What is carried interest?

The manager's share of the fund's profit, typically 20%, paid only after LPs have received their contributed capital back. It is worth nothing on a fund that does not return more than it raised, which is what makes it an alignment term rather than a fee.

What is a hurdle rate and why do venture funds rarely have one?

A hurdle, or preferred return, is a minimum return LPs must receive before carry starts, common in private equity at around 8%. Most venture funds omit it because venture outcomes are either far above or far below any hurdle, so the term adds complexity without changing behaviour.

What does 1:1 reserves mean?

The fund plans to invest roughly as much in follow-on rounds of its existing companies as in first checks. On a $25 million fund that is about half for initial investments and half held back. It is a policy the manager applies company by company, not a fixed rule.

Why is the fund term 5 to 7 years instead of 10?

A seed fund that invests in its first two to three years and expects exits through acquisition can run shorter than the traditional ten-plus-two. The term sets expectations and fee timing; companies still exit on their own schedule, and remaining positions at the end of the term are extended, distributed in kind or sold.

What is the GP commit?

The manager's own capital in the fund, conventionally 1% to 2% of commitments and often higher at small funds. It puts the manager's money on the same terms as the LPs'.

When do I get my money back?

When companies exit. Distributions follow the waterfall: contributed capital back to LPs first, then profit split with carry. Most distributions from a seed fund arrive in the second half of its life; the early years show a paper loss, the J-curve, because fees are paid from the start and companies are held at cost.

What is a capital call?

A notice from the fund asking you to wire part of your commitment, usually with ten business days to pay. Calls arrive over the first three to four years as the fund invests and pays fees. Missing a call is a default under the LPA, so size the commitment to cash you can produce on that schedule.

olivent.os/guide::Fund Fee Calculator

Venture fund economics explained: 2 and 20, reserves, and 5 to 7 year terms

Published September 13, 2026Updated September 13, 2026Adam Yohanan

A venture fund's economics come down to a management fee, carried interest, and how long the money is locked up. This guide explains each term with worked numbers, what reserves are for, why a seed fund can run on a 5 to 7 year term, and how fees change the return an LP actually receives.

What 2 and 20 means

"Two and twenty" is shorthand for a venture fund that charges a 2% annual management fee on committed capital and keeps 20% of the profits as carried interest. The fee pays for running the fund; the carry aligns the manager with the LPs, because it is worth nothing unless the fund returns more than it raised.

The two numbers describe very different money. The management fee is contractual and predictable: on a $25 million fund at 2%, it is $500,000 a year during the investment period, paid whether or not the companies do well. Carried interest is contingent: on the same fund, it is 20% of whatever profit exists after LPs have their capital back, which may be zero.

Most seed funds sit close to 2 and 20. Variations you will see are a lower fee on a very large fund, a higher carry (25% or 30%) at a manager with an unusual record, and different rules for how the fee steps down and how the carry is calculated, which are covered below. The Fund Fee Impact Calculator shows what the combination does to a specific commitment.

Management fee mechanics

The management fee is usually a percentage of committed capital, not of money actually invested, charged annually during the investment period, then stepped down. On a 2% fee and a $500,000 commitment, you pay $10,000 a year at the start, less later. Over a fund's life, total fees typically add up to 10% to 15% of the commitment.

Charging on committed rather than invested capital is the norm because the manager's work is heaviest in the first years, when little has been deployed. After the investment period, usually three to four years, the fee steps down: to a lower percentage, to a percentage of invested capital rather than committed, or on a fixed schedule. The Limited Partnership Agreement states the schedule; it is the first thing to read after the headline numbers.

Fees are paid out of committed capital, so they reduce the amount available to invest. A $25 million fund that pays $2.5 million in fees over its life invests $22.5 million. Some funds recycle: early proceeds are reinvested rather than distributed so that the full $25 million reaches companies. Whether recycling is allowed, and how much, is a term worth knowing.

