Private equity & Venture capital : Carried interest, Tag-along, drag-along clause, Ratchet, and Distribution waterfall

Private equity & Venture capital : Carried interest, Tag-along, drag-along clause, Ratchet, and Distribution waterfall

term	description
Carried interest	GP's share in fund's profits, generally set at 20% of net profits after fees.
Tag-along, drag-along clause	Management (generally mininority shareholder)'s right to sell their equity interest in the event of an acquisition. A contractual obligation used to protect a minority shareholder. If a majority shareholder (e.g. a private equity owner) sells his or her stake, then the minority shareholder has the right to join the transaction and sell (or buy) his or her minority stake in the company. It requires a future acquirer to make an offer for all shares before taking control. "A private equity fund will reorganize each company it acquires so that a future acquirer cannot take control without extending a purchase offer to all-shareholders, including current management." Also referred to as "co-sale rights".
Ratchet	Specifying the equity allocation between the limited partners (LPs, i.e. private equity fund investors) and management.
Distribution waterfall	Specifying how profits will flow to the LPs and also the conditions under which the GP may receive carried interest.