Your VC questions, answered.

A VC fund pools capital from institutional investors and high-net-worth individuals, then deploys it into early-stage startups over several years in exchange for equity, aiming to return the capital with large gains when those companies exit via acquisition or IPO.

A VC fund pools capital from institutional investors and wealthy individuals, then deploys it into early-stage startups over several years in exchange for equity, aiming to return the capital with large gains when those companies exit.

Reserves are capital set aside by a VC fund to invest in follow-on rounds of existing portfolio companies. Most funds reserve 40–60% of their capital for follow-ons, not just initial checks.

"2 and 20" refers to the standard VC fee structure: a 2% annual management fee on committed capital, plus 20% carried interest on profits. It's the industry-standard compensation model for fund managers.

"2 and 20" refers to the standard VC fee structure: a 2% annual management fee on committed capital, plus 20% carried interest on profits.

A GP commit is the amount of capital the general partners personally invest alongside LPs in their own fund — typically 1-3% of total fund size — signaling skin in the game.

A capital call is a formal request from a VC or PE fund to its LPs to transfer a portion of their committed capital to fund a new investment or cover fund expenses.

A clawback provision requires GPs to return previously paid carried interest to LPs if the fund ultimately underperforms — ensuring GPs don't keep carry from early winners if later losses bring overall fund returns below the hurdle.

A clawback provision requires GPs to return previously paid carried interest to LPs if, at the end of a fund's life, the GPs were overpaid relative to the fund's total performance.

A continuation vehicle (CV) is a new fund structure that allows a VC to hold onto high-performing portfolio companies beyond a fund's original term, giving existing LPs the choice to cash out or roll over.

A distribution waterfall is the contractual order in which proceeds from a VC fund are allocated between GPs and LPs. It determines who gets paid first, in what order, and under what conditions — protecting LPs and ensuring GPs only earn carry on genuine profits.

A distribution waterfall is the sequence of rules that determines how and when money flows from a VC fund back to GPs and LPs when portfolio companies exit.

A fund of funds (FoF) is an investment vehicle that allocates capital to multiple VC funds rather than directly into startups. It gives LPs diversified exposure to the VC asset class with smaller minimums, but adds an extra layer of fees.

A fund of funds (FoF) is an investment vehicle that invests in other VC or PE funds rather than directly in startups, giving LPs access to a diversified portfolio of managers.

A hurdle rate is the minimum return (typically 8% annually) that LPs must receive before the GP is entitled to collect carried interest.

A management fee is an annual charge — typically 2% of committed capital — that a VC fund collects to cover operating expenses like salaries, rent, and travel.

A side letter is a private agreement between a VC fund's GP and a specific LP that grants that LP special terms not available to other investors — like lower fees, co-investment rights, or additional reporting.

An evergreen fund is a VC or investment fund with no fixed end date — it continuously reinvests returns from exits back into new investments, unlike traditional closed-end funds that have a fixed 10-year life.

Carried interest — or "carry" — is the share of a fund's profits that go to the general partners (GPs) as compensation for managing the fund. It's typically 20% of profits above a certain threshold, and it's the primary way VCs get rich.

Carried interest is the share of a fund's profits that the general partners keep — typically 20% — and it's the primary way VC fund managers get wealthy.

Carried interest (carry) is the share of profits that GPs earn from a fund — typically 20% of returns above the hurdle rate. It's taxed as long-term capital gains (not ordinary income), which is controversial since it effectively taxes GP compensation at a lower rate.

Dry powder is the amount of committed but undeployed capital in a VC fund — money that's been promised by LPs but not yet invested. It represents a fund's available firepower for new investments or follow-ons.

Dry powder is the amount of committed but undeployed capital a VC fund has available to invest in new deals or follow-on rounds.

Capital recycling allows a VC fund to reinvest early exit proceeds back into new investments, effectively increasing the amount of capital deployed beyond the original committed amount.

The J-curve describes the typical pattern of VC fund returns over time: early years show negative returns as fees are charged and companies haven't yet matured, followed by improving returns as the portfolio develops and exits occur, drawing the shape of the letter J.

The J-curve describes the typical pattern of VC fund returns: negative in early years as fees are charged and investments are made at cost, followed by rising returns as portfolio companies mature and exit.

A GP (General Partner) manages the fund — they make investment decisions, sit on boards, and earn carried interest. An LP (Limited Partner) provides the capital but has no management role. GPs run the show; LPs are the silent money.

GPs (general partners) are the fund managers who make investment decisions and run the fund; LPs (limited partners) are the outside investors who provide the capital but have no say in day-to-day decisions.

VC funds invest in private, early-stage companies and are illiquid for years. Hedge funds invest in liquid public markets and can enter and exit positions quickly. They have very different risk profiles, time horizons, and investor bases.

Gross returns are calculated before management fees and carried interest are deducted; net returns are what LPs actually receive after all fees and expenses are paid.

The investment period is the window — typically three to five years from a fund's close — during which a VC can make new investments using that fund's capital.

