Carried interest is the share of a venture fund's profits that the general partner keeps as performance pay, a median of 20 percent according to Carta, paid only after limited partners get their contributed capital back. It is separate from the management fee, and because exits take years, carry often arrives late in a fund's life.
Definition: Carried interest ("carry") is the general partner's contractual percentage of a fund's net profits, paid only after LPs have recovered their contributed capital (and, where one applies, a preferred return), and usually subject to a clawback if later losses reduce the fund's overall gain.
Carry is the part of venture pay that is supposed to hurt when the fund does badly: if the companies don't return the money, the GP gets nothing beyond fees. For the other half of fund economics, see venture capital management fees.
What typical carried interest terms look like
Carta's Fund Economics Report 2025 found that the median venture GP takes 20 percent of a fund's profits in carried interest, and that the middle 50 percent of all new venture funds pay exactly 20 percent.
Carta's January 2026 comparison of small and large funds shows that among $1M to $10M funds, carry runs from 15 percent at the bottom decile to 25 percent at the top decile. Among funds over $100M, the 75th percentile is 25 percent and the top decile reaches 30 percent. Top-tier managers often have the leverage to ask for more; some small managers cut carry to attract LPs.
Three other terms shape how much of that percentage the GP actually receives:
- Preferred return (hurdle). A minimum return owed to LPs before carry is paid. Carta's carry guide uses a typical 8 percent preferred return in its private equity example. Hurdles are uncommon in venture: Carta found them in 9.5 percent of $1M to $10M funds and 12.4 percent of funds over $100M.
- GP catch-up. Where a hurdle exists, the GP may receive most or all of the next dollars until it has caught up to its full share of total profits.
- Clawback. If early exits pay carry but later losses shrink the fund's total profit, the LPA typically requires the GP to return the excess. ILPA's Principles 3.0 say clawback amounts should be gross of taxes paid and repaid no later than two years after they are recognized, and strongly encourage joint and several liability among GP members.
European vs American carried interest waterfalls
The distribution waterfall, set out in the limited partnership agreement, is the order in which exit proceeds get paid out.
| Feature | European (whole-of-fund) | American (deal-by-deal) |
|---|---|---|
| When carry is paid | After LPs get back all contributed capital (plus any hurdle) across the fund | On each profitable exit, as it happens |
| Speed of carry to GP | Slower | Faster |
| Clawback risk | Low | Higher, because early carry may be overpaid |
| LP view | More LP-friendly; ILPA calls it best practice | Needs strong clawback and escrow terms |
A whole-of-fund waterfall runs in four steps: return of all contributed capital (including fees and expenses) to LPs, any preferred return, any GP catch-up, then the split, typically 80 percent to LPs and 20 percent to the GP.
Because the first step applies across the whole fund, a venture GP usually waits for several exits, or one very large one, before seeing any carry. The venture capital fund lifecycle guide shows how late in a fund's life that tends to happen.
Illustrative worked examples: carried interest on a $50M fund
Base case (no hurdle, whole-of-fund, 20 percent carry). A $50M fund pays $8.75M in fees and $1.25M in expenses over its life, so $40M goes into companies. The portfolio returns $150M, which is 3.75x invested capital and 3x commitments.
- The first $50M goes back to LPs.
- The remaining $100M of profit is split 80/20: $80M to LPs and $20M of carry to the GP.
- LPs receive $130M on $50M, a 2.6x net multiple.
At $50M of total proceeds, carry is zero. At $75M, profit is $25M and carry is $5M.
With an 8 percent hurdle and full catch-up. Suppose the accrued preferred return is $20M by the time proceeds arrive (roughly 8 percent compounded on $50M for about four and a half years). On the same $150M: $50M returns capital, $20M pays the hurdle, the GP takes a $5M catch-up (so its $5M equals 20 percent of the $25M distributed as profit so far), and the last $75M splits $60M to LPs and $15M to the GP. Carry is still $20M. Without a catch-up, the $80M left after the hurdle splits $64M and $16M, so carry falls to $16M.
Notice where the hurdle actually bites: in mediocre outcomes. If the fund returns $65M, the $15M of profit all goes to LPs under the hurdle, so carry is zero. With no hurdle, carry would be $3M.
American waterfall and clawback. Say the fund's first exit returns $25M on a $5M investment and a deal-by-deal waterfall pays the GP 20 percent of the $20M gain, or $4M, right away. The rest of the portfolio later returns only $20M, so total proceeds are $45M against $50M contributed. The fund made no profit, final carry is zero, and the GP owes LPs a $4M clawback.
That's the risk of getting paid early: you may have to write the check back.
Because venture returns follow a power law, most of a fund's carry usually comes from a handful of companies.
How carried interest is split inside the firm
The fund's 20 percent is a pool, and the firm decides who holds what share. Carta's carry guide says firms typically divide it roughly in proportion to each person's contribution to the fund's success. At a small firm, general partners usually hold most of the pool, principals and senior associates may get small allocations, and analysts often get none. The venture capital salary guide covers carry by level.
Allocations commonly vest over several years. Carta's guide uses the example of a 10 percent allocation vesting over five years, so someone who leaves early keeps only the vested part. Weighing a VC job with carry? Ask two questions: what share of the pool you get, and on which funds.
How carried interest is taxed in 2026: the three-year rule
Current law. In the US, carry allocated from long-term capital gains is taxed at capital gains rates, up to 20 percent federally, rather than as ordinary income at up to 37 percent, as Carta's guide notes. Section 1061 of the Internal Revenue Code, added by the Tax Cuts and Jobs Act for tax years beginning after December 31, 2017, requires that a capital asset be held for more than three years for gain allocated to an "applicable partnership interest" (which covers most carry) to be treated as long-term, according to the IRS. Gain on assets held three years or less is treated as short-term. Final regulations were published in the Federal Register on January 19, 2021. Higher earners may also owe the 3.8 percent net investment income tax, which applies above $200,000 of modified adjusted gross income for single filers and $250,000 for joint filers, per the IRS.
