<p dir="ltr">I was reading about the cap table waterfall and had a question about how it actually works, since it is often mentioned in discussions about acquisitions but rarely explained clearly. Here is what I understood from my reading, and I would appreciate anyone correcting me or adding context.

<p dir="ltr">A cap table waterfall is a model showing how the proceeds of a sale or other exit are distributed across all shareholders and option holders, taking into account the terms attached to each class of shares rather than a simple proportional split. Preferred shareholders, usually investors, often have liquidation preferences that entitle them to be paid first, sometimes at a multiple of what they originally invested, before ordinary shareholders such as founders and employees with common shares receive anything.

<p dir="ltr">The waterfall seems to work step by step, starting with any debt that must be repaid, then moving through each class of preferred shares in order, and finally sharing whatever is left among common shareholders by ownership percentage. Participating and non participating preferred shares change the result significantly. Participating holders receive their preference and then also share in the remainder, while non participating holders must choose between taking their preference or converting to common shares and taking their proportional share, whichever is worth more.

<p dir="ltr">My question is at what point founders should start modelling a waterfall themselves, since it appears to matter a great deal at exit but is easy to ignore during earlier fundraising rounds when the numbers feel abstract.

<p dir="ltr">Has anyone here built or reviewed a cap table waterfall model, either before negotiating a round or ahead of an actual exit? How different were the real numbers from what founders expected, and what would you want people to understand earlier about how liquidation preferences play out?



<p dir="ltr">Found a fairly clear explanation of this on Entrepreneur Plus while I was reading around the topic, helped me understand the founder side of it a bit better.