Fund Structure
Waterfall Analysis
A detailed calculation showing how exit proceeds are distributed among all shareholders based on their specific rights, preferences, and terms.
A waterfall analysis models the step-by-step distribution of proceeds from a liquidity event to each class of shareholders. It accounts for liquidation preferences (participating vs. non-participating, seniority vs. pari passu), conversion rights, cap table ownership, and any special provisions like management carve-outs. The waterfall determines what each shareholder actually receives at different exit valuations.
In Practice
The waterfall analysis revealed that at a $100M exit, common shareholders would receive only $15M due to $85M in stacked liquidation preferences — but at $300M, they'd receive $150M as preferred investors converted to common.
Why It Matters
Waterfall analysis is the only way to understand what an exit actually means for each stakeholder. The same exit value can produce dramatically different outcomes depending on the cap table structure and investor terms.
VC Beast Take
If you haven't run a waterfall analysis at multiple exit scenarios, you don't actually know what your equity is worth. The cap table tells you ownership; the waterfall tells you economics.
Related Concepts
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