The company was formed out of a merger between Romite Group and Pentasaurus Studios, after which, they sold their Los Angeles office to Clearwater Animation. The new company's name consists of two parts:
- Water is a reference to Clearwater Animation, who owns a small stake in the venture.
- Drop is an acronym, made out of the names of the predecessor companies, Romite Group's Domino, Romite and Omegalpha, and Pentasaurus Studios.
The word waterdrop is also a term used for a little dropping of water. Their comic book division works as a publisher for comics related to Clearwater's properties.