What's the difference between a hard hurdle and a soft hurdle?
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Both set a return investors get before the manager shares in profits. With a soft hurdle, once the fund clears it, the manager's share applies to the whole gain; with a hard hurdle, only to the gain above it. If $100,000 earns $20,000 with a 5% hurdle, a 20% share is $4,000 under a soft hurdle and $3,000 under a hard one.
Everything here is for educational purposes only and is not legal, tax or investment advice, or an offer to buy or sell any security. Laws and thresholds change and depend on your facts, so talk to a qualified attorney before acting.
Key facts
- A hurdle is the return investors receive before performance pay.
- Soft hurdle: once cleared, the performance share applies to all the gain.
- Hard hurdle: the performance share applies only above the hurdle.
- Lock-ups, notice periods, gates and side letters also move money or timing.
Transcript
Operator: Two managers. Same returns. One earns $1,000 more, because of one word in the documents.
Founder: Which word?
Operator: Hard, or soft. It's about the hurdle: the return investors get before you share.
Operator: Example: $100,000 earns 20%, so $20,000. The hurdle is 5%: $5,000.
Operator: Soft hurdle: once you clear it, you share in all of it. 20% of $20,000: $4,000.
Operator: Hard hurdle: only what's above it. 20% of $15,000: $3,000.
Founder: So the fine print is money.
Operator: Every term is. Lock-ups, notice periods, gates, side letters. Each one moves money or timing.
Founder: So which word did I sign?