The Shortfall Problem: Cumulative vs. Non-Cumulative Preferred Returns
from Syndication Attorney Field Notes with Tilden Moschetti Hosted by Tilden Moschetti
What happens to an investor's preferred return when a fund has a lean year? In this episode, syndication attorney Tilden Moschetti clears up the pervasive confusion surrounding cumulative and non-cumulative preferred returns. Sponsors often assume cumulative structures act as dangerous compounding debt, while non-cumulative structures offer complete payment discretion. Both assumptions miss the mark. Tilden walks through a practical hypothetical to explain how shortfalls carry forward, why a priority position is not a promissory note, and the true meaning of non-cumulative forfeiture. Learn how to align your operating agreement's waterfall language with your actual cash flow and investor expectations. Also see: Cumulative vs. Non-Cumulative Preferred Returns in Private Offerings — https://www.moschettilaw.com/cumulative-vs-non-cumulative-preferred-returns-in-private-offerings/ Note: This episode's audio is generated using AI voice cloning technology based on Tilden Moschetti's written work. Watch the video on YouTube: https://youtu.be/47VK9KxDZho
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What this episode covers
Tilden Moschetti clarifies the mechanics of unpaid preferred returns during a bad cash flow year, breaking down the critical differences between cumulative and non-cumulative structures.
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