Fund Structure
Hurdle Rate
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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.
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Frequently Asked Questions
What is Hurdle Rate in venture capital?
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.
Why is Hurdle Rate important for startups?
Understanding Hurdle Rate is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
What category does Hurdle Rate fall under in VC?
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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