Carried interest is the performance-based compensation VC general partners earn on fund profits above a return threshold, typically 20% of profits. Often shortened to "carry," sometimes called "performance fee" or "incentive allocation," it is paid after LPs receive return of their contributed capital plus a defined preferred return (the "hurdle rate," typically 8% annualized), and is the primary economic driver of the VC compensation model. It is also the subject of ongoing tax-treatment debate because carry has historically been taxed as capital gains (typically 20% federal) rather than as ordinary income (up to 37% federal), saving GPs significant amounts in taxes.
The standard "2 and 20" structure: GPs earn 2% annual ma...