Fund Structure
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Quick Answer
The specific methodology used to compute whether a fund's preferred return threshold has been met, which determines when the GP begins receiving carried interest.
The hurdle rate calculation defines the precise methodology for determining whether a fund has cleared the preferred return threshold (typically 8% annually). Key variables include whether the rate is simple or compound, whether it's calculated on committed or contributed capital, whether it accounts for the timing of contributions and distributions, and how unrealized gains are treated. Different calculation methods can produce materially different results.
In Practice
Using compound interest on contributed capital with a time-weighted approach, the 8% hurdle on the $100M fund required $142M in cumulative distributions before the GP earned any carry — compared to $180M that would have been required under a committed capital calculation with the same rate.
Why It Matters
The methodology behind the hurdle rate calculation significantly affects GP economics. Subtle differences in calculation methods can shift millions of dollars between GPs and LPs, making this one of the most important but least understood aspects of fund terms.
VC Beast Take
Most LPs focus on the headline hurdle rate (8%) without scrutinizing the calculation methodology. This is a mistake — two funds with identical 8% hurdle rates can have very different economic outcomes depending on whether the rate is simple vs. compound and computed on committed vs. contributed capital.
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The hurdle rate calculation defines the precise methodology for determining whether a fund has cleared the preferred return threshold (typically 8% annually).
Understanding Hurdle Rate Calculation is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Hurdle Rate Calculation 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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