How VC Funds Work
What is "2 and 20" in venture capital?
"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" is shorthand for the fee structure that most venture capital and hedge funds use. The "2" means the fund charges a 2% annual management fee on the total committed capital. The "20" means the GPs take 20% of profits as carried interest.
The management fee is not performance-based — it's charged every year regardless of how the fund is doing. On a $200M fund, that's $4M per year to cover salaries, office costs, travel, and other operating expenses. Most management fee structures taper in later years — for example, 2% during the five-year investment period, then stepping down to 1.5% afterward.
The 20% carry is where GPs can make real money. It's only earned on profits — so GPs have every incentive to maximize returns. On a successful fund, carry can be worth far more than the cumulative management fees.
Some established, high-demand funds charge higher fees — "2.5 and 25" or even "3 and 30" — while smaller emerging managers sometimes offer lower fees to attract LPs. The "2 and 20" structure has faced scrutiny from LPs who argue that management fees can be excessive relative to performance, especially on larger funds where operational costs don't scale proportionally.
Related glossary terms
Related questions
What is carried interest and how does it work?
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.
What is a management fee in VC?
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.