2 and 20

The classic venture fee structure is "2 and 20": about 2% management fee per year on committed (sometimes invested) capital, and 20% carried interest on profits. Fees pay the lights. Carry is the upside. Fees arrive whether or not the fund performs. Carry arrives only if it does — usually after LPs get their capital back.

The big idea

Picture a restaurant. The 2% is the rent and payroll. The 20% is a slice of the night's profit, paid only after the investors who bought the kitchen get their money back. The analogy breaks on timing: carry is paid over a decade as companies exit, not nightly, and tax treatment of carry is controversial and jurisdiction-specific.

Walking through a $100M fund

Take a $100M fund with a flat 2% fee for 10 years.

Fee income ≈ 0.02 × $100M × 10 = $20M

Real LPAs often step fees down after the investment period, so think "on the order of $15–20M," not a precise invoice. That leaves on the order of ~$80M of investable capital after fees. The exact split depends on whether fees come from commitments or from invested capital, and on step-downs. The founder takeaway: a $100M fund does not put $100M into startups.

Now suppose the fund returns $400M of cash over its life (4× gross on committed capital is an excellent outcome).

Capital back to LPs     = $100M
Profit                  = $300M
GP carry at 20%         = $60M
LP share of profit      = $240M
LP total                = $100M + $240M = $340M  →  3.4× on committed capital

That $60M is shared among partners (and sometimes staff via a points system). Partners get rich from outsized exits, not from collecting fees on a mediocre book.

Some LPAs allow recycling: reinvesting returned capital or fee amounts under limits. Recycling can raise effective buying power above the naive "$80M after fees" sketch.

Common mistakes

• Equating fund size with check capacity. Fees and reserves both reduce what a first check can be.
• Thinking GPs get 20% of the whole $400M. Carry is 20% of profit after capital return, here $60M not $80M.
• Assuming fees prove skill. Fees arrive even if the book is mediocre. Carry is the performance check.

Check yourself

A $100M fund charges a flat 2% for 10 years. About how much is left to invest, order of magnitude?

On the order of $80M, after ~$15–20M of fees, before thinking about recycling.

The fund returns $400M. How much carry does the GP take at 20%?

$60M — 20% of the $300M profit after $100M of capital is returned.

Key takeaways

• 2% runs the firm. 20% of profits is carry, usually after LPs get capital back.
• A $100M fund invests on the order of ~$80M after fees.
• Partners get rich from fund-returning exits, not from fees on a quiet book.

Further learning

Next, return metrics — what LPs need after this split.

A compact walkthrough of fees and carry: