What is a waterfall structure?
Short answer: A waterfall structure sets the order in which cash proceeds are distributed to lenders, investors, founders, or fund participants.
Waterfalls are used in private equity, venture capital, real estate, credit, and M&A structures. They define who gets paid first, who takes the first loss, and when upside is shared.
Typical distribution order
- Senior debt: Senior lenders are usually repaid first, including principal, accrued interest, and agreed fees.
- Junior debt or preferred equity: Subordinated capital is paid after senior obligations, often with a fixed return or preferred return.
- Common equity: Founders, employees, sponsors, or ordinary shareholders receive value after senior claims are satisfied.
- Carry or promote: In fund and real estate structures, managers may receive performance economics once investors have received the agreed priority return.
Why it matters
The headline valuation is only part of the outcome. The waterfall determines how that value is allocated, so it should be modelled before agreeing a financing, sale, or investment structure.