Fund expenses (legal, audit, administration) are separate from the management fee and are borne by the fund, with a cap in most agreements.

Carried interest, hurdles and the waterfall

Carried interest is the manager's share of the fund's profit, typically 20%, paid only after LPs have received their contributed capital back. The waterfall is the order in which money is distributed: first capital back to LPs, then the carry split. Venture funds rarely have a hurdle rate; buyout funds usually do.

The important variable is whether the carry is calculated on the whole fund or deal by deal. In a whole-fund (European) waterfall, the manager receives no carry until LPs have received back everything they put in, including fees, across all investments. In a deal-by-deal (American) waterfall, carry can be paid on an early winner before later losses are known, with a clawback obligation if the fund ends up short. Whole-fund carry is the LP-friendly version and is what ILPA recommends.

A hurdle, or preferred return, is a minimum return LPs must receive before carry starts, common in private equity at around 8%. Venture funds mostly omit it, on the argument that venture returns are either far above or far below any hurdle and the term adds complexity without changing behaviour.

The GP commit is the manager's own money in the fund, conventionally 1% to 2% of commitments and often more at small funds. It is the simplest alignment term there is: it means the manager loses money on the same terms the LPs do.

What 1:1 reserves means

Reserves are capital the fund keeps back for follow-on investments in its existing companies. "1:1 reserves" means the fund plans to put roughly as much into follow-ons as into first checks: on a $25 million fund, about half into initial investments and half held for later rounds of the winners.

Reserves exist because the best information a seed investor ever gets about a company arrives after the first check. A fund with no reserves cannot act on it and is diluted in every later round. A fund with too much in reserve has under-invested in new companies. The ratio is a policy, not a rule; the manager decides company by company whether to follow on, and unspent reserves go into new investments late in the period or are not called.

Reserves interact with the fee. Because the fee is charged on the full commitment, reserved capital costs the same to hold as invested capital, which is one reason funds keep the investment period short and step the fee down.

Why a 5 to 7 year term

A fund's term is how long the vehicle exists before it must distribute what it holds. The traditional venture term is ten years plus extensions; Olivent's Fund I is five to seven. The shorter term fits a seed fund that invests in its first two to three years and expects exits through acquisition on a shorter horizon than an IPO.

A term is not a promise of liquidity. Companies exit on their own schedule, and a fund that reaches the end of its term with live positions extends, distributes shares in kind, or sells the positions in a secondary transaction. What the term does is set expectations and fee timing: management fees run through the investment period and step down afterwards, and the end of the term is when the manager has to resolve what remains.

A shorter term also changes the kind of company a fund can hold. A seed investor in a company that will take twelve years to reach an IPO needs a long-dated vehicle or a plan to sell the position along the way. A fund built around acquisitions in defense, cyber and AI infrastructure, where strategic buyers are active, can reasonably run shorter. The term should match the exit path the manager actually expects, and an LP should ask what that path is.

Capital calls and the J-curve

A fund does not take your commitment on day one. It calls capital in pieces as it makes investments and pays fees, usually over the first three to four years. Early on, fees and write-downs mean the fund's reported value is below the capital called, which draws the J-curve: down first, then up as the companies mature.

A $500,000 commitment might be called at 25% in year one, 30% in year two, 25% in year three and the balance for follow-ons and fees after that. Capital call notices give a period, typically ten business days, to wire. Missing a call is a default under the LPA with real consequences, so a commitment should be sized to the cash you can produce on that schedule for several years.

The J-curve is a reporting artefact as much as an economic one. Seed companies are held at cost or at the last round's price, and fees come out of the fund from the start, so the first few years show a loss on paper regardless of how the companies are doing. The Fund Timeline Visualizer draws the calls, the J-curve and the distribution period for a given set of terms.

What fees do to net returns

Fees and carry are the difference between the gross multiple the fund earns on its investments and the net multiple an LP receives. On a 2 and 20 fund that turns $25 million of commitments into $75 million of proceeds, a 3.0x gross, the LP receives roughly 2.5x net after the fee drag and the carry.

