Fund Structure
Waterfall
The distribution order determining how sale or liquidation proceeds flow to different shareholder classes — senior preferred shareholders are paid before junior preferred, who are paid before common.
The waterfall describes the order in which proceeds from a liquidation event (acquisition, dissolution) are distributed to different stakeholder classes. Each 'tier' in the waterfall must be fully satisfied before proceeds flow to the next tier. Typical waterfall order: Senior secured debt → Junior debt → Series B preferred (latest investors) → Series A preferred → Seed preferred → Common stock (founders, employees). For each preferred class, their liquidation preference is paid first; if non-participating, they then have the option to convert to common and share proportionally. Waterfall modeling — calculating exactly how much each stakeholder receives at different exit prices — is critical for founders evaluating acquisition offers. An offer that seems large on the surface may leave founders and employees with much less than expected after preferred liquidation preferences are satisfied.