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Definition of Waterfall

A waterfall describes the process and flow of sharing financial returns, e.g., in an LLC agreement or a limited partnership agreement. 

For example, in a venture capital fund, the waterfall might provide for priority distributions to the limited partners in the fund until their capital contributions are returned, and then the balance of funds distributed 20% to the general partner as carried interest and 80% to the limited partners in proportion to their respective aggregate capital contributions.