A waterfall allocates distributions between investors and the sponsor, and small drafting choices change the outcome substantially.

Return of capital first. Contributions returned before any profit allocation. Whether that means contributions for the realized investment only, or all contributions including fees and expenses, is the first divergence.

Preferred return. A hurdle rate accruing on unreturned capital, compounded at a stated frequency.

Catch-up. After the preferred return, the sponsor receives a disproportionate share until it has received its carry percentage of total profit. Whether the catch-up is full or partial is negotiated.

Carry split thereafter, commonly twenty percent to the sponsor, sometimes with tiers increasing at higher return multiples.

Deal-by-deal versus whole fund. Deal-by-deal pays carry on each realization, subject to a clawback if the fund underperforms overall. Whole fund pays carry only after all capital and the preferred return have been returned. The difference is timing and credit risk on the clawback.

Clawback. An obligation to return excess carry at the end, ideally backed by escrow, individual guarantees from the principals, and a computation net of taxes.

Modeling the waterfall on realistic scenarios before signing is the only way to understand it.