Exit Waterfall Lab
A venture investor rarely owns a fraction of a company in the way a founder does. They own a preferred instrument, and the instrument decides what a sale pays them. Take one cheque at one valuation, write it six ways, and slide the exit value from nothing to a multiple of the round: the lines show where each holder takes the money back, where each converts, and what the founders are left with under each one. The second tab stacks two rounds and lets you choose who is paid first.
The written version of these terms is the liquidation preferences guide. How the investor came to hold that fraction in the first place is the cap table lab.
Ownership is a fraction. A preference is a choice. Common stock takes its share of whatever is left. Almost everything a venture investor holds is a right to take the money back first and then decide whether the fraction would have paid more. Every instrument below is a different version of that choice, and the exit value decides which way it goes.
The round
So the investor holds 20.0% as-converted beside the founders’ 10,000,000 shares.
The equity-like ones
The sale
What the investor takes, as the exit rises
Six lines, one cheque. The common line is the fraction. Every other line sits on or above it, because every other instrument is the fraction with a floor added, and the kinks are where a holder stops taking the floor.
Non-participating preferred
The money back (times the multiple) or the fraction, whichever pays more. Never both.
At a $30.0m exit it takes $6.0m (1.20x the cheque, 20.0% of the proceeds) and the founders and employees take $24.0m. Below $25.0m it keeps the preference; above, it converts.
The same $5.0m at a $30.0m exit
| Instrument | Investor | Multiple | Of proceeds | Founders | What it did |
|---|---|---|---|---|---|
| Common stock | $6.0m | 1.20x | 20.0% | $24.0m | Pro rata |
| Non-participating preferred | $6.0m | 1.20x | 20.0% | $24.0m | Converts to common |
| Participating preferred | $10.0m | 2.00x | 33.3% | $20.0m | Preference, then participates |
| Participating preferred, capped | $10.0m | 2.00x | 33.3% | $20.0m | Preference, then participates |
| Post-money SAFE, unconverted | $6.0m | 1.20x | 20.0% | $24.0m | Converts to common |
| Convertible note, unconverted | $6.7m | 1.34x | 22.4% | $23.3m | Converts to common |
Keep going
All labsNext in Venture · 15 min
Cap Table Builder
Take a company from founding through a SAFE and a priced seed round. Set the cap, the pre-money and the option pool, watch the price per share and every holder’s stake move, then check your own arithmetic against the table.
Deal Simulations · 15 min
Capital Stack Challenge
Finance a real buyout. Size the revolver, term loans, notes, PIK and equity against the lender caps of the day, hold the structure through a shock, then see how the sponsor actually did it, with every figure linked to the filing.
Read the method