Preferred return (hurdle)

Definition

The return investors are owed before the operator shares profits.

Why It Matters

It is the first meaningful tier of the waterfall: until investors have earned it and recovered their capital, the searcher's carry pays nothing at all, which points the operator squarely at getting investors whole before taking a share. Two details decide how hard that is. Whether it compounds annually or accrues simply changes the hurdle materially over five years, and whether unpaid amounts carry forward decides what a slow year costs you later.

In numbers: On a $2,000,000 equity raise with an 8% preferred, investors are owed $160,000 a year before the searcher's carry pays anything; hold the business five years and roughly $800,000 of preferred plus the $2,000,000 of capital comes back before the split reaches the operator.