clawback

A word used in the venture capital industry to describe a common term found in partnership agreements. A clawback requires venture capitalists to refund fees to their investors if it turns out that the venture capitalists received more than their 20 percent share of a fund’s overall profits. Clawbacks became common in 2002, occurring when a venture capitalist took its 20 percent share of a fund’s early investment success, but the fund later lost money. Clawbacks also are used in other financing contexts, such as private equity.