How to Build an Exit Waterfall Model
In an acquisition, the headline price is not what stakeholders receive. Liquidation preferences, participation rights, and conversion decisions redistribute the proceeds - a waterfall model shows exactly who gets what.
How a waterfall distributes proceeds
A liquidation waterfall applies the terms in your cap table to a given exit value, in seniority order. Preferred stockholders take their liquidation preference first; participating preferred then share in the remainder; common stock and options get what is left. Because each preferred holder can often choose to convert to common instead of taking their preference, the model has to test both paths per class.
- 1Pay each preferred class its liquidation preference in seniority order.
- 2For participating preferred, add their pro rata share of the remaining proceeds.
- 3For non-participating preferred, take the greater of preference or as-converted value.
- 4Distribute the residual to common stock and exercised options.
- 5Account for the option pool and any unexercised in-the-money options.
The terms that move the money
| Term | What it means | Effect at exit |
|---|---|---|
| 1x non-participating | Preference or convert, not both | Investor picks the larger |
| 1x participating | Preference plus pro rata share | Investor double-dips |
| Participation cap | Participation stops at a multiple | Caps the double-dip |
| Seniority / stacked | Later rounds paid first | Order changes who is made whole |
A worked example
- Run the waterfall at several exit values to see the crossover points
- Identify where non-participating preferred prefers to convert
- Show each stakeholder’s dollar payout, not just their percentage
- Flag where common and options receive nothing
How Fintra models exits
Fintra’s exit and waterfall modeling reads the preferences, participation, caps, and seniority directly off your live cap table, then computes each stakeholder’s payout at any exit value - testing conversion per class automatically. You can sweep a range of exit values to see the crossover points and hand founders and investors a clear payout picture before a deal is on the table.
- Waterfall built from your live cap-table terms, not a fresh spreadsheet
- Automatic convert-or-take-preference test per preferred class
- Per-stakeholder dollar payouts across a range of exit values
- Crossover points where conversion or participation changes the outcome
Frequently asked questions
What is an exit waterfall?
A model that applies your cap-table terms - liquidation preferences, participation, seniority, and conversion - to an exit value in order to show how the proceeds are distributed to each stakeholder in dollars.
What does a participating preference do?
Participating preferred takes its liquidation preference first and then also shares in the remaining proceeds as if converted. It can significantly reduce what common holders receive, especially on modest exits, so it must be modeled explicitly.
When does non-participating preferred convert to common?
When the as-converted value of the shares would exceed the liquidation preference. At high enough exit values, the investor is better off converting, which is why the waterfall tests both paths per class.
Why model the waterfall at multiple exit values?
Because the distribution changes shape as the exit value rises - conversion decisions flip and common holders cross from zero to meaningful payouts. Sweeping a range reveals the crossover points that a single-number model hides.
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