How carry actually gets paid out

Hey!! You've made it to issue #120 of the VC Demystified newsletter. To access the 100+ other venture capital guides I've written, go here.

I posted about a MAJOR LIFE UPDATE this past week about the next phase of my career. I’m jumping full-time into VC Demystified and utilizing this network, community and access I’ve built over the last 6 years to do something big. But hint hint, I’m not going far :)

As many of you know, VC funds operate under a 2/20 compensation structure. 2% is a management fee paid out every year. 20% is a share of the fund's profits, otherwise known as carry. The management fee keeps the lights on. Carry is where the real upside lives.

But that's about as far as most explanations go. Knowing carry exists and understanding how it actually gets paid out are two very different things. Most people can recite the 2/20 line. Very few can tell you what's actually written into the Limited Partner (LP) agreement or when a fund manager actually sees that money hit their account.

I sat down with a GP this past week and we got into the weeds on exactly this. What ends up in the LP agreement, and how the mechanics actually play out once a fund starts realizing gains.

There are two ways VC funds distribute profits:

European is far more common today, especially among institutionally-backed funds.

Here's the part most people get wrong: the difference between the two isn't just the headline split. Both structures typically use the same 20% carry rate. But American calculates carry deal by deal, while European nets everything against the whole fund's losses and gains together, so they don't just differ in timing. They can differ in the actual dollar amount the GP takes home. That gap, in both dollars and years of waiting, can add up to millions over the life of a fund.

Let’s get into this with examples to make it more clear.