Guide · Fundraising & VC
Carry 101 for founders — what every term sheet hides in plain sight.
A plain-language guide to carried interest: how VC funds get paid, why carry matters on your term sheet, and what to ask before you sign. Carry is how your investors get paid, and once you see it, you read term sheets, board dynamics, and exit conversations differently. This is the short version — no accounting degree required.
What "carry" actually means
Carried interest — usually just called carry — is the share of investment profits that the fund's managers keep after returning the original capital to investors.
In a typical venture fund, the people who make the investment decisions (the General Partners, or GPs) raise money from outside investors (the Limited Partners, or LPs). The LPs put in almost all the money. The GPs put in a small amount themselves, run the fund, and, if things go well, take a slice of the profit.
That slice is usually 20%. Some top-tier funds charge 25% or 30%. It is the main reason a VC partner spends a decade shepherding portfolio companies: they only collect real money at the end if the fund performs.
The simple math of a fund
Imagine a fund raises €100 million. It charges a 2% annual management fee to cover salaries and operating costs. Over ten years, that adds up to roughly €20 million in fees.
The fund then invests in startups and, after many years, exits those companies for €300 million total. First, the LPs get back their original €100 million. Then there is €200 million in profit to split.
With 20% carry, the GPs keep €40 million of that profit and the LPs take home €160 million. The GPs' €40 million is shared among the partners according to the fund's own economics.
Quick formula
Fund return − Returned capital to LPs = Profit
Profit × Carry % = GP carry
Hurdle rates, catch-ups, and clawbacks
Most funds add a hurdle rate, often around 8% per year. That means LPs must receive their original capital plus an 8% annual return before the GP starts earning carry. It protects LPs from paying performance fees on mediocre results.
A catch-up provision lets the GP receive a higher share of profits once the hurdle is met, until the GP has caught up to its full 20% share of all profits. Without a catch-up, the LPs keep more of the early upside, and the GP is only paid on the profits above the hurdle.
A clawback is the opposite safety valve. If the GP takes too much carry early because one big exit happened before the rest of the fund soured, the LPs can reclaim the excess. This matters more to LPs than to founders, but it is another signal that venture fund economics are long-term and complicated.
Why this matters for your company
Carry is the incentive engine behind your VC's behavior. It explains why a fund may pressure you to raise more, grow faster, or aim for a much larger exit than you feel ready for. It also explains why a fund may lose interest if it decides your company cannot return enough of the fund to matter.
A €100 million fund that owns 10% of your company needs you to exit at €1 billion just to return the fund once. If you exit at €200 million, that same stake returns €20 million — meaningful to you, but not a fund-returner. That gap shapes how the board talks about strategy, risk, and timing.
Understanding carry does not make you cynical. It makes you literate. You can ask better questions about ownership, reserves, and whether the fund you are talking to is the right size and age for the company you want to build.
What to ask before you sign
- How big is the fund? A tiny fund and a huge fund have very different outcome math.
- How much of the fund do you need to return? Some funds call out a target ownership; others avoid the question.
- What is the follow-on reserve? Carry is only real if the fund has capital to keep supporting you through future rounds.
- Where is the fund in its life? A fund in year 8 is a different partner than a fund in year 2.
- Who owns the carry? The named partner on your deal may not be the one who keeps the economics.
The real takeaway
Carry is not a detail buried in a side letter. It is the gravitational field around every venture-backed company. Founders who understand it negotiate better, choose partners more thoughtfully, and read board conversations with one less layer of mystery.
You do not need to become a fund lawyer. You need to know enough to ask the one question that always matters: when this fund wins, does that look like the same future I am building?