Hypothetical-liquidation test
Last updated
Quick Answer
A hypothetical liquidation test computes what each partner would receive if the fund's remaining assets were sold at their current value and the waterfall run to completion.1,2
What it is
It is the standard method for testing a carry entitlement mid-life: rather than waiting for actual realizations, the fund models an immediate wind-up at current valuations and reads the resulting allocation. It is what makes interim clawback and escrow release tests computable, and it inherits whatever uncertainty sits in the valuations.1,2
Operational context
What good looks like
Why It Matters
It is what makes interim clawback testing and escrow release computable at all, and it inherits every uncertainty sitting in the manager's own valuations of what the fund still holds.1
Term Family
Related concepts
Frequently Asked Questions
What is Hypothetical-liquidation test in venture capital?
It is the standard method for testing a carry entitlement mid-life: rather than waiting for actual realizations, the fund models an immediate wind-up at current valuations and reads the resulting allocation.
Why is Hypothetical-liquidation test important for startups?
Understanding Hypothetical-liquidation test is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Sources & References
- 1.duanemorris-clawbacks — Private Equity Funds: Clawbacks and Investor GivebacksPrivate Equity Funds: Clawbacks and Investor GivebacksDuane Morris LLP(A hypothetical liquidation test computes what each partner would receive if the fund's remaining assets were sold at their current value and the waterfall run to completion.)secondary · T2 · vesting-clawback · formula
- 2.ilpa-fund-terms-2021 — Industry Intelligence Report — "What's Market in Fund Terms?" (2021)Industry Intelligence Report — "What's Market in Fund Terms?" (2021)ILPA(A hypothetical liquidation test computes what each partner would receive if the fund's remaining assets were sold at their current value and the waterfall run to completion.)primary · T1 · vesting-clawback · formula
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