Hurdle Rate

A discount rate that incorporates a premium reflecting the specific risks associated with a particular asset, cash flow stream, or investment. In intangible asset valuations, risk-adjusted discount rates are typically higher than the weighted average cost of capital to reflect the greater uncertainty inherent in intangible asset cash flows compared to tangible assets.

The share of investment profits that a fund manager (general partner) receives as performance-based compensation, typically 20% of profits above a hurdle rate. Carry is the primary financial incentive for venture capital and private equity fund managers.

The proportion of tasks, processes, or workflows within an organisation that are performed by automated systems rather than human labour. Automation rate is a key productivity metric, with higher rates typically correlating to improved operational efficiency, reduced error rates, and scalability — though the transition period often involves significant restructuring costs.

The rate at which a company integrates and derives value from acquired assets, particularly intangible assets such as technology, talent, and customer relationships following a merger or acquisition. A high absorption rate indicates effective post-deal value capture and is a key indicator of M&A success.

A clause in a private equity or venture capital fund agreement that adjusts the distribution of carried interest at the end of the fund's life to ensure the general partner has not received more carry than entitled based on overall fund performance. Lookback provisions protect limited partners against early distributions that overstate returns.

An annual fee charged by a fund manager (general partner) to cover operational costs, typically calculated as 1.5% to 2.5% of committed capital during the investment period and assets under management thereafter. Management fees are separate from carried interest.

The process by which an employee or founder earns full ownership of equity over time, typically over a 3-4 year schedule. Vesting aligns long-term incentives with commitment and usually includes a cliff period (often 12 months) before any equity vests.

The structured sequence in which investment returns are distributed among fund stakeholders, typically flowing from return of capital to limited partners, then preferred return, then a catch-up allocation to the general partner, and finally a profit split based on carried interest terms. The waterfall structure is central to fund economics and LP/GP alignment.

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What are realistic burn rates and how do you avoid misrepresenting runway?

Founders often calculate optimistic runway (assuming perfect cost control) when actual burn is higher. Honest runway = (cash on hand) / (conservative monthly burn + 3-month buffer).

What is burn rate and runway?

Burn rate is monthly cash spending; runway is current cash divided by monthly burn rate, indicating how many months until capital runs out.

What are liquidation preferences and how do they affect founders?

Liquidation preferences give investors priority over common shareholders in an exit, ensuring they recover their investment first — participating preferences can significantly reduce founder payouts in moderate exit scenarios.