Is carried interest taxed as capital gains?

In the US, yes — controversially. That's a policy debate; the mechanics don't change.

Does the individual partner get all the carry on my deal?

No. Carry is split across the partnership per an internal allocation. The partner who sourced your deal usually gets a larger share, not all of it.

What's a fund-returner?

A single investment that returns the entire fund's committed capital. Venture math depends on 1-2 per fund.

Carried Interest Explained: 2-and-20, Waterfall

Carried interest is the VC's share of fund profits. Understanding 2-and-20, the waterfall, and hurdle rates changes how you read investor behavior.

Carried Interest: How VC Fund Economics Actually Work

Carried interest is why your investor cares about markups, follow-ons, and exits the way they do. Understanding the mechanics is not accounting trivia — it's how you predict what they'll push for at each stage.

The 2-and-20 default

The GP (general partner) charges the fund a 2% annual management fee on committed capital, plus 20% of profits (the carry). Some large funds negotiate 2.5% or 30% carry; some emerging managers accept 1.5%. The 2-and-20 baseline hasn't moved much in decades.

The waterfall

LPs get their capital back first. Then the GP receives carry on distributions above that threshold. European waterfall: whole fund returns capital before carry starts. American waterfall: carry paid deal-by-deal with clawback. Fund docs specify which — it changes GP behavior materially.

Hurdle rate

Some funds have a preferred return (often 8%) before carry kicks in. Common in growth and private equity, less common in venture. When present, the GP catches up above the hurdle before splitting carry.

Why this affects your fundraise

A partner who needs three fund-returners to hit their carry number is looking for outlier outcomes. That's why they push for higher valuations, more dilution room, and swing-for-the-fences hires. A GP whose fund is already in profit behaves very differently — sometimes more conservatively, sometimes more aggressively.

Fund life and pressure

Carry only pays after LPs get their capital back — usually 7-10 years into a fund. Late in a fund's life, GPs face pressure to mark up remaining positions or exit them. This is when signal behavior around your company can shift, independent of your metrics.

Frequently asked questions

Is carried interest taxed as capital gains?: In the US, yes — controversially. That's a policy debate; the mechanics don't change.
Does the individual partner get all the carry on my deal?: No. Carry is split across the partnership per an internal allocation. The partner who sourced your deal usually gets a larger share, not all of it.
What's a fund-returner?: A single investment that returns the entire fund's committed capital. Venture math depends on 1-2 per fund.