Cash Flow Waterfalls and Joint Ventures: High Level Overview

When starting a joint venture, it is important to consider the use of a cash flow waterfall. A cash
flow waterfall is a framework that outlines the order in which cash flows are distributed among the
different stakeholders in a project, i.e., a cash flow waterfall is a method of prioritizing how cash flows
are distributed or allocated in a structured manner. In a joint venture, the cash flow waterfall can help
to ensure that all parties are treated fairly and that there is a clear understanding of how profits will be

Some considerations when using a cash flow waterfall in a joint venture include: defining the
cashflow waterfall, identifying the sources of cash flows, allocating cash flows, accounting for
contingencies, and reviewing/revisiting the cash flow waterflow.

The first step is to define the cash flow waterfall by setting out the order in which cash flows will be
distributed. This will typically involve identifying the various stakeholders and their respective rights to
the cash flows. The next step is to identify the sources of cash flows, which may include revenue
generated from the joint venture's operations, financing, or the sale of assets.

Once the sources of cash flows have been identified, they must be allocated to the various
stakeholders in accordance with the cash flow waterfall. This may involve setting out specific
percentages or amounts that each stakeholder is entitled to receive. This doesn't have to be really complex. You may just say the GP/LP contribute x and y % of the equity needed and the GP/LP receive a and b% of the available cash flows (plain and simple), but if you have preferred equity, convertible debt, and/or preferred returns with multiple hurdles it can be hard to model.

It is important to account for contingencies in the cash flow waterfall, such as unforeseen expenses
or changes in market conditions. This may involve setting aside a reserve fund to cover these

The cash flow waterfall should be reviewed periodically to ensure that it is still appropriate and that
all stakeholders are being treated fairly. If necessary, it may need to be revised to reflect changes in the
joint venture's operations or market conditions.

Benefits of using a cash flow waterfall include: improved transparency, prioritization of payments,
risk management, flexibility, and better decision-making. A cash flow waterfall provides a framework for
decision-making by helping to identify which payments should be prioritized and which can be deferred.
This can help to make more informed decisions about cash management and financial planning.