Waterfall Analysis
Definition
A calculation showing how exit proceeds flow to different shareholders in order of priority. In a liquidation or acquisition, proceeds flow first to debt holders, then preferred stockholders (by seniority), and finally common stockholders. The waterfall reveals what your shares are actually worth at various exit prices.
Real-World Example
Company sells for $100M. Waterfall: (1) $2M in outstanding debt is repaid. (2) Series B investors get their $30M 1x preference. (3) Series A investors get their $10M 1x preference. (4) Remaining $58M is split among all shareholders on an as-converted basis. Your 0.5% common stock is worth $290K — not $500K as you might expect from the headline number.
Common Mistake
Estimating your payout by simply multiplying your ownership percentage by the exit price. The preference stack means your effective ownership is lower at modest exits and approaches your nominal percentage only at very large exits. Always model the waterfall at multiple exit prices.
Why It Matters
Waterfall analysis is the only way to accurately estimate what your equity is worth at different exit prices. It reveals the critical threshold where common stockholders start receiving meaningful value.
Related Terms
Want to learn one equity concept per week?
Read the Newsletter