Definition
Cap Table Waterfall Modelling
Waterfall modelling calculates how the proceeds of an exit would be split among each shareholder class given the preference stack and conversion choices.
A waterfall model takes an assumed exit value and works through the liquidation stack — paying each preferred class its preference, accounting for participation and conversion to common where that yields more — to show what every holder, including founders and ESOP holders, actually receives. It reveals breakpoints where outcomes change.
Founders and investors run waterfall models before agreeing terms and before an exit, to understand the real economics behind headline valuations. It is essential for seeing how a modest exit might leave little for common shareholders.
Related terms
- Liquidation PreferenceA liquidation preference gives preferred investors the right to get their money back (or a multiple of it) before common shareholders in an exit or wind-up.
- Exit (Startup/PE)An exit is the event through which investors realise the value of their stake — typically an IPO, acquisition or secondary sale.
- Convertible Preference Liquidation StackThe liquidation stack is the order in which different classes of preferred shares get paid their liquidation preference in an exit.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.