A fund's vintage year is the year it made its first investment (or closed), used to compare fund performance against peers that deployed capital during the same market conditions.

Pro-rata rights give existing investors the right to maintain their ownership percentage in future funding rounds by investing their proportional share of new capital.

Protective provisions are contractual rights that require investor approval for major company decisions — like raising more money, selling the company, or changing the equity structure. They give VCs a veto over decisions that could harm their investment.

A SAFE (Simple Agreement for Future Equity) is an investment instrument where an investor gives a startup money today in exchange for the right to receive equity at a future priced round, typically at a discount or capped valuation.

A SAFE (Simple Agreement for Future Equity) is a contract that gives an investor the right to receive equity in a future priced round, in exchange for money invested today.

A board director has full voting rights on board decisions. A board observer can attend meetings and receives board materials but has no vote. Observers are common for smaller investors who want visibility without the legal responsibilities of a director.

A cap table (capitalization table) is a spreadsheet showing who owns what percentage of a company, including all shareholders, option holders, and warrant holders.

A cap table (capitalization table) is a spreadsheet or document that shows who owns what percentage of a company — founders, employees, investors — accounting for all shares, options, and convertible instruments.

A convertible note is a short-term debt instrument that converts into equity at a future funding round, with an interest rate and maturity date — unlike a SAFE which has neither.

A convertible note is a short-term debt instrument that converts into equity at a future financing round, typically with a valuation cap and a discount rate as rewards for investing early.

A down round is when a startup raises new funding at a lower valuation than its previous round, signaling financial distress and triggering dilution for earlier investors and employees.

A down round is a funding round where a company raises capital at a lower valuation than its previous round. It dilutes existing shareholders and triggers anti-dilution provisions for preferred investors.

A liquidation preference gives investors the right to receive their money back (or a multiple of it) before founders and common shareholders receive anything in a sale or liquidation event.

A liquidation preference gives investors the right to receive their money back before common stockholders (founders and employees) get paid in any sale or liquidation of the company.

A term sheet is a non-binding document outlining the key terms and conditions of a proposed investment, serving as the basis for negotiating a final deal.

A term sheet is a non-binding document that outlines the key terms of a proposed investment — valuation, ownership stake, governance rights, and investor protections — before the final legal agreements are drafted.

A term sheet is a non-binding document that outlines the key terms of a proposed investment — valuation, amount, ownership percentage, and governance rights. It's the starting point for negotiating a deal.

Anti-dilution protection adjusts an investor's share price downward if the company later raises money at a lower valuation, protecting the investor from being diluted by a down round.

Pre-money valuation is what a company is worth before new investment. Post-money is what it's worth after. If you raise $5M at a $20M pre-money valuation, the post-money valuation is $25M and the investor owns 20%.

VCs evaluate startups on team quality, market size, product differentiation, traction, and whether the opportunity can return the fund — often summarized as 'team, market, product.'

Startups raise venture capital by building traction, crafting a compelling pitch, getting warm introductions to investors, and running a structured fundraising process.

A seed round typically takes 2–4 months from first meetings to money in the bank. A Series A usually takes 3–6 months. The process is non-linear — there's often a lot of waiting, then a fast close once a lead commits.

VCs look for a clear problem, a compelling solution, evidence of traction, a large market, a strong team, and a crisp explanation of why now. Most pitch decks are dismissed in under 3 minutes — clarity and concision are everything.

A 409A valuation is an independent appraisal of a startup's fair market value for common stock, required by the IRS to set legal strike prices for employee stock options.

A SAFE (Simple Agreement for Future Equity) is an investment instrument where an investor gives a startup money now in exchange for the right to receive equity in a future priced round. It's not a loan — there's no interest rate or maturity date.

A bridge round is a small fundraise between larger priced rounds, typically used to extend runway so a startup can hit milestones needed to raise the next full round.

A bridge round is a small, quick fundraise — usually from existing investors — designed to extend a company's runway to reach the next milestone before a larger, priced round. It 'bridges' the gap.

A lead investor is the firm or individual that sets the terms of a funding round, typically invests the largest amount, and takes a board seat or observer rights.

The lead investor is the VC or angel who sets the terms of a round, typically commits the largest check, and coordinates the other investors. Getting a lead is the hardest part of fundraising — once you have one, filling the round is usually faster.

A warm introduction is a personal referral from someone who knows both the founder and the investor. It's the most effective way to get a VC's attention — most funds get thousands of cold outreach messages a year and respond to very few.

An option pool is a set of shares reserved for future employee equity grants. VCs require it to ensure there's enough equity to attract and retain talent after they invest.

Due diligence is the investigation a VC firm conducts before investing — reviewing financials, customer references, technology, legal documents, and team backgrounds.

Vesting is the schedule by which you earn your equity over time. A cliff is a minimum tenure required before any equity vests — typically 1 year.

A pitch deck typically includes 10-15 slides covering: the problem, solution, market size, business model, traction, team, competition, and funding ask.

ARR (Annual Recurring Revenue) is the annualized value of a company's subscription revenue. It's the primary top-line metric for SaaS companies because it captures the predictable, recurring nature of the business model.

