Venture capital what is carry

You get instant digital access, over links and references, commentary and future updates, and a high-quality PDF download. While the power law of returns generates revenue for venture capital firms, individual venture capitalists at a venture firm make money in two ways: carried interest on realized returns and annual management. Carry is split though not always equally between partners.

Management fees are an amount, typically calculated as a percentage of the funds committed to the firm, that limited partners owe annually to the venture fund in which they are invested. Venture capital firms often hire a manager to make investment decisions. Fund managers, who might not have a capital stake in the firm, are typically compensated by a fee and a share in future profits.

The share of future profits is referred to as carried interest, and venture capital associates "earn carry" when they start earning carried interest. Owning an asset can either cost money or make money. Businesses generally acquire assets to generate income, such as inventory. Retailers purchase inventory at wholesale, stock it in displays, and sell it to consumers at a higher price. An annual percentage of the funds committed to the VC that is used to pay the salaries and overhead of the GP.

In other words, the LPs must first receive all of their invested capital back plus an annual percentage return e. For investors in venture funds, it would also be salient to ask when the carry is collected and whether it is net of management fees and expenses: though rare, some funds will collect the carry as funds are paid out e. LPs should be looking for funds where they first receive all of their invested capital back before a GP is permitted to calculate its carry.

In the event, the fund does not receive any profits the fund organizer is not entitled to any carried interest. Fund organizers at times assign or waive carried interest for specific situations.

Organizers often provide incentives to their investors in the form of side letter agreements waiving a percentage of carry attributable to the investor. When the fund receives a distribution, the associated allocation will account for the waiver.