Preferred return (hurdle)

A minimum annual return investors are owed before the operator shares in the profits, commonly set near 8%.

It is the first meaningful tier of the waterfall: until investors have earned the preferred return and recovered their capital, the searcher's carry pays nothing, which points the operator at getting investors whole before taking a share.

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.