How to issue your first distribution notice: the waterfall, the withholding and the ILPA template

Before you start

Read the LPA's distribution clause the day the sale is agreed, not the day the wire lands. It sets how soon after receipt cash must be distributed, whether the GP may hold reserves and for what, whether proceeds may be recycled instead of distributed, whether distributions in kind are allowed and how shares are valued, whether tax distributions to the GP come first, and how the waterfall splits what is left. Write those answers on one page.

Then look at the deal file: cost basis, any escrow or earn-out, transaction expenses, and the dates. The first distribution is also the first time the waterfall runs on real money, which is why administrators model it before the proceeds arrive, not after.

Step 1. Confirm the proceeds and the basis

Tie the cash received to the purchase agreement: gross consideration, less transaction expenses, less any escrow or holdback at the buyer, equals what arrived. Then pull the cost basis of the position and compute the gain. Every later number in the notice splits this gain, so it has to be right to the cent, and it has to agree with what the auditor will see in the schedule of investments.

If part of the consideration is stock, decide now whether it is distributed in kind or held. If the LPA permits in-kind distributions, the valuation method and date it prescribes decide the gain each LP is allocated.

Step 2. Run the waterfall

The LPA's distribution waterfall decides, in order, how much goes to LPs as return of capital, how much as preferred return, how much to the GP as catch-up and carry, and how the rest is split. Two things decide the outcome and both are in the LPA, not in the software: whether the waterfall is whole-of-fund or deal-by-deal, and what counts as contributed capital for the return-of-capital tier (invested cost only, or cost plus fees and expenses).

Run it in the fund's system of record and have a second person rebuild it in a spreadsheet. The two must agree. Decide three things the waterfall output does not: whether to hold back any amount for reserves, escrow or a future clawback; whether any part of the distribution is recallable under the LPA's recycling provision; and whether the GP takes carry now or accrues it.

Step 3. Decide withholding

For a foreign partner, the fund may have to withhold tax before paying. Under section 1446 a partnership withholds on a foreign partner's share of effectively connected income at the highest rate for that type of partner, 37% for individuals and other non-corporate partners and 21% for corporations, pays it with Form 8813 and reports it on Forms 8804 and 8805, giving each foreign partner its 8805 even when no tax was due. Most venture capital gains from selling portfolio stock are not effectively connected income, and US-source income that is not effectively connected falls under a separate 30% regime that treaties can reduce. Which rule applies to which LP is the tax adviser's call; the operations job is to have the W-8 forms and the entity classification on file for every foreign partner before the notice is drafted, and to put the withheld amount on the notice so the LP can tie it to the 8805 later.

State withholding is separate and varies by state. Ask the adviser about every state the fund files in.

Step 4. Draft the notice

Use the ILPA Capital Call and Distribution Template v2.0, published in September 2025. Funds adopting the ILPA Performance Template use it for funds launched from Q1 2026; others switch for funds launched from Q1 2027, and ILPA expects the new format to be delivered first in Q1 2027. Use it now regardless: LPs' systems load it directly and a notice in a home-made layout gets re-keyed by hand.

Send it as a data file in the template's format, with the PDF as a courtesy, not the other way round. Deliver through the portal and put the payment date in the notice; an LP's treasury team books the inbound wire against it.

Step 5. Pay and reconcile

Wire on the payment date to the instructions each LP gave at onboarding, never to instructions received by email since. Reconcile the outbound wires to the bank the same day, post each to the LP's capital account, and tie the total to the waterfall output and the notice to the cent. A distribution that pays late, or pays an amount that differs from the notice, is the first thing an institutional LP raises on the next call.

Step 6. Update the statements

Issue updated capital account statements showing the distribution, the gain allocated and the new balance. Update DPI and TVPI in the performance summary so the next quarterly report carries the movement. File the notice, the waterfall model, the bank confirmation and the reconciliation together; the auditor will ask for the bundle, and so will the LP that queries the gain on its K-1 next spring.

The mistakes that cost a quarter

• Paying before the notice. Money that arrives without a notice sits unbooked in an LP's suspense account and generates the email you least want.
• A waterfall that only runs in one place. If the system and a rebuilt spreadsheet disagree, the LPA is right and one of them is wrong; find out which before the notice goes out.
• Withholding discovered after payment. Recovering over-paid cash from an LP is slow; withholding it in the first place is a line on the notice.
• Recallable amounts not stated. The LP's uncalled commitment changes; if the notice does not say so, the next capital call will be queried.
• In-kind shares without the valuation date. The LP cannot book the gain, and the fund's own TVPI and DPI will not reconcile to the statement.