Carry (Carried Interest)

TL;DR

The share of fund profits paid to the GPs above a defined hurdle, typically 20% in venture funds — 'carry' is the GP's economic upside.

Carried interest is the percentage of fund profits the General Partners keep after returning LP capital and (in many funds) clearing a hurdle rate. The standard venture fund structure is '2 and 20' — 2% annual management fee and 20% carry. Carry is usually subject to a 'European waterfall' (paid only after the entire fund is in profit) or an 'American waterfall' (paid deal by deal).

Carry is what gives VCs the same incentive as founders: both make life-changing money only on outsized winners. The mechanics of how carry vests, distributes, and accelerates inside a GP partnership are themselves complex.

Formula

Carry = Carry % × max(0, Total Distributions − Paid-In Capital − Hurdle)

• Carry % — GP share of profits, typically 20% (sometimes 25%–30% for top-tier firms)
• Total Distributions — Cumulative distributions to the fund (before carry split)
• Paid-In Capital — Capital called from LPs that must be returned first
• Hurdle — Minimum LP return (e.g. 8%) that must be cleared before GP earns carry, if applicable

European waterfall: hurdle and full return of capital must clear before any carry. American waterfall: carry can be paid deal-by-deal with clawback at fund end.

Worked example

Fund returned $400M on $200M paid-in (no hurdle). Profit = $200M; GP carry = 20% × $200M = $40M; LPs receive $200M + $160M = $360M (1.8× DPI net of carry vs 2.0× gross).

Common pitfalls

• Conflating GP economics with fund economics.
• Misunderstanding which waterfall structure applies.
• Underestimating how long carry takes to actually pay out.

When this shows up in a pitch deck

Fund-level term; founders may discuss carry indirectly when assessing investor incentives.

Related terms

• Management Fee — An annual fee LPs pay GPs to operate the fund, typically 2% of committed capital during the investment period and lower after.
• Hurdle Rate — The minimum annualized return GPs must deliver before they can begin earning carried interest.
• GP Commit — The capital General Partners personally commit to their own fund, signaling alignment with the LPs they're raising from.
• Limited Partner — A passive investor in a venture fund, providing capital but not making investment decisions, and limited in liability to their commitment amount.
• General Partner — A managing partner of a venture fund, responsible for sourcing, diligence, investment decisions, and value-add to portfolio companies.

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