Equity Multiple Hurdle vs IRR Hurdle: When the Sponsor's Promote Starts
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In a syndication waterfall, the sponsor's share of profit usually goes up in steps, called tiers. Each step starts when investors have received a target return. The target can be an IRR, an equity multiple or both. The choice changes who benefits when a deal sells early or runs long. This post explains the difference so you can read a waterfall with confidence. It builds on our guide to the waterfall and promote. General information, not investment, legal or tax advice.
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What each test does
| Test | Measures | Sensitive to time? | Favors |
|---|---|---|---|
| IRR hurdle | Annualized return on cash flows | Yes | Investors if the deal drags, the sponsor if it sells fast |
| Equity multiple hurdle | Total dollars returned divided by dollars invested | No | The sponsor if the deal runs long |
For the definitions, see equity multiple, IRR and cash on cash and how hold period changes IRR and multiple. A hurdle also differs from a preferred return. See preferred return vs hurdle rate.
A hypothetical example, fast sale
This is an illustration with made up numbers, not a projection. An investor puts in $100,000. After 1.5 years the property sells and the investor receives $125,000 in total. That is a 1.25 times multiple and an IRR of roughly 16% a year.
- With a 15% IRR hurdle, the sponsor's promote starts, because 16% is above 15%.
- With a 1.5 times multiple hurdle, it does not, because 1.25 is below 1.5.
A hypothetical example, slow deal
The investor puts in $100,000 and receives $160,000 in total after 8 years. That is a 1.6 times multiple and an IRR of roughly 6% a year.
- With a 15% IRR hurdle, the promote does not start.
- With a 1.5 times multiple hurdle, it does, even though the yearly return is modest.
Neither is "right." Each test protects against a different kind of outcome.
Why sponsors and investors use both
Many agreements say the promote starts at "the greater of" a target IRR and a target multiple. That makes the sponsor reach both: a good yearly rate and a meaningful total return. It protects investors from a promote paid on a very fast flip with a small profit, and from a promote paid on a long hold with a weak yearly rate.
What to ask
- Is each tier an IRR hurdle, a multiple hurdle or both?
- If both, is it "the greater of" or "the lesser of"?
- How are interim distributions counted?
- Can you show the waterfall at an early sale, the base case and a late sale?
- Where is this written in the operating agreement? See the operating agreement.
You can also try a model. See a waterfall model in Excel and American vs European waterfalls.
How DoorRaise fits in
The deal's profit split and any tiers are the sponsor's choice and appear in the offering documents. DoorRaise charges the sponsor only a flat $1,500 setup fee and a flat $5,000 yearly administration fee, never a share of profits.
Frequently asked questions
Which hurdle is better for investors?
It depends on how the deal turns out. A "greater of" test is more protective than either alone.
Does the multiple include distributions along the way?
Usually yes, it counts all cash received. Check the agreement.
Can a hurdle be missed and still be a good deal?
Yes. Hurdles decide how profit is shared, not whether a property performed.
Sources
- Investor.gov: Investor Bulletin, Private Placements Under Regulation D
- 17 CFR 240.10b-5, Employment of manipulative and deceptive devices
This article is general information as of November 2026, not legal, tax or investment advice. Every investment can lose money. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.