Waterfall Analysis
A calculation showing how exit proceeds are distributed among all shareholders in order of priority.
Definition
A waterfall analysis models how the proceeds from a liquidity event (acquisition or IPO) flow through the preference stack to each class of shareholders. It starts with the most senior claims (debt, then preferred stock liquidation preferences in order) and cascades down to common stockholders. The analysis shows what each shareholder receives at different exit price points. It is the most important analysis for understanding the real value of your equity.
Why it matters
A waterfall analysis reveals what your shares are actually worth at different exit prices. Without one, you might think your 1% ownership of a $100M company is worth $1M, when in reality, after $60M in preferences, your shares are only worth $400K.
Example
At a $100M exit: venture debt repaid ($5M), Series B preference ($30M), Series A preference ($15M), then all shareholders share the remaining $50M pro-rata. Your 0.5% is worth $250K, not the $500K you might have expected.