distribution waterfall

Definition

The specific order in which investment proceeds are distributed among LPs and GPs based on the fund's legal agreements. It's the pecking order that determines who eats first at the exit feast.

Example Usage

According to our distribution waterfall, LPs get 100% of returns until they've received their capital back plus the hurdle rate.

Origin

Visual metaphor for cascading priority of payments, used in structured finance since the 1980s.

Fun Fact

The two main waterfall structures are 'deal-by-deal' (GPs get carry on each successful exit) and 'whole fund' (GPs only get carry after the entire fund returns capital), with most modern VC funds using the latter.

Source: Private equity and venture capital fund structures

Related Terms

Intermediate

Cliff

The initial period before any stock options vest, typically one year, during which employees own exactly nothing and question all their life choices. It's called a cliff because if you leave before it, you fall off the edge of ownership into the abyss of having worked for below-market salary for nothing.

🚀 Startup / VC

Beginner

passion tax

The lower compensation that employees accept to work at mission-driven startups or in attractive industries like gaming or entertainment. Employers exploit your dreams to underpay you.

🚀 Startup / VC

Advanced

non-participating preferred

Preferred stock that must choose between taking its liquidation preference OR converting to common and sharing the remaining proceeds—can't do both. The slightly-less-greedy version of investor terms.

🚀 Startup / VC

Advanced

carry

Short for 'carried interest'—the percentage of fund profits that goes to VCs as performance compensation, typically 20%. It's why venture capitalists drive Teslas even when most of their portfolio is worthless.

🚀 Startup / VC

Advanced

trough of sorrow

The extended period after initial startup excitement fades when growth stalls and reality sets in, but you're too committed to quit. It's the emotional valley between 'we're going to change the world' and 'maybe we should get real jobs.'

🚀 Startup / VC

Advanced

reserve ratio

The percentage of a VC fund set aside for follow-on investments in existing portfolio companies. The math that determines whether your investor can actually support you in the next round or just awkwardly watch.

🚀 Startup / VC

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