---
title: "What Is Waterfall?"
term: "Waterfall"
description: "In venture and private equity, a waterfall is the ordered distribution of cash — from exits, dividends, or fund distributions — specifying who gets paid how much and in what sequence."
date: 2026-07-25T00:00:00.000Z
updated: 2026-07-25T00:00:00.000Z
topics: ["fund-economics", "deal-terms"]
source: https://venturecapitaltracker.com/glossary/waterfall
---

# What Is Waterfall?

> In venture and private equity, a waterfall is the ordered distribution of cash — from exits, dividends, or fund distributions — specifying who gets paid how much and in what sequence.

**A waterfall** is the step-by-step rule for splitting cash among stakeholders — whether distributing fund proceeds to LPs and GPs or allocating sale proceeds on a cap table.

### How it works

Two main contexts:

**Fund waterfall (LP/GP):**
1. Return LP contributed capital (return of capital)
2. Pay LP preferred return (hurdle, if any)
3. Split profits — typically 80% LP / 20% GP carry, with [catch-up](/glossary/catch-up) mechanics
4. Clawback provisions may apply if early distributions overpaid GP

**Exit waterfall (company):**
1. Pay transaction fees and debt
2. Satisfy [liquidation preferences](/glossary/liquidation-preference) by series
3. Participating preferred may take additional share
4. Remaining to common and option holders

Documents define American vs European carry waterfalls, deal-by-deal vs whole-fund, and escrow timing. Spreadsheet models test multiple exit prices — essential before board votes on sale.

### Why it matters

- **Founders:** Your personal outcome depends on exit waterfall, not headline valuation. Model preferences and participation at $50M, $100M, $200M exit.
- **LPs / GPs:** Waterfall language in the LPA sets carry timing and clawback — core economic negotiation in fund formation.

### Common mistake

Using last-round post-money as proxy for common proceeds. Waterfall math with stacked preferences often zeros common at moderate exit values.

### Related ideas

See also [liquidation waterfall](/glossary/liquidation-waterfall), [waterfall chart](/glossary/waterfall-chart), and [catch-up](/glossary/catch-up).

## FAQ

### What is a waterfall in simple terms?

A waterfall is the payout order — who stands first in line when money comes in. In funds, LPs typically get capital back before GP carry; in exits, debt and preferred get paid before common.

### Why does a waterfall matter?

For LPs, fund waterfall terms define how much profit GPs keep. For founders, exit waterfalls determine whether common shareholders receive anything after preferences and debt.


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Source: https://venturecapitaltracker.com/glossary/waterfall