Fund Structure
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Quick Answer
The minimum return LPs must receive before the GP starts collecting carried interest — typically 7-8% annually.
A hurdle rate (also called a preferred return or 'pref') is the minimum annual return that LPs receive on their capital before the GP begins taking carried interest. Standard hurdle rates in VC are 7-8% per year. Not all VC funds have hurdle rates — many early-stage funds don't, making it purely a 'return of capital then split profits' structure. Hurdle rates are more common in growth equity and private equity, where cash flows are more predictable. When a fund does have a hurdle rate, there's typically a 'catch-up' provision: once the hurdle is met, the GP receives 100% of profits until they've 'caught up' to their 20% share, then reverts to the standard 80/20 split.
In Practice
A $100M venture fund has an 8% hurdle rate. Over the fund's 10-year life, LPs must receive $216M back (their original $100M plus 8% compounded annually) before the GP can claim any carried interest. If the fund only returns $180M, the GP receives zero carry despite generating an 80% return for LPs. However, once the hurdle is cleared, the GP typically receives 20% of all profits above that threshold.
Why It Matters
Hurdle rates align GP incentives with LP returns by ensuring limited partners receive meaningful returns before GPs profit from carried interest. Without hurdle rates, GPs could collect carry on modest returns that barely beat inflation. This protection becomes crucial during poor vintage years when many funds struggle to generate positive returns, ensuring GPs remain focused on delivering substantial value rather than just beating zero.
VC Beast Take
Most first-time GPs underestimate how challenging hurdle rates become during tough markets. An 8% hurdle rate might seem reasonable, but it means your portfolio companies need to deliver exceptional returns just to get you to breakeven on carry. Smart GPs structure their funds assuming half their portfolio will be zeros—the hurdle rate forces discipline around position sizing and selection from day one.
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This concept is especially relevant for these venture capital roles:
A hurdle rate (also called a preferred return or 'pref') is the minimum annual return that LPs receive on their capital before the GP begins taking carried interest. Standard hurdle rates in VC are 7-8% per year.
Understanding Hurdle Rate is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Hurdle Rate falls under the fund-structure category in venture capital. This area covers concepts related to how venture capital funds are organized, managed, and governed.
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