Priority-based formula contained in an agreement (such as an LLC agreement, partnership agreement, or intercreditor agreement) for the determination of distributions or allocations between or among equity or debt holders.

A waterfall provision sets out the economic consequences of an investment or the business deal among parties. In doing so, it describes the priority for distributions of cash and property out of the company or for allocations of company income on either the occurrence of certain events (such as the sale or liquidation of the company or a default by a borrower) or out of the normal operating earnings of the company. Typically, each tier of the waterfall provision is entitled to a distribution or allocation that it receives in full before the next tier receives any proceeds or allocation.

For a discussion of the use of distribution waterfall provisions in partnership and limited liability company agreements for both investment vehicles and operating businesses, see Practice Note, Structuring Waterfall Provisions. For an example of a waterfall provision in project finance transactions, see Project Finance Waterfall Provision Flowchart. For a description of the principal characteristics of an intercreditor agreement between first and second lien lenders, see Practice Note, Intercreditor Agreement Between First and Second Lien Lenders: Overview.