Proceeds and Distributions
How to model proceeds, distributions, and carried interest waterfall in the venture fund models
Proceeds vs distributions
- Proceeds are the cash or other assets that a fund receives from an investment.
- Distributions are the cash or other assets that are paid out to investors in the fund.
How to model by fund type
- Standard closed-end venture fund — model exits (and writeoffs) from investments, using an assumption of holding period(s) from initial investment. For follow-ons, account for the total investment in the company at exit. More advanced portfolio construction uses multiple holding periods to represent different exit types (early, small, unicorn, long).
- Revenue-sharing funds — model recurring revenue share payments from companies, plus any proceeds from exits.
- Venture debt funds — model recurring principal and interest payments to pay off the debt, plus any proceeds from exits via warrant coverage.
- Crypto funds investing in tokens or token warrants — model investments into tokens/warrants and proceeds from token sales. The increased liquidity of tokens maps mechanically to the revenue-sharing or debt fund approach, with assumptions for amounts over time.
The role of a fund waterfall
The fund waterfall details how the proceeds to the fund are distributed to the investors and operators of the fund.
- Proceeds come into fund
- Minus recycling of proceeds (optional, dependent on LPA)
- Distributions from the fund paid to limited partners and general partners
Distributions break out by the return of capital invested by LPs and any additional distributions to LPs, minus carry to GPs.
European vs American waterfalls
- Total fund (European) — the fund must return all called capital to-date before GPs share in distributions via carried interest.
- Deal-by-deal (American) — the fund must return the cost basis of each investment (invested capital plus imputed fund fees) before GPs share in the distribution on that investment. Lets fund managers participate in distributions earlier than the European approach.
Clawbacks are structured so if later investments fail to return capital, the carried interest paid to GPs returns to the fund.
Per-deal carry and carry timing differ between European and American waterfalls, but the total carry is the same.
SPVs
Each SPV is a separate investment entity, and the participating LPs may vary, so an aggregation of SPVs has no clawback to include.
Fund waterfalls are covered in detail at Fund Waterfalls.