The first investor's terms bind the last.

A fund opens because one investor commits before the others will, and it is granted something to commit. A seat on the committee. An economic break: a lower charge, a better hurdle base, a larger share of co-investment. A right to be offered co-investment ahead of others. And a clause, usually the fourth item in the package and the one negotiated last, saying that it will receive whatever any later holder is given. Three of the four are terms. The fourth is machinery, and the machinery is what binds, because it carries every later concession back to the first investor and, through the later holders' own clauses, the first investor's package forward to them. By final close the economics of the fund are the union of every concession granted to anybody, applied to everybody who elected it, and the manager's own model was built on none of that.

This note sets out the anchor's package and why it is granted, the most-favoured-nation clause as machinery, how concessions travel backward and forward, the exclusion set and why it is drafted once, the concession schedule as the instrument that makes the raise visible, the pricing of each later concession across the register, the sequence that keeps the last investor's terms the manager's, the anchor's seat and the governance it creates, the lender's reading of the anchor's excuse, a comparison, a worked raise as a type, cases, what each party holds, the sequence, questions, terms and what to read.

The anchor's package

The first investor commits when nobody else has, to a fund that exists on paper, on a manager's record and a strategy's promise. It is granted, for that, a package that recognises the risk it took. A committee seat, because it wants a voice in a fund it underwrote before it had a register. An economic break, because it committed early and large. A co-investment right, because it wants access to the positions the fund cannot take whole. And the most-favoured-nation clause, because it does not want a later investor, committing when the fund is proven, to receive more than it did. Each is reasonable, and each is granted by a manager that needs the commitment more than it needs to read the fourth item.

The clause as machinery

The most-favoured-nation clause entitles the holder to elect the benefit of any term granted to any other holder, within a reach the clause defines and subject to exclusions it lists. It is machinery because it operates on every later concession automatically: the manager grants a term to a second-close holder; the first investor's clause reaches it; the first investor elects; the term is now the first investor's too. And because every later holder negotiates its own clause, which reaches the first investor's package to the extent the exclusions permit, the first investor's original terms travel forward. The clause does not stop at the investor who negotiated it. It is the conduit through which the register's economics become the union of every letter.

Why the fourth item is negotiated last

The anchor's package is negotiated in the order of its visibility. The seat is visible and is agreed first. The break is arithmetic and is agreed second, because the manager can model it. The co-investment right is agreed third, because the manager can describe it. The most-favoured-nation clause is agreed last, late in the evening, as boilerplate the anchor's counsel has in every letter and the manager's counsel has seen in every raise, and the reach and the exclusions are settled in minutes on a precedent that was drafted for a different fund. The order of negotiation is the inverse of the order of consequence. The seat costs the manager a chair. The break costs a known sum. The clause costs whatever the rest of the raise costs, multiplied, and it is agreed on a precedent because nobody priced it.

A manager that reverses the order, and negotiates the clause first, negotiates it with the raise in view. The exclusion set is drafted around the classes it expects to create, the excuses it expects to grant, the formats it expects to be asked for. The anchor's counsel resists the exclusions, because a narrow reach is worth less to the anchor, and the manager prices the resistance against the cost of a wide reach across the register it expects. The conversation is harder and it happens once.

The reach, drafted

The clause's reach is the set of terms it operates on, and it is drafted by reference to subject rather than to letter: economic terms, governance terms, information terms, liquidity terms, each named or each excluded. A clause that reaches "any term" reaches the lender's clause, the sovereign's excuse, the affiliate's rate and the reporting format alike, and the exclusion set is then doing all the work. A clause that reaches named subjects, with the exclusions inside each subject, is narrower at the start and needs fewer exclusions to hold. Counsel drafts the reach and the exclusions together, because each does what the other leaves undone.

The reach also has a time dimension. A clause that reaches terms granted before the anchor's admission is unusual, because the anchor is first; a later holder's clause that reaches terms granted before its admission reaches the anchor's package, and the question of whether it does is the forward travel this note describes. The clause says whether it reaches earlier letters, later letters or both, and a manager that grants a later holder a clause reaching earlier letters has granted the anchor's package forward unless the exclusions hold it.

The election

The clause gives a right to elect, and the election has mechanics. The manager notifies each holder whose clause reaches a new term, within a period, with the term's text and the conditions attached to it. The holder elects within a period, in writing, and the election takes effect from a date. A holder that elects a term takes it whole, with its conditions, because a clause that lets a holder elect the benefit without the burden is a clause the later holder's counsel would not have drafted. The election is recorded on the schedule and notified to the administrator, which applies it from the effective date.

