quarterly Distributions Distributions in respect of any partnership investment will be made in the following order of priority: (1) 100 percent to the limited partners until they have received an amount equal to their contributed capital, plus a priority return equal to 8 percent (compounded annually). (ii) 100 percent to the general partner until the general partner has received catch- up distributions equal to 20 percent of the sum of such distributions and the preference distributions in part (i). (iii) 80 percent to the limited partners and 20 percent to the general partner. General Partner Clawback Obligation Upon liquidation of the fund, the general partner will be required to restore funds to the partnership to the extent that it has received cumulative distributions in excess of amounts otherwise distributable APPENDICES: KEY TERMS AND CONDITIONS FOR THREE VC FUNDS 45 pursuant to the distribution formula set forth above, applied on an aggregate basis covering all partnership investments, but in no event more than the cumulative dis- tributions received by the general partner solely in respect of its carried interest. Diversification and Investment Limits The fund may not invest more than 20 percent of aggregate commitments in any single portfolio company. Appendix 2.B: Talltree Ventures IV Fund Size $250 million Term Following the tenth anniversary of the initial closing, the term of the partnership will expire on December 31st, unless it is extended for up to two consecutive one-year periods at the discretion of the general partner. This is to permit orderly dissolution, and no management fees will be charged during any such extension. Commitment Period Following the fifth anniversary of the initial closing, all partners will be released from any further obligation with respect to their unfunded commitments on December 31st except to the extent necessary to cover expenses and obligations of the partnership (including management fees) in an aggregate amount not to exceed unfunded commitments. Management Fees The annual contributions will equal 2 percent of com- mitted capital for the first 10 years of the fund. These contributions will be paid quarterly Distributions Distributions in respect of any partnership investment will be made in the following order of priority: (1) 100 percent to the limited partners until they have received an amount equal to their contributed capital, plus a priority return equal to 8 percent (compounded annually). (ii) 100 percent to the general partner until the general partner has received catch- up distributions equal to 20 percent of the sum of such distributions and the preference distributions in part (i). (iii) 80 percent to the limited partners and 20 percent to the general partner. General Partner Clawback Obligation Upon liquidation of the fund, the general partner will be required to restore funds to the partnership to the extent that it has received cumulative distributions in excess of amounts otherwise distributable APPENDICES: KEY TERMS AND CONDITIONS FOR THREE VC FUNDS 45 pursuant to the distribution formula set forth above, applied on an aggregate basis covering all partnership investments, but in no event more than the cumulative dis- tributions received by the general partner solely in respect of its carried interest. Diversification and Investment Limits The fund may not invest more than 20 percent of aggregate commitments in any single portfolio company
