To answer this more generally, the concept of "Two and Twenty" is really the framework that ends up being adopted by most businesses, management teams, private equity, venture capital, etc.
It works because it aligns interests between management and shareholders.
Here's how it might work:
Four individuals pool money to purchase a $1M property. Each contributes $250,000. Each owns 25% of the $1M property (let's assume no debt for this example).
One individual is named as the General Partner. This General Partner, in addition to their 25% equity stake, gets paid 2% of the assets under management per year ($20,000), and receives 20% of the PROFIT on the deal.
If $1M is invested, and $2M is returned, then the proceeds would look like this:
- The original $1M is returned to shareholders ($250,000 each)
- 20% of the $1M in profit ($200,000) goes to the General Partner
The remaining profit ($800,000) is distributed to shareholders ($200,000 each).
The General Partner can also be a shareholder, and if it was one of the four individuals, in this case would earn $200,000 on their $250,000 invested capital, plus $20,000 per year for managing the investment, plus 20% of the profit as an incentive for managing the asset.
"Two and Twenty" does not literaly have to be the split, and there are many nuances/tweaks to this structure that are commonly applied (such as preferred returns). But, the essence of this structure is a powerful and very common way to incentivize management and align their interests with shareholders. If the concept of "Two and Twenty" is new to you, you'd be wise to dive down the rabbit hole of this concept and hire legal counsel before setting up a structure with this kind of setup in place.