VC Fund Structure Explained: LPs, GPs, Fees & Terms (2026)

Pitch a VC and you'll meet a partner. But the cheque comes from a fund: a pool of other people's money with its own size, deadline and rules. Those rules decide how much the fund can put in and whether it can back your next round. They also decide how soon it needs you to sell. So it pays to know how a VC fund works before you build your investor list.

A VC fund structure is the legal setup that lets a venture firm invest other people's money in startups. Investors called limited partners (LPs) put money into a fund, usually a limited partnership. A general partner (GP) decides where it goes, and a management company runs the firm. The managers earn a yearly fee plus a share of the profits.

How is a VC fund structured?

Most VC funds have four parts. The fund, usually a limited partnership, owns the stakes in startups. LPs put in nearly all the money. The general partner, often an LLC owned by the partners, makes the decisions and earns the carry. The management company employs the team and collects the fee. Each is a separate legal entity.

Venture capital firms are usually organised this way: one limited partnership per fund, often with its own GP entity. In the US, many are formed in Delaware. LPs can't lose more than they put in, and profits pass straight through to the partners for tax (Carta). To invest in a US fund as an LP, you usually have to be an accredited investor (AngelList).

So a VC firm and a VC fund aren't the same thing. The firm is the brand and the team. A fund is one pool of money with its own LPs and end date. A firm often runs several at once. Fund III backs new companies, Fund II does follow-ons and Fund I sells its last stakes.

Not every manager uses a classic fund. An SPV pools money for a single deal, and a rolling fund takes new commitments every quarter (AngelList). A corporate VC invests its parent company's money instead of LPs'. For other private funds, see our guide to types of private equity funds.

How does a VC fund make money?

A VC fund makes money for its managers in two ways. The management fee, usually 2% of the fund a year, pays salaries and rent. Carried interest, usually 20% of the profits, is the real prize. LPs get their money back first, so carry only pays out if the fund returns more than it took in.

The management fee (the “2”)

The fee is a yearly charge, usually on the money LPs have committed. It pays for salaries, rent, travel and software. ILPA, the LPs' industry body, wants the fee cut once the investing years end.

Carried interest (the “20”)

Carry is the managers' share of the profits, paid after LPs get their money back. Here's how the fee and the carry work on a $50M fund.

That's why VCs hunt for companies that could return the whole fund. Say the fund owns 10% of you when you sell. To pay back $50M on its own, your company has to sell for $500M. Investors track the result with multiples such as MOIC.

What are typical VC fund terms in 2026?

In 2026 most VC funds still charge a 2% yearly fee while they invest and take 20% of the profits. The managers put a small slice of their own money in, and most US funds skip the hurdle. Smaller funds show the widest spread of terms.

Fees and carry barely change with fund size. The rest does. Small-fund managers put in a bigger share of their own money. They also spend more of the fund on running costs (Carta).

A hurdle, or preferred return, is a minimum return LPs earn before any carry. About 80% of private equity funds set it at 8%. Most US venture funds have none, though hurdles are more common outside the US (Goodwin).

What is the difference between a European and an American waterfall?

A waterfall is the order a fund pays money out in. In a European, or whole-fund, waterfall, LPs get all their money back before the managers take any carry. In an American, or deal-by-deal, waterfall, the managers take carry on each profitable exit as it happens. The total is usually the same. The timing isn't.

Say a $50M fund returns $150M over its life. The partners' 20% carry comes to $20M either way. Here's when each version pays it.

In the American version, the partners get $5.2M in year 5, while LPs are still about $25M short. If later deals flop, the partners may have to hand some back. That's a clawback. It's why ILPA calls the whole-fund model best practice. For deal-by-deal funds, it wants part of the carry held back in escrow.

For you as a founder, the waterfall rarely changes a board vote. But it explains the timing. Under deal-by-deal terms, selling your company early pays the partners carry straight away.

What is the life cycle of a VC fund?

A VC fund usually runs for about ten years. It spends a year or so raising money, then about five years investing in new companies. After that, it backs its winners and sells its stakes. Extensions can add a year or two. Where a fund sits in this cycle tells you if it still writes new cheques.

Ten years is the plan, not the rule, because startups take longer to sell than funds hope. By mid-2026, the median 2017 fund on Carta had returned just 0.37x the cash its LPs put in (Carta). An old fund with impatient LPs may push you towards an exit.

Why does a VC fund's structure matter to founders?

The structure tells you how a VC will behave. Fund size sets the cheque and the exit it needs. Reserves decide if it can back your next round. Fund age tells you if it's still investing. In our work on 600+ successful rounds since 2014, the best investor lists start from these facts, not from famous names.

Fund size and fund maths

Fund size sets the cheque. Say a $50M seed fund plans 25 companies. After fees, and with half the rest kept for follow-ons, it has about $20M for first cheques. That's roughly $800K each. Asking it to lead a $3M round won't work, however good your pitch is.

Each cheque also has to buy enough of you to matter. In our partners' experience, healthy dilution is about 10% at pre-seed, 15–20% at seed and 18–20% at Series A. Our dilution benchmarks show what's normal at each stage. The fund's needs also shape the deal itself, as our term sheet guide explains.

Reserves and follow-ons

Reserves are money a fund keeps back for its companies' later rounds. Ask how much is left and how the partners decide who gets it. Some funds follow on in every company. Others save it for their top few. Either way, each new cheque still has to get through the investment committee.

Fund age

An older fund may have little left for new companies. Carta's data shows the typical recent fund had invested about 80% of its money after nearly four years (Carta). In our work, a raise takes 35–40 investor meetings on average. So check when each fund was raised before you book the call. Building that target list is part of our fundraising work.

How do you set up a VC fund?

To set up a VC fund, you need a clear thesis and a track record LPs can check. Then you form the fund, a GP entity and a management company, and lawyers draft the partnership agreement. You put in some of your own money, hire a fund administrator and hold a first close. Then you keep raising.

1. Thesis and track record — a clear investment thesis and proof you can pick winners, such as angel deals or SPVs.
2. Fund size — set it by your strategy: cheque size, number of companies and reserves.
3. Entities and admin — the fund, the GP and the management company, the partnership agreement, and a fund administrator.
4. GP commit — LPs expect you to invest alongside them. ILPA wants it paid in cash, not through waived fees.
5. LP deck and fund model — the story and the numbers LPs check before they commit.
6. First close — then keep raising. ILPA suggests a final close within about a year of the first.

It's a tough market for new managers. In 2025, 64% of the money raised by VC funds on Carta went to funds above $100M (Carta). A small fund has to win LPs with a sharp thesis and proof it can deliver.