# Hurdle Rate (Preferred Return)

## Quick Definition

The minimum return a fund must deliver to LPs before GPs can take their share of carried interest.

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## What is a Hurdle Rate?

The hurdle rate (also called preferred return) is the minimum annualized return a fund must deliver to its LPs before the GP can start collecting carried interest. The standard hurdle rate in venture capital is 8%.

It's a performance floor. GPs don't earn carry until LPs get their money back plus the hurdle return.

## Why the Hurdle Rate Exists

LPs need a reason to lock up capital in illiquid venture funds for 10+ years instead of parking it in public markets. The hurdle rate ensures GPs only share in profits after delivering returns that justify the risk and illiquidity.

## How the Hurdle Rate Works

Two common structures:

**Hard hurdle**: GPs only earn carry on returns above the hurdle. If the hurdle is 8% and the fund returns 12%, carry applies only to the 4% excess.

**Soft hurdle with catch-up**: Once the hurdle is cleared, GPs receive a "catch-up" on all profits (not just the excess) until they've received their full carry percentage. Most VC funds use this structure.

### Formula

- Hurdle Amount = Committed Capital x Hurdle Rate x Years
- GP Carry Threshold = Committed Capital + Hurdle Amount
- Carry begins after fund distributions exceed GP Carry Threshold

### Example:

- $100M fund, 8% hurdle, 5-year hold
- Hurdle amount: $100M x 8% x 5 = $40M
- LPs must receive $140M before GP earns carry
- Fund returns $200M total
- GP carry (20%): applied to $60M above threshold = $12M (hard hurdle)
- Or with catch-up: 20% of full $100M profit = $20M (soft hurdle)

### Example

$50M fund with 8% annual hurdle rate. After 4 years, the fund has $90M in realized returns.

- Capital returned: $50M (1x)
- Hurdle: $50M x 8% x 4 = $16M
- LP threshold: $66M
- Profits above threshold: $24M
- GP carry (20% with catch-up): $8M (20% of total $40M profit)

Without the hurdle, GP would earn carry on the full $40M profit from dollar one. The hurdle ensures LPs get a baseline return first.