Carried Interest (Carry)
The share of a venture fund's profits paid to the general partner, typically 20%, after returning LP capital.
Carried interest is the general partner's performance compensation — a percentage, standardly 20% in venture capital, of the fund's profits above the amount LPs originally invested. It's the primary way GPs are meant to be paid for generating strong returns, distinct from the management fee that covers operating costs regardless of performance.
Most funds only pay carry after a hurdle rate is cleared and after LPs have received their capital back (a 'return of capital' waterfall), though the exact mechanics (European vs. American waterfall, deal-by-deal vs. whole-fund) vary and materially affect when and how much GPs actually collect.
Carried interest is taxed at long-term capital gains rates in the US rather than ordinary income rates, a long-running policy debate, since GPs are compensated for labor (managing the fund) but taxed as if it were investment gain.
Carry paid to GP = carry rate x (total distributions - total capital returned to LPs), after hurdle if applicableA $100M fund returns $350M total. After returning the $100M of capital to LPs, there's $250M of profit; at a standard 20% carry, the GP earns $50M and LPs keep the remaining $200M.
As an LP, always ask whether carry is calculated deal-by-deal or on the whole fund, and whether there's a clawback provision — deal-by-deal carry without a clawback can let a GP get paid early on winners even if later deals lose money and the fund never returns capital overall.
Is 20% carried interest standard for venture funds?
Yes, 20% is the long-standing industry norm, though top-tier or high-demand funds occasionally push for 25-30%, and carry structure (waterfall type, hurdle) varies more than the headline rate.
How is carried interest taxed?
In the US it's generally taxed at long-term capital gains rates rather than ordinary income rates, provided holding period requirements are met — a long-debated tax policy issue given carry compensates labor, not just invested capital.
Related terms
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