WATERFALL & SCENARIO MODELING
Exit waterfall analysis
before the wire, not after
Model what an exit actually pays: seniority tiers, liquidation preferences, participation caps, escrow holdbacks, and management carve-outs, read straight from your recorded share classes. Then chain hypothetical rounds and exits to project dilution and payouts across the path you're really planning: what-if modeling with money-conservation tested at the fixture level.
Exit waterfall engine
What the exit actually pays, tier by tier.
Ownership percentage is not exit proceeds. Liquidation preferences, participation, escrow, and carve-outs reshape who gets what, and founders who first see the mechanics at the term sheet, or at the wire, negotiate blind. Vquity's exit waterfall analysis reads the share classes you've already recorded, applies the preference stack tier by tier at any exit value you choose, and shows the resulting distribution holder by holder.
- Seniority tiers resolve in order (senior preferred first, then junior preferred, then common) with 1× and multiple preferences honored per class
- Participating preferred, non-participating preferred, and participation caps are modeled per class, including the convert-or-take-the-preference decision each class faces
- Escrow holdbacks and management carve-outs come off the top before the stack resolves, so the modeled proceeds match how deals are actually structured
The terms come straight from your cap table's share classes. The terms you record are the terms that get modeled, not a copy that drifts.
Scenario modeler
Chain the next two rounds and see what's left at exit.
The real question is never one round. It's "if we raise the A at this price, top up the pool, and raise the B two years later, what do the founders own at exit, and what does that stake pay?" That's a chain of assumptions no spreadsheet holds together for long. The scenario modeler stacks hypothetical rounds and exits on top of your real cap table and projects ownership and payouts through the whole sequence.
- Each modeled round carries its own terms: valuation, new-money amount, pool top-up, escrow, and anti-dilution assumptions
- Dilution is projected holder by holder through the chain, and every step shows who gave up what to get there
- Scenarios save as separate workspaces, so "the A at $24M pre" and "the A at $18M pre" sit side by side for comparison. None of it ever touches the live ledger
The mechanics
The terms that bend the curve.
Three clauses decide most of the distance between ownership percentage and actual proceeds. The model handles all of them.
Liquidation preferences
Each preferred class recovers its preference, 1× or a multiple, before junior tiers see anything. The model resolves the stack in seniority order and, for non-participating classes, checks whether converting to common pays more than taking the preference, at every exit value you try.
Participation caps
Participating preferred double-dips (preference first, then a pro-rata share of what's left) unless a cap stops it. The model applies each class's cap (2×, 3×, whatever the documents say) so you can see exactly where participation stops adding to a holder's payout.
Escrow & carve-outs
Real acquisitions hold back escrow and often carve out a management incentive pool before the waterfall runs. Both are modeled off the top, so the number next to each holder's name reflects the deal structure, not a fantasy where 100% of the headline price hits the stack.
What this is, and isn't
Modeling for decisions, not for the closing table.
The engine's money-conservation is tested at the fixture level: test suites run full cap-table fixtures through the waterfall and verify that every dollar of the modeled exit lands in exactly one tier: nothing created, nothing lost.
This is what-if modeling, strictly. The waterfall and scenario engines are decision tools. Use them to compare term sheets, pressure-test an offer, and see dilution before you commit. They are not an audit-grade legal calculation, and a modeled distribution is not a payout instruction. Final exit distributions depend on the executed documents and belong with counsel.
Exit waterfall analysis, worked through once
The mechanics are easier to trust after you've traced one distribution by hand. Take a company with a single preferred class and a clean deal structure:
Worked example: $40M exit, one preferred class
The company sells for $40,000,000. The deal holds back 10% in escrow ($4.00M) and carves out 6% of the remainder for management ($2.16M), leaving $33.84M for the stack. Series A invested $8M for 25% fully diluted, with a 1× non-participating preference. Its choice: take the $8.00M preference, or convert and take 25% of $33.84M = $8.46M. Converting pays more, so Series A converts, and every holder shares pro-rata: $8.46M to Series A, $25.38M to common and vested options. Check the total: 4.00 + 2.16 + 8.46 + 25.38 = $40.00M. Every dollar accounted for.
Now drop the exit to $28M and the answer flips. After escrow and the carve-out, $23.69M remains; converting would pay Series A 25% of that, about $5.92M, so it takes its $8.00M preference off the top instead, and common splits $15.69M. Same cap table, same documents, opposite behavior. That flip point is exactly what exit waterfall analysis exists to find, and hunting for it by hand across three classes with different caps is how spreadsheet models quietly go wrong.
If the preference mechanics themselves are new to you, the Academy's liquidation waterfalls lesson builds them up from first principles (seniority, multiples, participation, and the convert-or-not decision) with more worked numbers.
From one exit to a chain of what-ifs
A single waterfall answers "what does this exit pay today?" The scenario modeler answers the harder question: what does an exit pay after the financing path you're actually planning? Stack a modeled Series A on the real cap table, add the pool top-up the term sheet will demand, layer a Series B on top, and then run the exit. The model carries dilution and the growing preference stack through every step, so the founder payout at the end reflects the whole journey, not a snapshot of today.
Because scenarios chain, they're a negotiation instrument. Model the same round at two valuations and compare founder proceeds at three exit values; the difference is what that valuation gap is really worth to you, a number, not a feeling. For the round-level mechanics feeding these models, see how Vquity handles rounds, SAFEs, and convertibles, and for the underlying arithmetic, the dilution math lesson covers it step by step.
Want to push your own numbers first? The free dilution calculator runs round-by-round ownership math in the browser, no account needed. When you're ready for the full preference stack, the waterfall is one view away in the app, and the seeded sample company ships with share classes and grants ready to model against.
Frequently asked questions
Can I use the waterfall output at the closing table?
No, and we say so on the page. The waterfall and scenario engines are what-if decision tools for comparing term sheets and pressure-testing offers before you commit. They are not an audit-grade legal calculation: a real distribution depends on the executed documents, and final exit payouts belong with counsel.
What does "money-conservation tested at the fixture level" mean?
The test suite runs full cap-table fixtures through the waterfall engine and verifies that every dollar of the modeled exit value lands in exactly one tier: preferences, participation, escrow, carve-outs, and common must sum back to the exit value, with nothing created or lost. It's a correctness check on the model's arithmetic, not a legal guarantee about your deal.
Which waterfall mechanics can I model?
Seniority tiers resolved in order, 1× and multiple liquidation preferences, participating and non-participating preferred with participation caps, escrow holdbacks, and management carve-outs. The terms are read from the share classes recorded in your cap table, so the model reflects what you've actually documented, including the convert-or-take-the-preference decision for each non-participating class.
Can I model future rounds before the exit?
Yes, that's the scenario modeler. Stack hypothetical rounds on your real cap table, each with its own valuation, pool top-up, escrow, and anti-dilution assumptions, then run one or more exits at the end of the chain. The model projects each holder's dilution and payout through every step, and scenarios save side by side for comparison.
Does any of this change my live cap table?
No. Scenarios and waterfalls are sandboxes on top of the ledger. They read your recorded share classes and holdings but never write to them. Closing a real round goes through the atomic Close-Round wizard; modeling a hypothetical one leaves the ledger untouched.
Move your cap table off the spreadsheet.
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