Carried interest (or simply "carry") is the profit share that venture capital and private equity fund managers earn on successful investments. It is the primary way VCs get rich — not management fees.
How carry works
The standard VC fund structure is "2 and 20": a 2% annual management fee on committed capital, plus 20% carried interest on profits.
- A $100M fund returns $300M
- First, the $100M of invested capital goes back to the limited partners
- The remaining $200M of profit is split: $160M (80%) to LPs, $40M (20%) to the GPs as carry
Hurdles and clawbacks
- Some funds have a hurdle rate (preferred return, common in PE, rarer in VC): LPs must earn, say, 8% annually before carry kicks in
- Clawback provisions require GPs to return carry if early wins are followed by losses that drop the fund below the threshold
- Top-decile firms sometimes command 25–30% carry ("premium carry")
Why founders should care
Carry explains investor behavior. A partner's personal payout depends on outlier exits, not modest ones — which is why VCs push portfolio companies toward large outcomes, follow-on aggressively into winners, and are largely indifferent to small acquisitions. If your realistic outcome is a $30M exit, a fund needing billion-dollar outcomes to earn carry is a misaligned partner.
Tax treatment
In the US, carried interest held longer than three years is taxed as long-term capital gains rather than ordinary income — a recurring political controversy and a periodic target of tax reform proposals.