Venture capitalists are compensated through a combination of management fees and carried interest (often referred to as a “2 and 20” arrangement):
- Management fees – Annual payment is made by the investors (in the VCF) to the Fund manager for carrying out the operations. In a typical Fund, the general partners receive an annual management fee up to 2% of the committed capital.
- Carried interest – This is a share of the profits of the Fund (typically 20%), which is paid to the VCF’s management company as a performance incentive. The remaining 80% of the profits are paid to the investors. Strong limited partners, in top-tier venture firms, have commanded a carried interest of 25% to 30% of the profits, in the recent past.