Carried Interest Terminology 101

Your carried interest dictionary

Carried interest comes with its own language. Fund professionals use these terms daily without thinking about them. For everyone else, it can feel like a foreign language designed to exclude you.

This glossary is your reference. Bookmark it. Come back to it whenever you encounter a term you don't recognize. Every definition is written for clarity, not precision — we'll sacrifice some technical nuance to make sure you actually understand what these words mean in practice.

The fundamentals

Carried Interest (Carry)

The share of profits that fund managers receive as compensation for managing the fund. Typically 20% of profits above a minimum return. Think of it as a performance bonus — but instead of a one-time payment, it's a share of every successful investment over the life of the fund.

General Partner (GP)

The entity that manages the fund — makes investment decisions, sits on boards, helps companies grow. Your spouse works for the GP. The GP earns management fees (salary) and carried interest (performance pay).

Limited Partner (LP)

The investors who provide the capital. Pension funds, university endowments, sovereign wealth funds, wealthy families. They put up the money; the GP invests it. LPs have no say in individual investment decisions.

Fund

A pool of money raised to invest in companies. Funds have a defined life (usually 10-12 years), a defined size (e.g., "$500 million fund"), and a specific strategy (e.g., "early-stage technology"). Your spouse may have carry in multiple funds simultaneously.

Vintage Year

The year a fund was formed and began investing. "Fund IV, 2019 vintage" means the fourth fund this firm has raised, and it started deploying capital in 2019. Vintage matters because it determines the investment period, the maturity of portfolio companies, and when distributions are likely.

Portfolio Company

A company that the fund has invested in. A single fund might have 20-40 portfolio companies. Each one is a bet — some will succeed spectacularly, some will fail completely, and most will land somewhere in between.

The money flow

Capital Call

When the fund needs money from its partners to make an investment or pay expenses, it issues a capital call. Your spouse's share (the GP commitment) comes from family funds. Capital calls can be $25K-$100K+ at a time and come with 10-14 days notice.

Distribution

Money flowing back to partners from fund exits. When a portfolio company gets acquired or goes public and the fund sells shares, the proceeds are distributed according to the waterfall. This is when carry becomes real cash.

Waterfall

The order in which profits flow to different parties. Think of it as a cascade — water (money) flows down through different pools in a specific order. The structure of the waterfall determines when carry gets paid.

European Waterfall (Whole Fund)

Carry is only paid after the entire fund has returned all invested capital plus the hurdle rate to LPs. This means no carry until the fund as a whole is profitable. More conservative, more common in recent funds.

American Waterfall (Deal-by-Deal)

Carry is paid on each successful exit individually, without waiting for the whole fund to be profitable. This means the GP can receive carry even if the overall fund is underwater. Less common today, but some older funds use it.

Hurdle Rate (Preferred Return)

The minimum annual return LPs must receive before carry kicks in. Typically 8%. If the fund returns less than 8% annually to LPs, the GP gets no carry. The hurdle protects LP interests and ensures the GP only profits from genuine outperformance.

GP Catch-Up

After the hurdle is met, the GP receives a larger share of the next dollars distributed until they've "caught up" to their full carry percentage on all profits. This is a technical feature of the waterfall that accelerates carry payments once the hurdle is cleared.

Clawback

A provision requiring the GP to return carry if later fund performance doesn't justify early payments. If a fund pays carry on early exits but later investments lose money, the GP may need to give some carry back. This creates risk for carry already received.

Your spouse's position

Carry Allocation (%)

Your spouse's personal share of the total GP carry. If the GP earns $100M in carry and your spouse has a 0.5% allocation, their gross carry is $500K. This percentage is the single most important number for estimating your family's carry value.

GP Commitment (Co-Invest)

Money your spouse must invest alongside the fund as "skin in the game." This is subtracted from carry proceeds — it's the cost basis. Typical commitments range from 1-5% of the fund size, spread across all GPs. The portion of that commitment still in the fund (committed but not yet deployed or returned) is tracked as DAW — "Dollars at Work."

Vesting

Carry doesn't fully belong to your spouse immediately. It vests over time (usually 4 years). If they leave before fully vested, they forfeit the unvested portion. Vesting schedules affect both the value and the risk of the carry position.

Unvested Carry

Carry that has been allocated but not yet earned through time-based vesting. If your spouse left tomorrow, they would forfeit this portion. The value of unvested carry depends on how long they stay.

Valuation terms

Mark / Marking

The fund's internal estimate of a portfolio company's current value. Funds "mark" their portfolio quarterly. Private company marks are estimates, not market prices — they carry significant uncertainty.

NAV (Net Asset Value)

The total value of the fund's portfolio minus liabilities. Your share of NAV, adjusted for carry mechanics, is a starting point for estimating your carry position.

MOIC (Multiple on Invested Capital)

How many times the investment has grown. A $10M investment now worth $30M is a 3.0x MOIC. Simple, intuitive metric. Above 1.0x = profitable. Below 1.0x = underwater.

IRR (Internal Rate of Return)

The annualized return, accounting for the timing of cash flows. A 3.0x MOIC over 3 years is very different from 3.0x over 10 years. IRR captures that difference. Funds target 20-25% net IRR.

Secondary Market

An informal marketplace where investors buy and sell fund interests. If you need liquidity before the fund distributes, selling on the secondary market is an option — but you'll take a 20-40% discount. Platforms like Forge Global and Hiive facilitate these transactions.

Illiquidity Discount

The reduction in value applied because carry can't be easily converted to cash. If carry is "worth" $1M but can't be sold for 5 years, its present value is lower. Standard discounts range from 20-30%.

Legal and tax terms

K-1 (Schedule K-1, Form 1065)

Annual tax document showing your spouse's share of fund income, losses, and distributions. Arrives between February and October. Contains valuable information about carry allocation and fund performance. See our guide: What Are All These Documents?

Community Property

In California and other community property states, assets earned during marriage belong equally to both spouses. Carry earned during marriage is generally community property — even if only one spouse's name is on the fund documents.

LTCG (Long-Term Capital Gains)

Carry held more than a year is typically taxed as long-term capital gains (currently 20% federal) rather than ordinary income (up to 37%). This favorable tax treatment is one of the most debated features of carried interest in public policy.

LPA (Limited Partnership Agreement)

The master legal document governing the fund. Contains waterfall terms, hurdle rates, clawback provisions, and transfer restrictions. Understanding your fund's LPA is essential for accurate carry valuation.

ROFR (Right of First Refusal)

A provision giving the fund the right to buy back carry before it can be transferred to someone else. Important for estate planning and divorce proceedings — it may limit your ability to divide or transfer carry.

What to do with this glossary

You don't need to memorize every term. But you should be comfortable with the fundamentals: carry allocation, waterfall, hurdle rate, vesting, and K-1. These five concepts account for 80% of what you need to understand about your family's carry position.

When you're ready to move from vocabulary to valuation, try the CarryForward calculator. It translates these concepts into actual numbers for your situation.