Overview · What & why
A decision, before a calculation.
A promote allocates a larger share of qualifying profit to a sponsor after specified investor priorities are met. Hurdles can be expressed as a preferred return, an equity multiple or an IRR. These are different tests. A spreadsheet cannot infer the intended economics from the word “waterfall”; it needs explicit rules.
A concrete example
With $1M capital, $80K preference and $420K residual split 80/20, the investor receives $1.416M and sponsor $84K. A different sponsor share changes allocation but not the $1.5M total cash available.
What to remember
Write the agreement logic in words before implementing the arithmetic.
Before using this in a project: Tier order, sharing ratios, catch-up terms, hurdle definitions and treatment of interim events.