We present detailed theoretical models for investigating the optical, electrical, and thermal characteristics of gain-guided vertical-cavity lasers. A two-dimensional description of current flow in the proton-implanted region is achieved. Heterojunctions are taken into account for the first time, and their influence on current spreading is demonstrated. Thorough finite element calculations of the temperature profile in the whole device indicate the formation of a thermally induced waveguide. The temperature dependence of threshold current is evaluated, and it is shown that different mode positions greatly influence the output characteristics of the laser. We apply the developed models to analyze the behavior of our three-terminal vertical-cavity lasers. Good agreement is obtained between experimental and theoretical results. Using optimized design, we have achieved record low-threshold currents of 650 muA.