The mechanics matter because a clause without them is a clause whose elections are disputed. A holder that learns of a term two years after it was granted, and elects it with retrospective effect, has a claim the manager cannot price; a clause with a notification period and an election period, and an effective date that is prospective, has elections the manager can schedule.

Backward and forward

Backward: the manager, closing a pension institution in the second close, grants it a hurdle on a better base. The first investor's clause reaches the term, because hurdle terms are inside the reach unless excluded; the first investor elects; and the manager has granted the better base to two holders for the price of one. Closing a sovereign in the third close, the manager grants an excuse right. The first investor's clause reaches it unless regulatory excuses are excluded, and the first investor, which has no regulatory reason, elects an excuse right it will use commercially.

Forward: the second-close holder's own clause reaches the first investor's economic break, to the extent the exclusions do not protect it. If the break was excluded as tied to the anchor's status, it stays the anchor's; if it was not, the second-close holder elects it, and the third-close holder after it, and the anchor's break is the register's.

The exclusion set

The exclusion set is the list of terms the clause does not reach, and it is drafted at the first investor's negotiation because it cannot be widened afterwards without that investor's consent. The usual exclusions are terms tied to the size of a commitment, so that a class for large commitments does not travel to small ones; terms tied to a holder's regulatory, tax or legal position, so that a sovereign's excuse right does not travel to a corporate; terms tied to the anchor's status as the first investor, so that the anchor's break stays the anchor's; and terms granted to the manager's affiliates. A manager that drafts a narrow exclusion set to win the first commitment, because the anchor wanted a wide reach, has drafted the economics of the last investor, because every later concession now travels to the anchor and the anchor's package travels to everyone.

The class as the answer to the letter

An economic request from a later holder has two answers: a letter, which travels, and a class, which does not if it is excluded as tied to size. A class is a set of units with their own economics, created in the constitution, open to any holder that meets its conditions, and described in the memorandum. A later holder that asks for a lower charge on a large commitment is offered the class for commitments of that size rather than a letter, and the anchor, if its commitment meets the size, is in the class already or may move into it. The class does what the letter did without the travel, because the class's conditions are the exclusion.

Classes have a cost the letter does not. Each class is a waterfall the administrator runs, a line the memorandum carries, a set of units the registrar keeps, and a disclosure the regime expects. A fund with eight classes is a fund whose administrator runs eight waterfalls and whose memorandum describes eight sets of economics. The manager that creates classes creates as few as the raise needs, and the schedule's pricing column tells it when a class is cheaper than the letters it replaces.

The amendment and the anchor's consent

A class created after the anchor's admission is an amendment to the constitution, and the constitution says who consents. If the class is within the manager's power, the manager creates it and notifies; if the amendment needs a holder vote, the anchor votes; and if the anchor's letter gives it a consent right over amendments affecting its economics, the anchor consents. A manager that drafts the anchor's letter with the raise in view reserves the power to create size classes without the anchor's consent, because the alternative is a class the anchor prices at each close.

The concession schedule

A schedule, maintained by the manager and disclosed to each holder at admission, lists every side-letter term granted, the holder, the date, whether it is inside or outside the reach and why, and the holders entitled to elect it. The schedule lets each later holder see the fund's real economics before it subscribes, which is the disclosure the regime expects, and lets the manager see what the next concession will cost across the whole register before it is granted, which is the arithmetic the manager's own model needs. A raise without a schedule is a raise whose economics nobody can total until the administrator tries.

Pricing each later concession

Before any later concession is offered, the manager prices it across the register: which existing holders' clauses reach it, which would elect, what the elections cost in the manager's economics, and whether the concession is worth the commitment it closes. A concession that closes one holder and is elected by nine has cost ten times its face, and the manager that priced it declined it or excluded it or created a class for it. The pricing is a column in the schedule, and a manager that keeps the column knows the cost of every letter before it signs.

Where it surfaces

It surfaces at the administrator, which runs the waterfall on the elected terms and finds, at the first distribution, that the elections it was told of do not match the letters it was not shown. It surfaces at the second holder's diligence, when a holder that was promised the fund's headline economics reads the schedule and finds the anchor's rate on the anchor's units and its own rate on its own. It surfaces at the lender's annual review, when an excuse right elected by a holder the lender had counted changes the base. It surfaces at the regulator's inspection, when the side letters are requested and the disclosure to later holders is read against them. And it surfaces in the manager's own economics, when the charge on the fund is totalled across the classes and elections and is found to be the anchor's rate on every unit that elected it.

