Limited partners
What should an LP clarify about the distribution waterfall of a pre-seed venture fund?
a pre-seed venture fund: A distribution waterfall defines how proceeds are allocated under the specific agreement.
A distribution waterfall defines how proceeds are allocated under the specific agreement. Carry percentages are incomplete without the base, return-of-capital rules, timing, deductions, and any other conditions. Deal-level and fund-level arrangements may behave differently.
Start with the decision
Ask a qualified adviser to map the governing provisions to a worked example. Label every simplifying assumption. Include a low or zero-profit case, and ask how prior distributions, losses, escrow, or clawback provisions affect actual payments.
The illustrative scenario
This is an educational workbook. The company or fund and all numerical inputs below are fictional. They are not ADIN results, customer claims, market benchmarks, or a forecast.
The fictional fund plans small initial investments before companies have repeatable revenue. It expects to reserve capital for selected later rounds. The LP is reviewing whether check sizes, ownership assumptions, and support work fit the fund budget.
Early paper marks can move before meaningful liquidity. Separate investment selection, subsequent financing, ownership dilution, and cash distributions when discussing progress.
A deliberately simplified one-period waterfall
Assume a fictional one-period arrangement with $21,600,000.00 of proceeds. For this exercise only, return $12,000,000.00 of capital, deduct $240,000.00 of expenses, then apply an invented 20% carry share to the remaining $9,360,000.00. The carry calculation is $1,872,000.00. Proceeds after the modeled expenses and carry are $19,488,000.00.
The 1.8-times proceeds assumption is not a return target or forecast, and the 20% rate is not a statement of any particular fund's terms. This simplified model has no preferred return, catch-up, recycling, prior distributions, escrow, clawback, or other provisions. A real waterfall can require substantially different calculations and qualified document review.
Compare the proposed number of companies with investable capital after the model's costs and reserves. Treat a target ownership percentage as an assumption until terms support it. Replace the proceeds with a case that has no eligible profit and observe that the modeled carry is zero. Keep the possibility of losses and delayed or absent distributions visible. The lesson is to define the base and sequence before comparing percentages, not to infer an expected payment from a promising portfolio.
| Item | Illustration |
|---|---|
| Fictional proceeds available | $21,600,000.00 |
| Assumed capital returned first | $12,000,000.00 |
| Assumed expense deduction | $240,000.00 |
| Remaining eligible profit in this model | $9,360,000.00 |
| Invented 20% share of that profit | $1,872,000.00 |
| Proceeds after expenses and carry | $19,488,000.00 |
| Carry when eligible profit is zero | $0.00 |
Use this worksheet
Answer the questions with a source, date, owner, and next action. Mark an unknown as unknown. Use public or permissioned information and involve a qualified specialist when a question requires expertise beyond the team’s competence.
- What proceeds are eligible?
- What is returned first?
- What deductions apply?
- When can carry be paid?
- What happens if later results change?
Questions specific to this scenario
- What is funded by the first check?
- Which follow-ons qualify?
- How are unsuccessful investments represented?
Request the portfolio model, reserve policy, ownership assumptions, dated company evidence, and a reporting sample that distinguishes marks from cash. Include companies that failed or did not raise again.
A concrete next test
Rebuild the initial-check and reserve model with a smaller final close. Ask which portfolio assumptions change and what evidence supports the ownership target. Compare early company milestones with paper marks so the LP can distinguish learning progress from cash realization.
Interpret the result
An illustration teaches the question structure and arithmetic under stated assumptions. It does not describe every fund, predict a payout, or interpret the legal effect of a real waterfall.
Compare the proposed number of companies with investable capital after the model's costs and reserves. Treat a target ownership percentage as an assumption until terms support it.
Sources and method
These primary resources provide background for the concepts. The fictional scenario, calculations, and worksheet are ADIN educational examples; the sources do not report or validate those invented results. Reviewed October 11, 2026.