A hurdle is a minimum performance level that must be achieved before a party participates in upside — whether carry for a GP, payouts for growth shareholders, or bonuses for executives.

How it works

In fund economics, the hurdle often refers to the preferred return LPs must receive before the GP earns carried interest on profits. If the hurdle is 8%, LPs get their capital back plus 8% annual return before carry splits kick in on remaining gains. In employee equity, growth shares use a valuation hurdle: no value accrues until the company exceeds a set price. Earnouts in M&A set revenue or EBITDA hurdles for deferred payments. Hurdles can be hard — no payout below the line — or soft, with partial participation. The specific definition lives in legal documents; “hurdle” in conversation may mean different things depending on context.

Why it matters

• Founders: Understand hurdles in your equity grants and any earnout if you sell — they determine when value actually vests or pays out.
• Investors / LPs: Hurdle structure directly affects GP incentive to prioritize absolute returns over fund size. European vs American waterfall mechanics change when hurdles apply.

Common mistake

Using “hurdle” interchangeably with “hurdle rate” without checking the document. One may refer to a return threshold; the other to an interest rate benchmark in carry calculations.

Related ideas

Hurdle rate, preferred return, carried interest, and growth shares all use hurdle logic.