Episode 26: Waterfalls

Tokens of Wisdom

Today we’re keeping the performance-based comp discussion going and looking at “Carried Interest” or “Carry” for short: performance-based compensation for closed-end funds – VC, PE, etc. One big structural difference from open-ended funds is that the GP typically doesn’t get performance-based comp on paper (i.e., unrealized) gains. For a refresher on closed-end vs open-end funds, listen to Episode 9.

Instead, proceeds from monetization events get distributed among the partners in proportions dictated by a complicated cascading mechanism in the fund’s offering documents. That cascading mechanism is called: The Waterfall!

Key Points From This Episode:

• Background on the Waterfall concept and an elegant analogy to help you visualize it.
• Examples of the waterfall in action – from simple to more complex.
• Descriptions of “preferred return” and “GP catchup” provisions.
• Ways to make the Waterfall even more complex.
• American vs European waterfalls.

Disclaimer:

This show is for informational purposes only. Nothing presented here constitutes legal advice. Tokens of Wisdom is produced by Dave Rothschild, partner at Cole-Frieman & Mallon LLP headquartered in San Francisco, California. For more information, visit https://colefrieman.com/

Links Mentioned in Today’s Episode:

Dave Rothschild - https://www.linkedin.com/in/davidcrothschild/

Cole-Frieman & Mallon LLP - https://colefrieman.com/

Music by Joe Ginsberg - https://www.instagram.com/thejoeginsberg

For any questions or comments, email: [e-mail]