Fund Structure
What is carried interest in venture capital?
Quick Answer
Carried interest (carry) is the share of investment profits — typically 20% — that fund managers (GPs) earn as performance-based compensation after returning LP capital plus a preferred return (usually 8%).
Detailed Answer
Carried interest is the cornerstone of VC economics. It's the GP's share of fund profits, structured as a performance incentive that aligns GP and LP interests.
How it works: 1. LPs contribute capital (commitments) to the fund 2. GPs invest that capital into startups 3. When investments exit (IPO, acquisition), proceeds flow back 4. LPs first receive their capital back (return of capital) 5. LPs then receive a preferred return (hurdle rate, typically 8% annually) 6. Remaining profits split: 80% to LPs, 20% to GPs (the carry)
Example: A $50M fund returns $200M. After returning $50M capital and ~$30M hurdle, the remaining $120M profit splits $96M to LPs and $24M carry to the GP team.
Carry is typically subject to a clawback provision: if later investments underperform, GPs must return excess carry received from early winners. Carry is taxed as long-term capital gains (currently ~20%) rather than ordinary income, though this treatment is frequently debated politically.
Related Questions
What is venture capital?
Venture capital is a form of private equity financing where investors provide capital to early-stage, high-growth startups in exchange for equity ownership, typically expecting 10x+ returns over 7-10 years.
How do venture capitalists make money?
VCs make money through two streams: management fees (typically 2% of fund size annually, covering operating costs) and carried interest (typically 20% of fund profits above a hurdle rate, which is where real wealth is built).
How do you raise a venture capital fund?
Raising a VC fund involves establishing a legal entity (LP structure), defining your thesis and target fund size, building a track record, creating fundraising materials (PPM, pitch deck), and securing commitments from LPs over 6-18 months.
What is an LP in venture capital?
An LP (Limited Partner) is an investor who contributes capital to a VC fund but has no active role in investment decisions. LPs include pension funds, endowments, family offices, fund-of-funds, and high-net-worth individuals.