Waterfall Distribution Calculator

A waterfall distribution is the sequence of rules that determine how fund profits are split between the GP (general partner/fund manager) and LPs (limited partners/investors). The term 'waterfall' describes how money flows through tiers: first, LPs get their capital back (return of capital), then they receive their preferred return (hurdle rate), then the GP may receive a catch-up, and finally remaining profits are split according to the carry percentage (typically 80/20). Each tier must be fully satisfied before money flows to the next.

In a European (whole-fund) waterfall, the GP cannot collect carry until all capital across the entire fund has been returned to LPs plus their preferred return. This is LP-friendly because it ensures LPs are made whole before the GP profits. In an American (deal-by-deal) waterfall, the GP can collect carry on each profitable exit without waiting for the full fund to return capital. This is GP-friendly but creates clawback risk — if later deals lose money, the GP may have to return carry already collected. Most institutional VC funds use European waterfalls.

A GP catch-up is a waterfall tier that allows the GP to 'catch up' to their carried interest percentage after LPs have received their preferred return. In a 100% catch-up with 20% carry, after LPs receive their hurdle return, 100% of the next dollars go to the GP until the GP has received 20% of all profits distributed so far. After the catch-up is complete, remaining profits are split 80/20. Without a catch-up, the GP only receives their carry percentage on profits above the hurdle, which can significantly reduce GP economics.

A preferred return, also called a hurdle rate, is the minimum annual return LPs must receive before the GP can earn carried interest. The industry standard is 8% per year, compounded. On a $50M fund over 10 years, this means LPs must receive approximately $108M (their $50M back plus $58M in preferred returns) before the GP earns any carry. The hurdle protects LPs from paying carry on mediocre returns that barely outperform safer investments like bonds or public equities.