Fund formation and first-time fund managers
How do I write a fund term sheet for LPs?
Short answer
Write the term sheet as a short, plain summary of the economics and rules of your fund. Cover strategy, size, minimum commitment, fees, carry, term, reporting and risks. Keep it clear enough that an LP can read it in one sitting. Many managers also talk to securities counsel about it before sharing it. I treat it as the start of a conversation, not a sales page.
Start with what an LP wants to know in the first two minutes. What are you buying, how much do I have to put in, what does it cost me, and when do I get my money back? If your term sheet answers those four questions cleanly, it covers the basics.
What goes on the page
A term sheet is a summary. The full terms usually live in the fund documents, which many managers develop with their securities counsel. The summary usually covers a handful of items.
- Fund name, strategy and target size
- Minimum commitment per investor
- Management fee and carried interest
- Any preferred return and how distributions are split
- Fund term and how long capital is committed
- GP commitment, meaning how much of your own money is in
- Reporting schedule and how you will communicate
- Key risks
Minimums matter. On one panel at a Family Office Club event, a manager described a lower middle market private equity fund with a million dollar minimum. One family came in at five million. The point of that structure was access to the space in a diversified way without writing a check big enough to hit a typical fund minimum on their own. Your minimum tells LPs who the fund is built for.
This panel shows how managers think about minimums, fund size and who their LPs really are.
Summary and key takeaways from this video
Write it for the skeptical reader
Family offices and institutional LPs have seen a lot of term sheets. What they say they are tired of is not high fees or low fees. It is being left in the dark after they wire the money.
"They haven't been very happy with the lack of transparency from their fund managers, especially the last tranche of emerging fund managers."
So build transparency into the document itself. State how often you will report. State what the report contains. Say who the LP calls with questions. A term sheet that spells out communication can build more trust than one that only shows a target return.
Be honest about being new and about risk
If this is your first fund, say so. I hear this advice from experienced investors often. One guest, speaking about how he built his family office, said you do not need to fake it until you make it. He said he likes to see the deal, the risks, and a mitigation plan, and that many people overlook this part. A short risk section in your term sheet does the same job.
This clip covers why showing a risk register and a mitigation plan beats leading with a big return number.
Then keep communicating after the close. Gideon, a sponsor on one of our panels, said his firm overcommunicates, and that when business plans are not going to plan, investors want to hear the strategy and the pivot. You really find out if you picked a good sponsor when times are not so good. Your term sheet is the first place that promise shows up.
Gideon explains why direct, frequent communication keeps LP trust when plans change.
Before you send it
Do not copy a term sheet from another manager and change the name. Fees, carry and structure depend on your strategy and your investors. Many sponsors talk to a securities attorney about how to share the document with different kinds of investors. I am not a lawyer and this is not legal advice.
From my books and event talks
Think about who is reading your term sheet when you set the fund size. In the panels I have heard, big multifamily offices and institutions often prefer funds because they do not have time to diligence every deal, and they may write bigger checks to a fund. Families often would rather do a direct deal. Some investors also like to see momentum. A speaker on one panel said they would rather see you fill a smaller fund before you launch another one and another one. So size the fund to something you can actually close.
"Most family offices, and families, would rather put money in a direct deal than a fund. But big multifamily offices and big institutions don't have time to do diligence on every deal. They typically do prefer the funds and will write bigger checks to funds."
"People like to see momentum. They'd rather see you fill a smaller fund than launch another fund, and another fund, and another fund, and see how those different ventures performed over time."
Facts and figures
- One panelist described a lower middle market private equity fund with a one million dollar minimum and a five million dollar investor.
- One panelist said sponsors raising from individual or institutional LPs see check sizes from a couple hundred thousand dollars to multi-millions, and the process stays relationship driven.
- A recurring complaint from family offices and institutional LPs is a lack of transparency from emerging fund managers.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: Panel Discussion: Tech, Due Diligence, and Investment Strategies at The Family Office Club Event, Top Capital Raising Strategies and Tools from Founders, Fund Managers & Family Offices, From Tech Exec to $100M+ Investor: How He Built His Family Office from Scratch. Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around fund document drafting, investor eligibility rules and term sheet review. Do not use AI to write your own legal agreements.
What to do next
- 1List the eight items above and write one or two plain sentences for each.
- 2Add a short risk section that names your real risks and how you would handle them.
- 3State your reporting schedule and who answers LP questions.
- 4Consider talking with securities counsel about the term sheet and the fund documents.
- 5Share it with a few friendly LPs and ask what was unclear.
More questions on this
How long should a fund term sheet be?
Short enough to read in one sitting. Many run a few pages. The detail belongs in the formal fund documents.
Should I mention that this is my first fund?
Yes. Experienced investors tell me they respect honesty about a first fund, especially when it comes with a clear plan for managing risk.
Who should review my term sheet before I send it?
Many managers ask securities counsel to take a look. Counsel can speak to how the terms fit with the fund documents and how you raise capital.
Related questions
- How do I start my first private equity fund?Start by learning who will fund it.
- How do hurdle rates and catch-up work in a fund?A hurdle rate is the minimum return investors receive before the manager shares in profits.
- What are clawback provisions in fund agreements?A clawback provision in a fund agreement is generally meant to bring back money that was already paid out, under conditions the agreement sets.
- How do I form a Delaware limited partnership for a fund?Many sponsors work with an attorney on the state filings and a limited partnership agreement.
Work through it with the ready to raise checklist. See all fund formation and first-time fund managers resources.