Why You Need To Understand Your Waterfall! (pt. 1)

waterfall analysis

Understanding how proceeds are distributed amongst your shareholders and employees is critical in assessing both equity deals and exit. Many founders only focus on their captable and lose track of the waterfall implications.

Captable is a widely used term in Venture Capital meaning a table showing the capital structure / who owns stock in a company. Usually this means an excel sheet with all holders of shares, their number and percentage ownership in the company. After a few venture capital rounds, founders leaving and employee stock option plans (ESOP) it gets messy fast.

The captable does not reflect how the proceeds are distributed in case of an exit. With investors having preference rights, liquidation preferences and implemented employee plans the table does not show how much € everyone might expect when the company is sold.

This is where the waterfall comes in, it shows how proceeds are distributed in case of an exit. A simple case could look like this:

i) Proceeds (could be cash or shares or a combination) plus cash in the bank at time of exit.

ii) Minus all debt

iii) Minus Cash and Exit Bonuses

iv) Minus Preference shares, participating preferred portion

v) Minus Preference shares pro rata

vi) Minus Common shareholders pro rata

= 0

Based on your shareholder agreements, ESOP plans and conditions from the buyer this could look a thousand different ways and in many cases is not very straight forward. Having this clear will help you select the right investor terms and help you align your stakeholders in case of an exit.

Subscribe to our newsletter

Stay up to date

Please tick the below box if you would like to hear from us.

Logo of Volta Ventures, Venture Capital Firm in the Benelux with offices in Amsterdam and Gent
Venture Capital Fund

Belgium

Gebroeders Vandeveldestraat 68, 9000 Gent
Rouaanse Kaai 1, 2000 Antwerp 

The Netherlands

Vijzelstraat 68, 1017 HL Amsterdam
chevron-down linkedin facebook pinterest youtube rss twitter instagram facebook-blank rss-blank linkedin-blank pinterest youtube twitter instagram