What changed in 2025: nothing for carry. The One Big Beautiful Bill Act, signed on July 4, 2025, made no change to the tax treatment of carried interest, as Kirkland & Ellis noted in its review of the final law.
What is proposed. The Ending the Carried Interest Loophole Act (S. 4330), introduced on April 16, 2026 by Senators Wyden, Whitehouse, and King, would repeal Section 1061 and tax carry holders on deemed annual compensation at ordinary income rates. DLA Piper's May 2026 review stresses that it is only a proposal and current law has not changed.
Because venture exits often take longer than three years, the rule matters most for quick exits and secondary sales. Plan around carry with a tax adviser.
What LPs and new angels should check in carry terms
Whether you're an LP in a fund or an investor in an SPV that charges carry, these are the terms we'd read first:
- The percentage. Anything above 20 percent is easier to justify with a strong track record. Check whether the rate changes at any performance threshold, too.
- Waterfall type. Whole-of-fund is more LP-friendly and is ILPA's best practice.
- Hurdle and catch-up. A hurdle with a full catch-up changes little for a strong fund.
- Clawback terms. Who is liable, whether it is joint and several, and whether any carry is held in escrow.
Where we land on carried interest
In our view, carry is venture's strongest alignment tool when the fund is small enough for it to matter. A GP on a modest fund lives or dies by the 20 percent. On a very large fund, a 2 percent annual fee (the median in Carta's same report) alone can make a very comfortable living, and the incentive quietly shifts from returns to asset gathering. We've called that the gap between the 20 percent game and the 2 percent game, and our take on misaligned fund incentives goes further.
For LPs, the question is which number this manager really lives on. That's our read, and plenty of large funds stay hungry.
Carry is easier to judge once you've watched the work it is charged for. In 1752vc's Emerging Angels program, accredited investors who are new to angel investing spend eight live weeks in a working fund's investment process, monthly Investment Circles included, where deals get argued long before anyone earns anything on them; the SPV guide covers the single-deal version of the same economics. The venture capital fund structure guide covers the rest of the LPA, and the capital call guide shows how the capital behind the carry is drawn.
The bottom line
Carry is 20 percent of profits, paid late, taxed on a three-year clock and clawed back if early wins turn into late losses. The waterfall and clawback terms decide whether it truly lines the GP up with the LPs.
The fee pays for the office. The carry pays for being right.
Key takeaways
- Carried interest is the GP's share of fund profits, a median of 20 percent per Carta, paid only after LPs recover contributed capital.
- A European (whole-of-fund) waterfall, which ILPA calls best practice, pays carry later than an American (deal-by-deal) waterfall and limits clawback risk.
- Hurdles are uncommon in venture (9.5 to 12.4 percent of funds by Carta's data), and a full catch-up erases their effect in strong outcomes.
- Under IRC Section 1061, carry gains need a holding period of more than three years for long-term capital gains treatment.
- The 2025 One Big Beautiful Bill Act did not change carried interest; the 2026 Ending the Carried Interest Loophole Act is only a proposal.
Frequently asked questions
It is the percentage of a fund's profits that the general partner receives as performance pay, most commonly 20 percent. It is paid after limited partners have received their contributed capital back, plus any preferred return, and it is separate from the annual management fee that covers the firm's operating costs.
Under a whole-of-fund waterfall, all exit proceeds go to LPs until their contributed capital (and any hurdle) is returned, and remaining profits are then split, usually 80 percent to LPs and 20 percent to the GP. In a $50M fund that returns $150M with no hurdle, carry is 20 percent of the $100M profit, or $20M.
A European, or whole-of-fund, waterfall pays carry only after LPs recover all contributed capital across the fund. An American, or deal-by-deal, waterfall pays carry on each profitable exit as it happens, which gets money to the GP sooner but raises the risk of overpayment, so it relies on clawback provisions. ILPA calls the whole-of-fund model best practice.
In the US, carry from assets held more than three years is generally taxed as long-term capital gain under IRC Section 1061, at a top federal rate of 20 percent, while gains on assets held three years or less are taxed as short-term. The 2025 One Big Beautiful Bill Act did not change this. Consult a tax advisor for your situation.
A clawback requires the GP to return carry it received on early exits if later losses mean the fund's total profit did not support that carry. ILPA's Principles 3.0 say clawbacks should be calculated gross of taxes and repaid within two years, and strongly encourage joint and several liability among the partners.
Sources
- Carta: Fund Economics Report 2025 (full article)
- Carta: Five Ways That Fund Economics Differ Between Large and Small VC Funds
- Carta: What Is Carried Interest? Definition, Taxation and Fee Structures
- ILPA: Principles 3.0, Fostering Transparency, Governance and Alignment of Interests (PDF)
- IRS: Section 1061 Reporting Guidance FAQs
- IRS: Topic No. 559, Net Investment Income Tax
- Kirkland & Ellis: Final One Big Beautiful Bill Act, No Changes to Carried Interest
- DLA Piper: Carried Interest Reform Returns to Congress, Ending the Carried Interest Loophole Act
Disclaimer: This guide is for general education only and is not legal, tax or investment advice. Laws, market data and program terms change, so it may not reflect the latest developments or fit your situation. Treat it as a starting point, not a source of truth, and talk to a qualified lawyer, accountant or financial adviser before you make decisions.
