waterfalls
When should waterfall terms be reviewed by counsel before distributions?
Counsel should review when terms are ambiguous, side letters affect payments, reserves are discretionary, clawback risk exists, or material carry will be paid.
Legal review is most useful before money moves, when ambiguity can still be resolved through process and documentation. For sponsors, LP finance teams, administrators, and counsel reviewing distribution economics, the practical answer is to treat the question as part of distribution modeling, return thresholds, preferred return, catch-up, promote, reserves, true-up, and clawback review, not as a one-off definition. The record should show the governing agreement, proceeds schedule, capital accounts, waterfall model, reserve analysis, distribution notice, and approval record so an investor, lender, counsel, administrator, or operating lead can reconstruct the decision later. Ask counsel to review the distribution sequence, defined terms, approval rights, notice requirements, side letters, and any discretionary reserve decision. The common failure mode is treating the model as the legal answer and discovering after payment that the documents required a different allocation or notice process.
Related glossary terms
Related questions
What should be checked before running a distribution waterfall?
The team should check proceeds, capital accounts, return thresholds, preferred return, catch-up terms, reserves, fees, expenses, and document language.
How should sponsors explain a preferred return in investor materials?
They should explain the rate, compounding method, accrual period, payment priority, catch-up interaction, and whether unpaid amounts carry forward.
What is the difference between a catch-up and a promote split?
A catch-up reallocates distributions after the preferred return so the sponsor reaches an agreed share, while the promote split governs residual upside after that tier.