A lot of the financial modeling I do around joint venture focuses on real estate and preferred returns, preferred equity, and IRR hurdles. However, one type of joint venture deal that is more common in other business sectors is the cumulative distribution hurdle approach.
The idea behind this is that as more and more cash is distributed to investors, they get less and less share of the available distributions. What is defined as 'more and more' is literally total distributed thresholds. In the joint venture model I build for this, you literally define manual total cash distribution thresholds, see the following:
People like this because it is really easy to understand (it is a bit complicated to build the logic so it works right, but that's where I come in). An LP simply knows, ok if I get over $x then my share of the available distributions is y% and so on for each hurdle.
I know the latest deal with Microsoft and OpenAI investors had something like a cap of 100x total cash returned on their initial investment, which you could setup in this type of joint venture structure, simply defining the threshold levels based on the initial investment.
Sometimes, to get a deal done in a new startup business, the investors are not super sophisticated and being able to clearly state how contributions and distributions work can make things go smoother. In the model above, you could easily just have a single hurdle and the cash splits are the same after that. You don't necessarily have to use every single tier.
Typically, what you would see in a real estate deal is that the LP would contribute 80-100% of the initial investment and then they may get 100% of the cash flow that is available until a certain IRR hurdle or preferred return is met. Then, eventually as their total return on investment reaches certain levels, the cash ends up getting split at a lower rate (maybe 70/30 in favor of the LP) or 50/50 or even 0/100). It all depends on the terms and the project at hand.
So the concept is similar, but this is just a little bit of a different way to define each hurdle.
You can explore all the types of joint venture templates I have built here.
Article found in Joint Venture.