The cost of getting it wrong

A register whose economics are the union of every concession costs the manager the difference between its model and the union, for the life of the fund. It costs the later holders the disclosure they did not receive, and a holder that subscribed on a memorandum describing economics the letters had already changed has a claim the regime recognises. It costs the lender its base, if an elected excuse right reached a holder the lender had counted. And it costs the next raise, because a manager whose first fund's economics were set by its anchor raises its second with the anchor's letter in every prospective holder's hands.

The cost of getting it right is a harder first negotiation, a schedule maintained from the first close, and a pricing exercise before every concession. The cost is real and it is paid once.

The disclosure the regime expects

Each regime expects a holder to know, before it subscribes, the terms on which other holders hold, to the extent those terms affect the subscribing holder's position. The expectation is met by the schedule, disclosed at admission, and by a memorandum that says side letters exist, what subjects they cover and that the schedule is available. A memorandum that describes the headline economics and is silent on the letters, while the letters have changed the economics for half the register, is a memorandum the regulator reads against the letters at inspection. The schedule's disclosure is the manager's evidence that each holder subscribed knowing what the others held.

The sequence that holds

The first investor is admitted on a package whose exclusion set was drafted with the whole raise in view: the classes the manager expects to create, the regulatory excuses it expects to grant, the anchor's own status. Each later concession is priced across the register before it is offered. Each holder is admitted with the schedule in hand. The manager's model carries the elections it expects. That sequence is unglamorous and it is the only one in which the last investor's terms were chosen by the manager rather than by the first.

The anchor's seat

A committee seat for the anchor is a governance term rather than an economic one, and most exclusion sets keep it the anchor's as tied to size or status. The seat gives the anchor a voice in related-party approvals, extensions and policy changes, and the constitution says whether a conflicted member votes, because an anchor with a co-investment right is a related party on co-investment allocations. The seat is granted with the constitution's committee provisions in view, so that the anchor's voice is within the committee's rules rather than above them.

The lender's reading

A capital-call lender reads the anchor's excuse right and any limit on its obligation to fund, and counts the anchor's commitment in the base only to the extent the obligation is preserved; a lender's clause in the anchor's letter preserves it. The anchor's most-favoured-nation clause may import, from a later holder, an excuse right the lender did not see at signing, and the lender's counsel reads the clause's reach for that risk and requires the lender's clause in every later letter.

By concession · by travel	Granted to	Reaches whom	Excluded if	The manager's cost
Economic break to the anchor	The first investor	Every later holder, forward	Tied to anchor status	The register's, if not excluded
Hurdle on a better base to a second-close holder	The second-close holder	The anchor and every holder, backward and forward	Tied to size	Multiplied by the electors
Regulatory excuse to a sovereign	The sovereign	The anchor, backward, unless excluded	Tied to the holder's position	Commercial excuse rights for all who elect
Co-investment priority to the anchor	The anchor	Later holders, forward, unless excluded	Tied to size or status	The allocation policy's integrity
Committee seat to the anchor	The anchor	Later holders, forward, unless excluded	Tied to size	The committee's size
Reporting in a holder's format	One holder	All who elect	Rarely excluded	Administration

A raise, as a type

A manager closes an anchor with a committee seat, a lower charge on its units for its size, a co-investment priority and a most-favoured-nation clause whose exclusions, drafted with the whole raise in view, cover terms tied to size, to regulatory position and to anchor status. The schedule opens with the anchor's package and the exclusions noted. In the second close a pension institution asks for a better hurdle base; the manager prices it across the register, finds the anchor would elect it, and offers instead a size class the exclusions protect, created by amendment with the anchor's consent. In the third close a sovereign asks for a regulatory excuse; the manager grants it as a reallocation with a lender's clause, excluded from the reach as tied to position; the anchor cannot elect it. At final close the schedule shows three letters and one class, each holder received it at admission, and the manager's model carries the economics the schedule shows.

A timeline, as a type

At the first close the anchor's package is granted: seat, break, co-investment priority and a clause whose reach is named by subject and whose exclusions cover size, position, anchor status and affiliates. The schedule opens. At the second close a pension institution asks for a better hurdle base; the pricing column shows the anchor would elect; a size class is created under the manager's reserved power and the institution subscribes to it. At the third close a sovereign asks for a regulatory excuse; it is granted as a reallocation with a lender's clause and excluded as tied to position. At the fourth close a family office asks for reporting in its format; it is granted, it travels, two holders elect, and the administrator's schedule carries three formats. At final close the schedule lists four letters and one class, each holder received it at admission, and the manager's model carries the three formats and the class. At the first distribution the administrator runs two waterfalls, one per class, and the elections it applies are the ones the schedule shows.

