18 Comments
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Sam's avatar

Hey SK one quick question on the example here:

For step 3, the GP catchup, I thought GP are catching up to 20% of the profits that already been distributed up to that point, rather than 20% of the profit pool? Basically LP already received 7.92M, then 7.92M / (80%/20%) = 1.98M rather than then 8.416M shown in the example.

I might be wrong but GP in this example are getting c. 15M of the profit pool (30%) which is significant higher than the 20% assumption, so just want to point out my confusion here

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Shahrukh Khan's avatar

Thanks Sam - you are correct, and that is my mistake. I am reminded of my grade school days and the silly math mistakes I made. The GP in my (incorrect) calculation is receiving far more than 20% of total profits. I will note this point for future reference!

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Sam's avatar

As someone in the industry, trust me i wish your math is correct:)

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A.MurvAI's avatar

Hi,

I think the math is still incorrect and that the catchup should go until the distributed profit is 80-20% between the LP and GP. So it should not be 20% of the 80%. It should actually be 25% of the 80% so after the catchup phase they have 80-20 ratio which they will keep afterwards as well until the whole profit is distributed.

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Shahrukh Khan's avatar

Oh darn - honestly, I may have to go a fund administrator for this. We lawyers are not used to this kind of math. Appreciate you making the clarification. I will note it at the top that this math is slightly off.

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May 13
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A.MurvAI's avatar

I guess the above about Taylor is a scam?

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docpatti's avatar

Thank you. Very comprehensible explanation.

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Shahrukh Khan's avatar

Of course - thanks for reading!

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Max Bessler's avatar

Very well written! Thank you for clarifying a concept that everyone assumes everyone else knows about.

I thought the psychology comparing the VC and PE approaches was particularly interesting too. I’d read a piece about how the GP/LP relationship differs between the two types of shops.

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Shahrukh Khan's avatar

Thanks Max - will dig into GP/LP dynamics in future pieces regarding different dimensions of the fundraising process.

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Max Bessler's avatar

I think your readership here, given the demography of this platform, is going to slant young/early professional: so I know when I read your stuff I am constantly thinking about my own psychology and who I’d want to work with and what on over the longer term. That psychology totally affects firm culture and then individual job enjoyment.

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Shahrukh Khan's avatar

Good point - I suppose a somewhat good analogy is being IPO ready. Companies that want to go public start preparing years in advance, and that's what makes for a strong market debut.

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Jared Brown's avatar

Been waiting for it, thanks for delivering!

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Shahrukh Khan's avatar

Of course - thank you for reading!

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Institutional Capital Compass's avatar

Love how clearly this is explained. Admittedly, it took me much longer than it should have early in my career to get a good grasp on the waterfall!

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Shahrukh Khan's avatar

Thanks - could say the same for myself!

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James Giammona's avatar

Yes! This I why I subscribe! Thank you for including the psychology of interest at the beginning too.

Can’t wait to hear about the tax strategies!

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Shahrukh Khan's avatar

Thanks James, as always grateful for your eyes and ears!

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