VC & PE Glossary
What Is Reserves?
Updated
Definition
In venture fund context, reserves are capital a GP sets aside from the fund for follow-on investments in existing portfolio companies — rather than for new initial checks. Founders also use 'reserves' for balance-sheet cash held for contingencies.
Useful for: GPs, Founders, LPs
Reserves (in fund economics) are the portion of a venture fund earmarked for follow-on investments in existing portfolio companies — pro-rata and defensive support — distinct from capital allocated to new deals.
How it works
GPs often target reserve ratios — e.g., 50% of fund for initial checks, 50% for follow-ons — varying by strategy. Reserve decisions happen in partnership meetings: double down on breakout companies, pay pro-rata to avoid dilution, or conserve cash when the fund is late-stage or recycling is capped. /glossary/recycling and /glossary/capital-call capacity affect usable reserves.
Company-level reserves mean retained cash or bad-debt provisions on financial statements — different context, same word.
Why it matters
- Founders: Clarify lead’s reserve intent early; “we’re in your cap table” does not guarantee a follow-on check.
- GPs: Misallocated reserves starve winners or overfund zombies — both hurt fund IRR.
- LPs: Reserve discipline appears in annual letters and affects DPI timing versus concentration risk.
Common mistake
Founders assuming seed fund will lead Series B without reserve policy discussion. Many seed funds are structurally reserve-light by design.
Related ideas
/glossary/recycling, pro-rata rights, follow-on strategy, and fund allocation.
Related terms
- Capital Call — A capital call is a formal notice from a fund GP to LPs to wire a portion of their committed capital — for investments, management fees, fund expenses, or follow-on reserves.
- Recycling — In fund economics, recycling is when a GP reinvests proceeds from early exits or other distributions into portfolio companies rather than paying that cash out to LPs — effectively increasing invested capital without raising a new fund.
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Common questions
Short answers for founders, LPs, and operators