The structure paper's page

The structure paper carries a page for the anchor's package: the four items, the clause's reach by subject, the exclusion set and the reason for each exclusion, the classes the manager expects to create and the reserved power to create them, the election mechanics, and the schedule's form. The page is written before the anchor's letter is negotiated, so that the negotiation is conducted against a design rather than a precedent, and it is the page the manager's counsel, the administrator and the lender's counsel read together.

The onshore registers and the clause

A fund holding through onshore vehicles has investors at the fund's register only, and the clause operates there. But the onshore vehicles' own economics, such as a promote to a developer beneath the platform or a landowner's contribution class in a company holding a parcel, are terms the fund's holders may ask to reach, and a clause drafted to reach "any term of any vehicle in the structure" reaches them. The reach is drafted to the fund's own terms, and the onshore economics are disclosed in the memorandum as what they are rather than reached by election.

Four cases, as types

A manager drafts a narrow exclusion set to win the anchor, who wanted a wide reach. Every later concession travels to the anchor, and the anchor's lower charge travels forward to every holder whose clause reaches it. By final close the manager's charge on the fund is the anchor's rate on every unit, and the manager's model, built on the headline rate, is wrong by the difference.

A manager grants a second-close holder a hurdle on a better base by letter, without pricing it. The anchor and four others elect; the administrator computes five holders on the better base and seven on the worse; the seven read the schedule, which did not exist, and ask why.

A manager grants a sovereign an excuse right without excluding regulatory excuses from the reach. The anchor elects it and uses it commercially, declining an investment it dislikes; the capital-call lender, which did not see the election, excludes the anchor's commitment from the base at its annual review.

A manager drafts the exclusion set with the raise in view, prices every concession across the register, creates classes where economics are asked for, and admits every holder with the schedule. The last investor's terms are the manager's, and the register's economics are what the memorandum said.

What each party holds

The manager holds the exclusion set drafted once, the schedule, the pricing of every concession across the register, and the decision to create a class rather than grant a letter.

Counsel holds the most-favoured-nation clause's drafting, the exclusions and their reasons, and the class procedure.

The anchor holds its package and its clause, within the exclusions.

Each later holder holds its own clause, the schedule it received at admission and its elections.

The administrator holds the waterfall on the classes and the elected terms, which the schedule specifies.

The lender holds its clause in every letter and its reading of the anchor's reach.

The sequence

1. The exclusion set is drafted at the first investor's negotiation with the whole raise in view: size, regulatory position, anchor status, the manager's affiliates.
2. The anchor's package is granted within the exclusions, with a lender's clause in its letter.
3. The schedule is opened with the anchor's package and disclosed to every holder at admission.
4. Every later concession is priced across the register before it is offered, and economic requests are met by classes.
5. Every later letter carries a lender's clause and is drafted with excuse as a reallocation.
6. The manager's model carries the elections the schedule predicts.

Questions a manager asks

Can the exclusion set be widened later. Only with the anchor's consent, which the anchor gives for a price; the set is drafted once.

What if the anchor insists on a wide reach. The manager decides whether the anchor's commitment is worth the economics of the last investor, and a manager that has priced the raise usually finds a class for the anchor's break cheaper than a wide reach.

Does the clause reach classes. A class created in the constitution and excluded as tied to size is outside the reach; a class not excluded is inside, and every holder may elect into it.

How is a concession priced. By listing the holders whose clauses reach it, assuming each elects, and totalling the cost in the manager's economics; the schedule's column.

What about reporting terms. They travel and cost administration, which is why the administrator's schedule carries every elected format.

Does the anchor's seat travel. Usually excluded as tied to size or status; a committee of every holder that elected a seat is not a committee.

Terms used

Anchor: the first investor, whose commitment opens the fund.

Most-favoured-nation clause: a holder's right to elect the benefit of terms granted to others, within a reach.

Exclusion set: the terms the clause does not reach, drafted at the anchor's negotiation.

Concession schedule: the manager's record of every term granted, who holds it and who may elect it.

Backward and forward: the travel of later concessions to the anchor and of the anchor's package to later holders.

Pricing across the register: the cost of a concession multiplied by the holders who would elect it.

What to read

The anchor's side letter and its most-favoured-nation clause; every later holder's clause; the constitution's provisions on side letters and classes; the concession schedule; the facility's requirements on letters. On this site, the worked structure on seed terms and the economics and vehicles rooms under Structures.