waterfalls
Last updated
Quick Answer
A catch-up is the waterfall tier that lets the sponsor receive a larger share of proceeds after the preferred return until the negotiated profit split is restored.
A catch-up is a distribution mechanism that appears after investors receive their preferred return or hurdle. During the catch-up tier, the sponsor may receive most or all of the next dollars until the sponsor reaches the agreed share of total profits. Without catch-up, the sponsor may only receive its promote share on residual profits after the pref. With catch-up, the sponsor can economically catch back up to the intended split.
In Practice
Example: After investors receive capital back and an 8% preferred return, the next proceeds may go 100% to the sponsor until the sponsor has received 20% of total profits. After that point, the waterfall shifts to an 80/20 residual split.
Why It Matters
Catch-up matters because it can materially increase sponsor economics after the hurdle is cleared. Two waterfalls with the same pref and promote percentage can produce different outcomes depending on whether catch-up exists and how fast it operates.
VC Beast Take
Catch-up is where many simplified waterfall summaries become misleading. If the model does not show the catch-up tranche separately, the sponsor and LP may think they agreed to the same economics while expecting different cash outcomes.
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A catch-up is a distribution mechanism that appears after investors receive their preferred return or hurdle. During the catch-up tier, the sponsor may receive most or all of the next dollars until the sponsor reaches the agreed share of total profits.
Understanding Catch-Up is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Catch-Up falls under the waterfalls category in venture capital. This area covers concepts related to important concepts in venture capital.
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