Distribution waterfall

Definition

The order a deal's cash is divided, each tier paid before the next.

Why It Matters

In an investor-backed search it decides how much of the upside the searcher keeps: return of capital and a preferred return come first, then carried interest steps up as investor returns clear agreed hurdles. What comes off the top at a sale is the liquidation preference, and whether it participates decides if investors are paid twice out of the same proceeds. Model it before agreeing to anything, because the same headline carry pays very differently depending on where the tiers sit and whether the preferred return compounds. A modest-looking split with an early first hurdle can beat a generous one that starts too high to reach.

In numbers: A common split returns investor capital first, then a preferred return around 8%, then an 80/20 split to investors above it.