The VC Fund Structure
LPs, GPs, carry, management fees, and how the money flows
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The Limited Partnership
Most VC funds are structured as limited partnerships. The GP (General Partner) entity manages the fund and makes investment decisions. The LPs (Limited Partners) provide the capital but have no management authority. This structure gives LPs liability protection — they can only lose what they invested — while giving GPs full control over investment decisions.
Management Fees
GPs typically charge a 2% annual management fee on committed capital during the investment period (usually years 1-5), then on invested capital or net asset value during the harvest period (years 6-10). This fee pays for salaries, office space, travel, and operations. On a $100M fund, that's $2M per year — $20M over the fund's life — before a single dollar is returned to investors.
Carried Interest (Carry)
Carry is the GP's share of profits — typically 20% of gains above the LPs' contributed capital (and sometimes above a hurdle rate). If a $100M fund returns $300M, the $200M in profit is split 80/20: $160M to LPs, $40M to the GP. Carry is the primary way GPs build wealth — and it only pays out when the fund actually generates returns, aligning GP and LP incentives.
The GP Commitment
GPs typically invest 1-5% of the fund's capital themselves. This 'GP commit' signals skin in the game — LPs want to know that their fund manager's personal wealth is at risk alongside theirs. For a $100M fund, that's $1-5M the GP team must come up with personally.