Fund Structure
Last updated
Quick Answer
The stage in fund distributions where GPs begin receiving carried interest after LPs have received back their full invested capital plus preferred return.
In the standard waterfall structure: LPs first receive return of all invested capital, then LPs receive their preferred return (hurdle rate, typically 8%). Then comes the 'catch-up' — the GP receives 100% of distributions (or a high percentage) until they have received their full carry (typically 20%) on all profits earned so far. After catch-up, distributions split at the carry rate going forward.
The catch-up provision ensures GPs are fully compensated for their carry entitlement before profit-sharing reverts to the standard split.
In Practice
If a fund has $100M in profits above the hurdle, the GP's catch-up is $25M (getting them to 20% carry on $125M total above-hurdle distributions). Until that $25M catch-up is paid, LPs receive nothing further — all distributions go to the GP to catch them up.
Why It Matters
Understanding catch-up provisions matters when evaluating fund economics as an LP. In a fund with significant catch-up provisions, LPs receive no distributions for an extended period after the hurdle is cleared — the GP catches up first. This affects LP cash flow planning significantly.
VC Beast Take
Most LPs don't realize how dramatically catch-up provisions can accelerate GP wealth accumulation once distributions start flowing. We've seen GPs go from zero carry to millions in a single quarter when a fund hits its DPI catch-up threshold. The math gets especially interesting in today's environment where funds are holding winners longer—when those delayed exits finally happen, the catch-up can create massive carry windfalls that compress what would have been years of gradual distributions into intense bursts.
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In the standard waterfall structure: LPs first receive return of all invested capital, then LPs receive their preferred return (hurdle rate, typically 8%).
Understanding DPI Catch-Up is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
DPI Catch-Up falls under the fund-structure category in venture capital. This area covers concepts related to how venture capital funds are organized, managed, and governed.
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