Tools · Exit waterfall
Who actually gets paid at an exit
Model a liquidation waterfall across every preferred round — preference multiples, participation, caps and seniority — and see which holders do better converting to common than taking their preference.
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Preferred stack
Distribution at $60,000,000
- Preference stack
- $20,000,000
- Common price / share
- $3.0000
- Rounds converting
- 2 of 2
- Distributed
- $60,000,000
| Holder | Takes | Preference | Participation | Total | % of exit | MOIC |
|---|---|---|---|---|---|---|
| Series B6,000,000 shares · $15.00M in | Converts to common | $0 | $18,000,000 | $18,000,000 | 30.0% | 1.20x |
| Series A4,000,000 shares · $5.00M in | Converts to common | $0 | $12,000,000 | $12,000,000 | 20.0% | 2.40x |
| Common stock8,000,000 shares | — | $0 | $24,000,000 | $24,000,000 | 40.0% | — |
| Options and reserved pool2,000,000 shares | — | $0 | $6,000,000 | $6,000,000 | 10.0% | — |
Preference or convert
Every preferred holder takes whichever is worth more. Each figure below holds the other rounds' decisions fixed, because those decisions change the answer — if a large round converts, the common pool is split more ways and a smaller round can flip back.
Series B
- Take the preference
- $15,000,000
- Convert to common
- $18,000,000
Converting is worth $3.00M more, so this round gives up its preference.
Flips to converting above an exit of about $50.00M.
Series A
- Take the preference
- $5,000,000
- Convert to common
- $12,000,000
Converting is worth $7.00M more, so this round gives up its preference.
Flips to converting above an exit of about $32.50M.
Across a range of exits
The same stack at different exit values. Watch where common stops being worth nothing, and where the preferred rounds switch from the preference to converting.
| Exit | Series B | Series A | Common | Options |
|---|---|---|---|---|
| $10.00M | $10.00Mpreference | $0preference | $0 | $0 |
| $20.00M | $15.00Mpreference | $5.00Mpreference | $0 | $0 |
| $40.00M | $15.00Mpreference | $7.14Mconverted | $14.29M | $3.57M |
| $60.00M | $18.00Mconverted | $12.00Mconverted | $24.00M | $6.00M |
| $80.00M | $24.00Mconverted | $16.00Mconverted | $32.00M | $8.00M |
| $160.00M | $48.00Mconverted | $32.00Mconverted | $64.00M | $16.00M |
| $320.00M | $96.00Mconverted | $64.00Mconverted | $128.00M | $32.00M |
Where the answer flips
| Round | Conversion breakeven | Reading |
|---|---|---|
| Series B | $50,000,000 | Below this exit the preference wins; above it, converting wins. |
| Series A | $32,500,000 | Below this exit the preference wins; above it, converting wins. |
Breakevens are found by solving the whole stack at many exit values, not by comparing one round in isolation. Change any other round's terms and these numbers move.
What an exit waterfall actually decides
A cap table tells you who owns what percentage. It does not tell you who gets paid what. At an exit, the proceeds run through the liquidation preferences written into each round's charter before common stock sees a dollar. Two companies with identical ownership percentages can pay their founders wildly different amounts on the same sale price, purely because of terms agreed years earlier.
The waterfall is the order of that payout. Senior preferred first, then junior preferred, then whatever is left shared pro rata. The complication — and the reason most calculators get this wrong — is that a preferred holder is never forced to take their preference. They hold convertible stock. They take whichever is worth more.
Convert or take the preference
A non-participating preferred holder faces a binary choice: collect the liquidation preference and stop, or convert to common and take a pro-rata slice of everything. Below a certain exit value the preference is a floor that protects them. Above it, the preference is a ceiling they will happily give up.
That decision is not independent per round. If a large round converts, the common pool gets split more ways, which lowers the per-share price, which can push a smaller round back onto its preference. This tool solves for the point where no round can improve its own outcome by changing its mind — and reports the breakeven exit value where each one flips. That is the number worth knowing before a term sheet is signed, not after.
The terms that move the answer
| Term | What it does | Where it bites |
|---|---|---|
| Preference multiple | Guarantees the holder gets back a multiple of what they invested before anyone junior is paid. | A 2x or 3x pref on a large round can absorb an entire mid-sized exit on its own. |
| Participating | The holder takes the preference and then also shares the residual pro rata. | Uncapped participation means the holder never converts, so common is diluted at every exit value. |
| Participation cap | Stops participation once total proceeds reach a multiple of the amount invested. | Above the cap the holder is better off converting, so the cap creates a second crossover point. |
| Seniority | Ranks which preference is paid first. Rounds at the same rank are pari passu. | In a down exit, stacked seniority means the earliest investors can receive nothing at all. |
| Option pool | Reserved and outstanding options dilute the residual alongside common. | A large unallocated pool quietly reduces the founders' share of every dollar above the preference stack. |
How this is calculated
For a given set of conversion decisions, the arithmetic runs in three passes:
1. Preferences, senior tier first
claim = invested × preference multiple. Each seniority tier is paid in full before the next one starts. If the money runs out inside a tier, that tier splits what is left in proportion to claim size.
2. Residual, per share
price per share = residual ÷ participating shares, where participating shares are common, options, every converted round's as-converted shares, and every non-converting participating round's shares.
3. Caps, then reflow
A capped participant stops at cap × invested − preference already paid. The money it would have taken is redistributed to whoever is still uncapped, which can push a second holder into its own cap — so this step repeats until nothing more binds.
4. Solve the conversion decisions
Passes 1–3 are re-run while flipping one round at a time, until no round can improve its own payout by changing its decision. Breakevens come from bisecting the exit value and re-solving at each step.
What this model deliberately leaves out
The exit value you enter is assumed to be net proceeds available to the equity stack. Debt, transaction fees, escrow and holdbacks, earnouts, and management carve-outs are not modelled — subtract them before you type a number. Neither are option exercise proceeds added back, so options are treated as fully-diluted shares rather than a cash inflow. Anti-dilution ratchets, pay-to-play conversions, dividends accruing on preferred, and drag-along mechanics all change real outcomes and none of them are here.
Charters differ. Two rounds described as “1x non-participating” can behave differently depending on how the conversion and deemed-liquidation clauses are drafted. This is a model for understanding the shape of a deal and for stress-testing a term sheet before signing it. It is not legal advice, and the actual distribution at a real exit is determined by the charter and the merger agreement, read by a lawyer.