What is Liquidation Waterfall?
Who gets paid, and in what order, when the company is sold or wound down.
Liquidation Waterfall: definition
When a company is sold, proceeds are not split simply by ownership percentage. Preferred shareholders usually have a liquidation preference - the right to get their money back (often 1x) before common shareholders receive anything - and may participate further. The waterfall models this cascade, paying senior preferred first, then junior, then common, so each holder’s actual payout can differ sharply from their headline ownership.
- Liquidation preference: preferred gets its money back first (e.g., 1x)
- Participating vs. non-participating: whether preferred also shares in the rest
- Seniority: later rounds often paid before earlier ones
- Common shareholders receive what remains after preferences
How Fintra handles it
Fintra models the liquidation waterfall from the cap table, applying each class’s preference, participation, and seniority to a given exit value. You can see exactly what founders, each investor, and option holders would net at different sale prices - turning a complex, error-prone spreadsheet exercise into a governed calculation grounded in the real cap table.
Worked example
| Holder | Right | Payout |
|---|---|---|
| Preferred investors | 1x preference on $10M | $10,000,000 |
| Common + options | Remaining proceeds by % | $10,000,000 |
| (If exit were $8M) | Preference exceeds proceeds | Preferred takes all $8M |
Frequently asked questions
What is a liquidation preference?
It is the right of preferred shareholders to receive a set amount - often 1x their investment - before common shareholders get anything in a sale or liquidation. A 1x non-participating preference is founder-friendly; higher multiples or participation shift more proceeds to investors.
What is the difference between participating and non-participating preferred?
Non-participating preferred takes either its preference or its as-converted common share, whichever is greater. Participating preferred takes its preference and then also shares in the remaining proceeds - a "double dip" that reduces common holders’ payout.
Why can a big exit still leave founders with little?
Because preferences are paid first. With large or stacked preferences (or participation), preferred investors can absorb most of a modest exit, leaving common shareholders - including founders and employees - with far less than their ownership percentage implies. Modeling the waterfall reveals this.
Does Fintra model exit waterfalls?
Yes. Fintra applies each share class’s preference, participation, and seniority from the cap table to model payouts at any exit value, so stakeholders can see their true net proceeds under different scenarios.
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