Preferred return tier
Last updated
Quick Answer
The preferred return tier pays limited partners an agreed return on their contributed capital before the general partner participates in profits.1,2
What it is
Operational context
What good looks like
Why It Matters
The tier's size is set by the compounding convention and the date capital is treated as at risk, not by the rate everyone quotes, so two funds naming the same preferred return can owe very different amounts.1
Term Family
Related concepts
Related Questions
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 distribution waterfall mechanism?
A distribution waterfall is the ordered sequence of tiers that determines how a fund's proceeds are split between limited partners and the general partner.
Frequently Asked Questions
What is Preferred return tier in venture capital?
It sits immediately after return of capital in a conventional waterfall. The rate, the compounding convention and the date from which capital is treated as at risk are each separately negotiated, and each changes the size of the tier without changing the headline rate.
Why is Preferred return tier important for startups?
Understanding Preferred return tier 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(The preferred return tier pays limited partners an agreed return on their contributed capital before the general partner participates in profits.)primary · T1 · waterfall-models · structure
- 2.duanemorris-clawbacks — Private Equity Funds: Clawbacks and Investor GivebacksPrivate Equity Funds: Clawbacks and Investor GivebacksDuane Morris LLP(The preferred return tier pays limited partners an agreed return on their contributed capital before the general partner participates in profits.)secondary · T2 · waterfall-models · structure
Newsletter
CarryBeast Brief
Carry math, waterfall tiers, and incentive design. Every Tuesday.
CarryBeast Brief
The weekly brief on carry and fund economics
Weekly analysis of waterfall structures, promote splits, and incentive design across private funds. Every Tuesday, free.
Archstone
Run your fund like an institution.