Catch-up

Definition

The tier where the operator collects its share after the preferred.

Why It Matters

It is the clause that makes a preferred return look more generous than it is. Once investors have received their preference, the catch-up sends most or all of the next dollars to the operator until the split reaches the agreed ratio, and only after that does money divide the way the headline says. Whether it is full or partial decides how much of an ordinary exit reaches each side, and it is the tier most often skimmed in a term sheet because it sits between two numbers that are easier to read.

In numbers: With an 8% preferred and a full catch-up to 20%, the operator receives nothing until investors clear the preference, then takes 100% of the next dollars until it holds 20% of the profit.