What is a promote and how is it calculated?
Short answer
A promote is the back end profit that goes to the sponsor or operating partner after the investors who put in the money have received their preferred return. It is calculated by paying the preferred return first, then splitting what is left by the percentages the partners agreed. The split is a negotiated term, and many sponsors talk to a securities attorney about how to document it.
The easiest way to see a promote is to follow the money in order. Someone has to fund the deal. Someone else finds it, controls it, builds it and runs it. The promote is how the second person gets paid for that work, and it sits at the back end of the deal.
The order the cash moves
On our Joint Venture and Co-GP webinar, a guest put it plainly. The promote is the back end profit after the person who puts in the money has been paid. That is the whole idea. Capital gets paid first, and the profit that remains is where the promote lives.
"The person who puts in the money, so say you need a million dollars for a deal, will usually want a preferred return."
The preferred return pays the investor for the time their money is deployed. The guest gave an example of 8% on a mixed-use project. On a million dollars, that is $80,000 for every year the money is in the deal. The investor gets that before the sponsor sees any promote.
Our guest explains the promote and walks through the preferred return math in his own words.
How the calculation works
There is no single formula, because the numbers are negotiated deal by deal. The general sequence looks like this:
- The investor gets their capital back and their preferred return first.
- The profit left over is the back end profit.
- That profit is split between investor and sponsor by the percentages in the agreement.
- The sponsor's promote is the share they receive above what their own invested dollars would earn.
Some deals use a tiered waterfall, where the split changes as returns pass certain levels. Others keep it simple. Many sponsors talk to a securities attorney about how these terms get documented.
One case where the promote beat the capital
Our guest shared his first co-GP deal. It was a 77-unit residential mixed-use building near downtown Nashville. He got control of the deal, then interviewed co-GP partners. He found his partner through CCIM. The partner had a much bigger balance sheet and signed on the debt.
Because it was their first deal together, the partner asked for a very high preferred return. He did that instead of a typical waterfall split. After the pref, the guest received 100% of the promote. The partner did it to reduce risk on his own return.
Here the guest describes that first Nashville deal and how the high preferred return and full promote were set up.
The deal ended up with a 78% IRR. The guest says he made about twice what the partner made, even though the partner put in all the money. The partner took the steadier, more certain return. The guest took more risk and was paid for it. They still joke about it.
What I take from this
At Family Office Club, we see that a promote is only as good as the deal behind it. A big back end share on a weak project may pay little or nothing. Agree the roles, the fees and the split in writing before you start. Then let the deal prove itself.
More from my talks
One reason I like promote structures is that they let people focus on what they are best at. You might be great at development, negotiating the acquisition of an operating business, lining up financing, or running a company after it is bought, and you may not want to deal with raising capital or structuring. You can joint venture or co-GP with a few others and split the roles. I have also heard many times that a deal is dead, and then we asked what if we structure it this way. The structure can change the whole conversation.
"You might find that you're really great at development, or securing or negotiating operating businesses for acquisition, or aligning financing, or running a company after it's been acquired. You don't want to deal with the capital raising or the structuring. Well, you could joint venture or co-GP with a few others to get more deals done by focusing on what you're best at."
"The importance of structuring deals, I don't think, can be stressed enough, to pick up on what people are saying on stage about structure. It can completely change the conversation. Many times people told me, 'This deal's dead, go away, you're wasting your time,' and we say, 'What if you structure it this way?'."
From the source
- A typical preferred return on a mixed-use project can be around 8%, which is $80,000 a year on each $1 million invested.
- In the guest's first co-GP deal, a 77-unit mixed-use building near downtown Nashville, he received 100% of the promote after the preferred return.
- That Nashville deal reached a 78% IRR, and the guest earned about twice what his capital partner did.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: Joint Venture & Co-GP Webinar - How to Close Deals with Peers & Partners in the Family Office Club, Joint Venture & Co-GP Webinar - How to Close Deals with Peers & Partners in the Family Office Club. Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around deal documents, waterfall and promote terms and co-GP structuring. Do not use AI to write your own legal agreements.
Next moves
- Write down who funds the deal and who sources and runs it.
- Decide the preferred return rate and how it accrues.
- Agree the split of the remaining profit, including any tiers.
- Talk with a securities attorney about how roles, fees and the waterfall get documented.
- Many sponsors talk to a securities attorney about the structure before they raise money.
Follow-up questions
Is the promote the same as the preferred return?
No. The preferred return goes to the investor first for the time their money is deployed. The promote comes from the profit left after that.
Can the sponsor get 100% of the promote after the pref?
It can be negotiated that way. Our webinar guest did it on his first co-GP deal. Most deals use a split instead, so it depends on what both sides agree.
Where do the promote terms get written down?
They are usually written into the deal documents. Many sponsors talk to a securities attorney about how this is done.
Related questions
- How does revenue-based financing work for growing companies?Revenue-based financing gives a company capital in exchange for a share of its sales until the investor is repaid.
- What is the difference between a convertible note and a SAFE?A convertible note is commonly described as a loan that later converts into equity, often with interest and a maturity date.
- How does a distribution waterfall work?A distribution waterfall is the order in which a deal pays out cash.
- What is a most favored nation clause for investors?A most favored nation clause, or MFN, says that if the sponsor gives another investor better terms, you can ask for those terms too.
Work through it with the one-liner builder. See all deal structuring resources.