How the GP actually gets paid
The standard structure, often called "2 and 20," pays the GP two ways: a management fee, roughly 2% of committed capital per year, covering salaries and operations regardless of performance, and carried interest ("carry"), roughly 20% of profits above a hurdle, the part that actually rewards good investing.
Worked example: a $100m fund over its life
| Item | Amount |
|---|---|
| Committed capital | $100m |
| Management fees (2%/yr × 10 years) | $20m |
| Capital actually deployed into companies | $80m |
| Total returned to the fund at exit (assume 3.5x gross MOIC on deployed capital) | $280m |
| Profit (returned − committed) | $180m |
| Hurdle (8%/yr, often waived at seed, included here for illustration) | $100m preserved before carry applies |
| Carry (20% of profit above hurdle) | ~$36m to the GP |
| Net to LPs | ~$244m on $100m committed (2.44x net) |
The GP commit and the hurdle
The GP commit, typically 1-2% of the fund contributed by the GPs themselves, aligns incentives: the GP loses real money too if the fund performs poorly. The hurdle rate is the minimum return LPs must receive before carry kicks in at all, common at growth-stage and PE-style funds, though many seed funds waive it given how central rare outliers are to a strategy a hurdle would otherwise penalize.
Checkpoint
- 2 and 20: ~2% annual management fee, ~20% carry on profits above the hurdle.
- Net MOIC to LPs is always lower than gross MOIC, the difference is fees and carry.
- GP commit aligns incentives; hurdle rate protects LPs' minimum return before carry applies.
If anything here still feels unclear, ask before moving to Lesson 26.