Waterfall Analysis
Definition
Waterfall Analysis: A waterfall analysis shows how exit proceeds are distributed among shareholders based on their rights and preferences. It calculates payouts at different exit valuations, accounting for liquidation preferences, participation rights, and conversion scenarios. Understanding the waterfall is crucial for founders to know their actual ownership value.
Example Usage
“The waterfall analysis showed that at a $50M exit, investors would take $40M due to 2x preferences, leaving founders with just $10M.”
Common Misconceptions
Related Terms
Liquidation Preference
Liquidation preference determines how proceeds are distributed when a company is sold or liquidated. Investors with liquidation preference get paid be...
Preferred Stock
Preferred stock is a class of ownership with rights superior to common stock, typically held by investors. Preferences usually include liquidation pre...
Exit
An exit is an event that allows startup investors and shareholders to convert their equity into cash. Common exits include acquisition by another comp...
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