DPI (Distributions to Paid-In Capital) measures how much cash a VC fund has actually returned to LPs relative to how much was invested. A DPI above 1x means LPs have gotten their money back.

IRR (Internal Rate of Return) is an annualized return metric that accounts for the timing of cash flows. VCs use it alongside MOIC to measure fund performance — MOIC shows how much money was made, IRR shows how quickly.

IRR (Internal Rate of Return) is the annualized return on a VC investment, accounting for the timing of cash flows. Top-quartile VC funds target net IRRs above 20-25%.

NRR measures how much revenue a company retains and expands from its existing customer base over time, accounting for churn, contraction, and expansion. NRR above 100% means existing customers are worth more over time — a hallmark of strong SaaS businesses.

TVPI (Total Value to Paid-In Capital) is the total value of a fund including unrealized gains. MOIC (Multiple on Invested Capital) is the gross investment multiple on a deal or fund.

Burn multiple measures how much a company spends (net burn) for every dollar of new ARR it adds. A burn multiple of 1x means you spend $1 to add $1 of ARR. Lower is better — it indicates capital efficiency.

Payback period is how long it takes to recoup the cost of acquiring a customer through that customer's gross margin contribution. Shorter payback periods mean faster capital efficiency and less risk.

The Rule of 40 states that a healthy SaaS company's growth rate plus profit margin should equal at least 40%, balancing growth and profitability.

VCs focus on growth rate, revenue, burn rate, CAC/LTV, churn, and net dollar retention — the specific metrics depend on the stage and business model.

VCs earn through management fees (2% of fund annually) for salary and operations, and carried interest (20% of profits) as performance compensation.

Breaking into VC typically requires one of three paths: prior operating experience at a startup, investment banking/consulting background, or a track record of angel investing.

Breaking into VC is hard because there are few entry-level seats and most firms prefer operators with direct startup experience. The most reliable paths are: work at a startup, build an investment track record, or come from a feeder profession like banking or consulting.

VC firms have a hierarchy: Analyst → Associate → Principal/VP → Partner → General Partner. Decision-making and carry concentrate at the GP level.

VC analysts source deals, research markets, build financial models, write investment memos, and support portfolio companies. The role is more research-heavy and less deal-execution-heavy than banking — you're building conviction about markets and founders, not closing transactions.

Scout programs pay individuals — usually founders, angels, or operators — to source deals on behalf of a VC fund. Scouts get a small allocation of carry if their referred companies are funded. It's a way for funds to extend their network and for aspiring VCs to build a track record.

The VC career ladder runs: Analyst → Associate → Principal/VP → Partner → General Partner. But it's not a traditional ladder — most VCs enter at different levels, and many never make GP. The industry is small and advancement is slow.

A 409A is an independent appraisal of a private company's fair market value (FMV). It's required by the IRS to set the exercise price of employee stock options — options must be priced at or above FMV to avoid tax penalties.

A drag-along right allows a majority of shareholders (often led by investors) to force minority shareholders to approve a sale of the company. It prevents a small group of shareholders from blocking an acquisition that the majority supports.

A right of first refusal gives an investor or the company the right to purchase shares before a shareholder can sell them to a third party. It's a standard provision designed to give existing stakeholders control over who joins the cap table.

Most seed rounds involve giving up 15–25% of the company on a fully diluted basis. Giving up too little makes the round not worth the investor's time; too much leaves founders over-diluted before Series A.

SAFEs are simpler, faster, and cheaper for early-stage raises. Priced rounds take longer and cost more in legal fees, but give investors defined ownership and give founders a clean cap table. Most pre-seed and seed rounds use SAFEs; Series A and beyond are almost always priced.

Default alive means a startup's current revenue growth will cover its expenses before it runs out of cash — it can survive without raising another round. Default dead means it will run out of cash before breaking even unless it raises more money.

If you leave before fully vesting, you forfeit unvested shares. Vested shares are typically yours to keep, but you may have a limited window (90 days in most option agreements) to exercise them before they expire.

A liquidation preference guarantees investors get their money back (and sometimes more) before founders and employees receive anything in an exit. A 1x non-participating preference is standard and founder-friendly; participating preferred and multiple liquidation preferences can significantly reduce founder payouts.

A thesis-driven strategy means a VC fund invests based on specific macro or sector beliefs — rather than purely reacting to inbound dealflow. It helps focus sourcing, develop pattern recognition, and position the fund as an expert in a domain.

Pattern matching is when VCs evaluate founders and companies by comparing them to previous successful founders and companies. It speeds up decision-making but has been criticized for perpetuating bias — funding founders who look, talk, and went to school like past winners.

Portfolio construction is how a VC fund decides how many companies to invest in, at what check sizes, with how much reserve capital, to maximize the probability of fund-returning outcomes given the fund's size.

The power law describes how VC returns are extremely concentrated — a tiny number of investments (often 1–2 per fund) drive the majority of the fund's total returns. Most investments fail or return little; a few generate outsized gains.