Fund Structure
Waterfall
Last updated
Quick Answer
The distribution order determining how sale or liquidation proceeds flow to different shareholder classes — senior preferred shareholders are paid before junior preferred, who are paid before common.
The waterfall describes the order in which proceeds from a liquidation event (acquisition, dissolution) are distributed to different stakeholder classes. Each 'tier' in the waterfall must be fully satisfied before proceeds flow to the next tier. Typical waterfall order: Senior secured debt → Junior debt → Series B preferred (latest investors) → Series A preferred → Seed preferred → Common stock (founders, employees). For each preferred class, their liquidation preference is paid first; if non-participating, they then have the option to convert to common and share proportionally. Waterfall modeling — calculating exactly how much each stakeholder receives at different exit prices — is critical for founders evaluating acquisition offers. An offer that seems large on the surface may leave founders and employees with much less than expected after preferred liquidation preferences are satisfied.
Related Concepts
Further Reading
How Waterfall Distributions Work: American vs European
How VC fund profits are distributed between GPs and LPs. The 4-tier waterfall, American vs European models, and clawback provisions.
MRR: What Monthly Recurring Revenue Means in Venture Capital
MRR (Monthly Recurring Revenue) is the foundational metric for early-stage SaaS companies. Here's what it means, how to calculate it correctly, what MRR components VCs want to see, and how it relates to ARR.
Venture Capital Fund Administration: What It Is, Who Does It, and Why It Matters
Fund administration is the operational backbone of every venture fund — handling NAV calculations, capital calls, LP reporting, K-1s, and compliance. Here's what emerging managers need to know before they raise.
How to Write an LPA: The Limited Partnership Agreement Guide for Fund Managers
A practical 2026 guide for venture capital and private equity fund managers on drafting, negotiating, and operating under a Limited Partnership Agreement (LPA): key sections, ILPA standards, costs, lawyer selection, and common mistakes.
Best VC Fund Administration Software in 2026: Compared for Emerging Managers
A no-fluff breakdown of the top VC fund administration platforms — Carta, Juniper Square, Allvue, Standish, Assure, NAV Fund Administration, and AngelList Stack — compared by pricing, minimum fund size, features, and fit for emerging managers.
Understanding Liquidation Preferences: What Employees Need to Know
Liquidation preferences determine who gets paid first when a startup exits. In some scenarios, investors take everything and employees get nothing — even in a 'successful' acquisition. Here's how it works.
Related Guides
How to Build a SAFE Cap Table That Doesn't Haunt You at Series A
SAFEs are simple to issue and complex to manage. Here's a practical walkthrough of how to structure early rounds so you don't spend Series A cleaning up messes.
VC Fund Economics: Management Fees, Carry, and Distributions Explained
The complete breakdown of how VC fund economics actually work — management fees, carried interest, hurdle rates, waterfalls, and the real math behind a fund lifecycle. Built for emerging managers who need to understand the numbers before they raise.
The Complete Fund Operations Checklist: From Formation to First Close
A step-by-step operational checklist covering every decision, filing, and system an emerging fund manager needs — from entity formation through first LP close.
Understanding Startup Equity and Dilution: A Complete Guide
How equity actually works, what dilution really means, and what founders take home in different exit scenarios. Real math, worked examples, no hand-waving.
Frequently Asked Questions
What is Waterfall in venture capital?
The waterfall describes the order in which proceeds from a liquidation event (acquisition, dissolution) are distributed to different stakeholder classes. Each 'tier' in the waterfall must be fully satisfied before proceeds flow to the next tier.
Why is Waterfall important for startups?
Understanding Waterfall is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
What category does Waterfall fall under in VC?
Waterfall falls under the fund-structure category in venture capital. This area covers concepts related to how venture capital funds are organized, managed, and governed.
Newsletter
The VC Beast Brief
Join thousands of founders and investors. Every Tuesday.
The VC Beast Brief
Master VC terminology
Get smarter about venture capital every week. Our newsletter breaks down the terms, concepts, and strategies that matter.
VentureKit
Ready to launch your fund?