Exit waterfall
Preference or conversion, then what reaches the common.
By Surojit Chakraverti, founder of L3VLUP and an investor running a long-short healthcare and technology equities strategy.
On this subject: exit waterfall.Updated 30 September 2026
What it does
Who gets what when the company is sold. A non-participating preferred holder takes the greater of its preference and its as-converted share of the exit; whatever it leaves is shared by the common holders pro rata. Across a row of exit values the schedule shows where the preference stops mattering, which is the number a founder should know before signing a term sheet.
Where it lives
The same schedule in each model that carries it, with the rows to open. Open a model in the browser, go to the sheet, and click the lines.
- Assumptions, row 22: Liquidation preference, multiple of money invested
- Waterfall, row 6: Exit equity value
- Waterfall, rows 9–15: Liquidation preference, Investor as-converted ownership, As preferred: the lesser of the preference and the exit, As converted: ownership × exit…
- Waterfall, rows 18–26: Proceeds to common holders, Common shares (everyone but the investor), Founder A, Founder B…
What a reviewer looks for
- Paying a non-participating preferred its preference and a pro rata share.
- Forgetting that the unallocated pool either dilutes proceeds per share or is excluded, and being unclear which.
- Reading the conversion point off ownership alone when the preference multiple is above 1x.
Learn it, then build it
Understand · Primer
Cap Tables and Startup Financing
Build · Lab · ~12 min
Exit Waterfall Lab
Run a liquidation waterfall at any exit value, say where a preferred holder chooses to convert, and explain what a 1x non-participating preference actually costs the founders.
Read · Guide · 13 min
Liquidation Preferences and Preferred Stock, Explained
Vocabulary: Liquidation Preference.