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Residual / final split tier

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Quick Answer

The residual tier divides all remaining profit in the agreed final ratio, commonly 80% to limited partners and 20% to the general partner.1,2

What it is

This is the 'thereafter' tier: whatever remains once return of capital, preferred return and any catch-up have been satisfied is split in the agreed proportion. It is the tier the familiar 80/20 shorthand actually refers to, and it describes the final split only.1,2

Operational context

What good looks like

Why It Matters

The familiar 80/20 shorthand describes this tier alone, so reading it as a description of the whole waterfall overstates what limited partners keep and understates how much the earlier tiers decide.1

Common mistakes

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.

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Frequently Asked Questions

What is Residual / final split tier in venture capital?

This is the 'thereafter' tier: whatever remains once return of capital, preferred return and any catch-up have been satisfied is split in the agreed proportion. It is the tier the familiar 80/20 shorthand actually refers to, and it describes the final split only.

Why is Residual / final split tier important for startups?

Understanding Residual / final split 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. 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 residual tier divides all remaining profit in the agreed final ratio, commonly 80% to limited partners and 20% to the general partner.)primary · T1 · waterfall-models · structure
  2. 2.duanemorris-clawbacks — Private Equity Funds: Clawbacks and Investor GivebacksPrivate Equity Funds: Clawbacks and Investor GivebacksDuane Morris LLP(The residual tier divides all remaining profit in the agreed final ratio, commonly 80% to limited partners and 20% to the general partner.)secondary · T2 · waterfall-models · structure

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