As per the operating agreement of a standard Seed Labs deal, distributions are executed in two "Tiers":

Tier I: return of subscription (100% to investor, 0% to General Partner). This is often referred to as the "1x hurdle". The subscription amount is calculated as the capital commitment (the number you see on Seed Labs) minus the management fee take. e.g. a $100k check with 2% lifetime management fees has a $98k subscription.

Tier II: carry (X% to GP, 100-X% to investor where X is the carry charged). Every dollar of value sent after Tier I is fulfilled is subject to the carry charge. For example, after that $98k has been sent, on a subscription where 20% is the carry charge, for every dollar of value in excess, 20 cents goes to the General Partner, and 80 cents goes to the investor.

Treatment of Capital

All forms of value that is returned will contribute to the distribution waterfall equally: first to Tier I, then to Tier II. In particular:

Unused capital

Any unused funds (cash left uninvested in the bank account) are returned pro-rata to investors and would contribute first to the Tier I waterfall, then to Tier II.

Cash proceeds from exit

Any proceeds from the target investment(s) satisfy the Tier I waterfall first, then the Tier II waterfall.

IPO share distributions

GPs have two mechanics they can choose from when distributing IPO value: distributing the shares themselves via an in-kind distribution, or selling shares for cash on the open market and distributing cash. The value returned to investors, which determines which Tier each dollar returned falls under, is based on the Fair Market Value (FMV) of the shares.

Determining Fair Market Value (FMV)

This FMV of shares is determined as follows:

For shares sold as cash, the FMV is the price per share that shares were sold at.

For shares distributed in-kind, the price of shares on the date of distribution. The most standard practice is as follows:

• Close of trading day: The closing price is determined at the close of the trading day.
• FMV: The FMV Seed Labs uses to calculate the waterfall is the closing price.
• Beginning of next trading day: An in-kind share disbursement request goes out from the Seed Labs team to the brokerage firm for distribution on Tuesday morning with GP approval in the loop.

Treatment of Fractional Shares

The DTC system only allows sending whole shares. Once we compute the total value owed to each party, most parties are owed a fractional value — say, 0.33 shares — that a whole-share transfer can't deliver exactly. There are two industry-standard methods for handling that remainder:

Cash in lieu. Fractional shares are distributed as cash. If an investor is owed 0.33 shares, the brokerage firm is directed to sell the corresponding whole shares, wire the proceeds to the deal vehicle's bank account, and Seed Labs distributes them as cash. This shows up as a small gain on the investor's K-1 and requires the investor to have wiring information on file. It delivers the highest precision — down to the near-dollar value each investor is owed.

Hamilton Method. The waterfall runs in dollars as normal, then converts each investor's dollar entitlement into shares and gives every investor the whole-number floor of their share count. The residual whole shares — the sum of the dropped fractions — are distributed one at a time to the investors with the largest fractional remainders until they're exhausted. This distributes only whole shares (no cash) while ensuring the per-investor tickets sum exactly to the fund's total holding.

Changes to distributions process

The GP has some flexibility in the distribution math/process, afforded to them via both the operating agreement and standard GAAP accounting practices. These are subject to review and approval by Seed Labs. Generally, good-faith modifications of the waterfall calculations that return more value to investors are acceptable.

More information on custom distributions can be found here.