IRR is the metric every term sheet cites and the metric every founder misreads. IRR is a financial metric used to evaluate the profitability of an investment – in effect, the expected annual return, calculated from the amount invested, the cash flows an investment is expected to generate, and the timing of those inflows and outflows. The higher the IRR, the more attractive the investment, but the number is only ever a projection, never a promise – a distinction that matters more than most transaction documents make clear.

IRR Across the Table

• For founders, projected IRR typically appears in the term sheet and SSHA as a benchmark for investors' expected returns – it is a reference figure, not a guarantee of capital return, however it is phrased in the deck. You can move it in your favour by optimising pricing, streamlining costs, elevating product quality, and diversifying revenue.
• For VCs, IRR is central to prioritising a portfolio and allocating resources; because it is time-sensitive, earlier, and larger exits produce higher IRRs, which is exactly why drag-along and tag-along rights matter so much more than founders initially assume. GPs typically target an IRR of at least 30% for seed-stage investments and around 20% for later-stage, lower-risk deals.
• For LPs, net IRR – after fees and expenses – is the key performance indicator across fund allocations, and is linked to carried interest, since many GPs only earn carry once they clear an agreed hurdle rate tied to IRR.

The part worth internalising: IRR rewards speed as much as it rewards size. A VC pushing for an earlier exit is not necessarily wrong about your company's ceiling – they may simply be optimising a metric you have never been shown the mechanics of. Understanding that upfront changes how you read every conversation about timing.