Distribution waterfall
Last updated
Quick Answer
A distribution waterfall is the ordered sequence of tiers determining how a fund's proceeds are divided between limited partners and the general partner.1,2
What it is
Proceeds flow through the tiers in a fixed order, and each tier must be satisfied before the next receives anything. The conventional sequence is return of contributed capital, then preferred return, then a general partner catch-up, then the residual split. The order is the mechanism: resequencing the tiers changes the payout without changing any percentage.1,2
Operational context
What good looks like
Why It Matters
Most waterfall modeling errors are ordering errors rather than arithmetic ones. The tiers are where a fund's economics are settled, and reading them in sequence is the only way to see who is paid when.1
Term Family
Related Questions
What is meant by hurdle rate?
In a fund waterfall the hurdle rate is the annual return limited partners must receive on their contributed capital before the general partner participates in profits.
What is the 80 20 rule in private equity?
"80/20" refers to the residual tier of a distribution waterfall, where profits remaining after the earlier tiers are split 80% to limited partners and 20% to the general partner as carried interest.
What is the concept of clawback?
The concept is that interim payments are provisional until the final result is known.
What is the correct order of distribution in a typical distribution waterfall?
The conventional order is return of capital, then preferred return, then GP catch-up, then the residual split.
Frequently Asked Questions
What is Distribution waterfall in venture capital?
Proceeds flow through the tiers in a fixed order, and each tier must be satisfied before the next receives anything. The conventional sequence is return of contributed capital, then preferred return, then a general partner catch-up, then the residual split.
Why is Distribution waterfall important for startups?
Understanding Distribution waterfall is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Sources & References
- 1.ilpa-model-lpa-wof-ts — ILPA Model LPA Term Sheet — Whole-of-Fund Waterfall Version (July 2020)ILPA Model LPA Term Sheet — Whole-of-Fund Waterfall Version (July 2020)ILPA(A distribution waterfall is the ordered sequence of tiers determining how a fund's proceeds are divided between limited partners and the general partner.)primary · T1 · waterfall-models · structure
- 2.ilpa-model-lpa-wof — ILPA Model Limited Partnership Agreement — Whole-of-Fund Waterfall (July 2020)ILPA Model Limited Partnership Agreement — Whole-of-Fund Waterfall (July 2020)ILPA(A distribution waterfall is the ordered sequence of tiers determining how a fund's proceeds are divided between limited partners and the general partner.)primary · T1 · waterfall-models · structure
- 3.duanemorris-clawbacks — Private Equity Funds: Clawbacks and Investor GivebacksPrivate Equity Funds: Clawbacks and Investor GivebacksDuane Morris LLP(A distribution waterfall is the ordered sequence of tiers determining how a fund's proceeds are divided between limited partners and the general partner.)secondary · T2 · waterfall-models · structure
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