Carried interest — often called carry — is the general partner’s performance-based share of fund profits, usually after LPs receive return of capital and a preferred return hurdle.

How it works

Standard VC/PE economics: ~2% annual management fee on commitments (during investment period) plus ~20% carry on profits. Example flow:

1. LPs receive distributions until contributed capital is returned
2. LPs may receive a preferred return (hurdle) — often around 8% IRR — on contributed capital
3. GPs receive a catch-up allocation so they reach their 20% share of profits above the hurdle
4. Remaining profits split ~80% LP / ~20% GP

Carry vests internally among partners via the firm’s partnership agreement. Clawback provisions recover excess carry if early winners later sour and final fund returns fall below the agreed split.

Founders rarely negotiate carry directly, but carry drives GP behavior on follow-ons, reserves, and exit timing.

Why it matters

• GPs: Carry aligns the team with outsized outcomes; fee alone does not build firm wealth.
• LPs: Lower carry or higher hurdles improve LP net returns but may affect GP retention on smaller funds. Structure details matter as much as headline 20%.
• Founders (investors on cap tables): Understanding carry explains why your VC pushes for bigger exits and reserves follow-on capital for winners.

Common mistake

Assuming carry applies from dollar one of any exit. Waterfall order — return of capital, hurdle, catch-up — determines when GP economics kick in.

Related ideas

See also catch-up, management fee, clawback, carried interest tax, and waterfall.