Why LP Sophistication Should Dictate Your Waterfall Structure

Waterfall structures are often treated as mechanical exercises, but in practice they communicate how a sponsor thinks about alignment, fairness, and risk. The structure selected sends an immediate signal to LPs about sophistication, transparency, and credibility.

A common mistake is applying the same waterfall across every raise, regardless of the LP base or capital profile. In reality, LP sophistication, return expectations, and governance standards should dictate waterfall complexity, not GP preference alone.

Misaligned structures introduce friction early in the diligence process and can delay commitments before returns are even discussed. Institutional investors expect waterfalls to reflect market norms and align incentives appropriately across the capital stack.

Getting this right is foundational to investor confidence and effective capital formation. Sponsors that approach waterfall design with discipline and context are better positioned to move efficiently through diligence and execution.

If your team needs support building institutional-grade waterfalls, validating your existing models, or structuring a capital raise, feel free to reach out to discuss how we can support your organization.