Work it through. Commitments of $25 million; fees over the life of about $2.5 million; capital invested about $22.5 million. Suppose the investments return $75 million. Profit above the $25 million contributed is $50 million; carry at 20% on a whole-fund waterfall is $10 million; LPs receive $65 million, or 2.6x on their $25 million. If the fund instead recycles fees so that the full $25 million is invested at the same 3.33x gross on invested capital, the arithmetic improves slightly for the LP.

The same fund at a 1.0x gross returns $25 million: no profit, no carry, and LPs receive back their capital less nothing further, but they have borne the fees inside that $25 million, so the money that came back was earned by the companies, not saved by the fund. Fees only stop mattering when the multiple is large; at seed, the multiple is either large or the fund has not worked, which is why LPs focus on the manager's ability to produce outliers more than on a quarter-point of fee.

The calculator runs these numbers for your commitment, fee schedule and expected multiple, and compares fee structures side by side.

Olivent Fund I terms

Olivent Fund I is a $25 million target seed fund with a 2% management fee, 20% carried interest, a 5 to 7 year term, and roughly 1:1 reserves for follow-on, writing first checks of $250,000 to $1 million into Israeli founders through a US vehicle. It is the fund's first; one SPV has closed to date.

Those are the headline terms; the Limited Partnership Agreement governs and is provided during onboarding. The fund is open to investors who are both accredited and Qualified Clients, which the eligibility guide explains, and the current summary of terms is on the Fund I page.

Frequently asked questions

Is the management fee charged on committed or invested capital?: Usually on committed capital during the investment period, then stepped down, often to a percentage of invested capital or on a fixed schedule. The Limited Partnership Agreement states the schedule. Charging on commitments funds the early years when the manager's work is heaviest and little has been deployed.
What is carried interest?: The manager's share of the fund's profit, typically 20%, paid only after LPs have received their contributed capital back. It is worth nothing on a fund that does not return more than it raised, which is what makes it an alignment term rather than a fee.
What is a hurdle rate and why do venture funds rarely have one?: A hurdle, or preferred return, is a minimum return LPs must receive before carry starts, common in private equity at around 8%. Most venture funds omit it because venture outcomes are either far above or far below any hurdle, so the term adds complexity without changing behaviour.
What does 1:1 reserves mean?: The fund plans to invest roughly as much in follow-on rounds of its existing companies as in first checks. On a $25 million fund that is about half for initial investments and half held back. It is a policy the manager applies company by company, not a fixed rule.
Why is the fund term 5 to 7 years instead of 10?: A seed fund that invests in its first two to three years and expects exits through acquisition can run shorter than the traditional ten-plus-two. The term sets expectations and fee timing; companies still exit on their own schedule, and remaining positions at the end of the term are extended, distributed in kind or sold.
What is the GP commit?: The manager's own capital in the fund, conventionally 1% to 2% of commitments and often higher at small funds. It puts the manager's money on the same terms as the LPs'.
When do I get my money back?: When companies exit. Distributions follow the waterfall: contributed capital back to LPs first, then profit split with carry. Most distributions from a seed fund arrive in the second half of its life; the early years show a paper loss, the J-curve, because fees are paid from the start and companies are held at cost.
What is a capital call?: A notice from the fund asking you to wire part of your commitment, usually with ten business days to pay. Calls arrive over the first three to four years as the fund invests and pays fees. Missing a call is a default under the LPA, so size the commitment to cash you can produce on that schedule.

Sources

ILPA Principles 3.0 (Institutional Limited Partners Association)
NVCA model legal documents (model Limited Partnership Agreement) (National Venture Capital Association)
Olivent Fund I terms (Olivent Venture Capital)

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Educational content, not tax, legal or investment advice. Nothing here is an offer to sell or a solicitation to buy securities; any offer is made only to eligible investors through the fund's offering documents.