A waterfall is the order of priority in which proceeds are distributed among shareholders and creditors during an exit, such as a sale or liquidation. It ensures that each group of stakeholders receives payment based on their specific claim.
How does a waterfall work in startup exits?
In a startup exit, the waterfall defines who gets paid first, typically starting with secured creditors, then preferred shareholders, and finally common shareholders. This prioritization helps manage expectations and protect different investors’ rights.
Why is the waterfall structure important?
A waterfall structure clarifies the distribution process, providing transparency and ensuring that each group of stakeholders understands their potential payout.
How does a waterfall impact founders and common shareholders?
Founders and common shareholders are usually last in line, meaning they may only receive proceeds after all other claims have been settled. Understanding the waterfall structure helps them plan realistically for potential outcomes.
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