What this tool does
The Cap Table Waterfall Calculator is designed to illustrate how exit proceeds are allocated among shareholders in a company based on their ownership stakes, liquidation preferences, and participation rights. Key terms include 'liquidation preference', which refers to the order of payout to investors in the event of a liquidation event, and 'participation rights', which allow certain shareholders to receive their preferred returns and participate in any remaining proceeds. This tool enables users to input various parameters, such as total exit proceeds, the amount of investment, and specific preferences of each class of shares, to simulate different exit scenarios. By doing so, it provides a clear understanding of the financial outcomes for each shareholder class, aiding in decision-making for investors, founders, and financial analysts involved in equity distribution during exit events.
How it calculates
The calculator determines the distribution of exit proceeds using the formula: Total Exit Proceeds = Preferred Payout + Common Payout. The variables include: Total Exit Proceeds (TEP), which is the total amount available for distribution, Preferred Payout (PP), calculated as the greater of the invested amount or the liquidation preference per share multiplied by the number of shares (PP = max(Invested Amount, Liquidation Preference × Number of Preferred Shares)), and Common Payout (CP), which is the remaining funds after preferred payouts (CP = TEP - PP). The core relationship is that preferred shareholders receive their payouts first, and any remaining funds are allocated to common shareholders based on their ownership percentage. This allows users to visualize the hierarchy of payouts in different exit scenarios.
Who should use this
Venture capital analysts assessing potential returns on investment in startup companies, financial consultants advising clients on shareholder agreements and exit strategies, and corporate finance professionals structuring mergers and acquisitions to understand equity distribution implications.
Worked examples
Example 1: A startup has total exit proceeds of \$1,000,000. There are 100,000 shares of preferred stock with a liquidation preference of \$5 per share. The preferred payout would be PP = 100,000 × \$5 = \$500,000. The remaining proceeds for common stockholders would be CP = \$1,000,000 - \$500,000 = \$500,000.
Example 2: In another scenario, the same startup has \$2,000,000 in exit proceeds with 100,000 preferred shares at a \$5 liquidation preference, but also 50,000 common shares. The preferred payout remains PP = 100,000 × \$5 = \$500,000. The common payout would be CP = \$2,000,000 - \$500,000 = \$1,500,000. Thus, each common shareholder would receive \$1,500,000 ÷ 50,000 = \$30 per share.
Limitations
This tool assumes that all shareholders have clear and defined liquidation preferences and participation rights. It does not account for complex scenarios where multiple classes of shares have varying rights or when convertible securities are involved. Additionally, it operates under the assumption that exit proceeds are sufficient to cover all preferred payouts. Precision may be limited in cases where decimal values are used, leading to rounding errors. Edge cases, such as scenarios with insufficient total exit proceeds to cover preferred payouts, may yield misleading results if not handled appropriately.
FAQs
Q: How does the calculator handle multiple classes of shares with different liquidation preferences? A: The calculator allows users to input specific liquidation preferences for each class of shares, calculating payouts in the order of priority based on the user-defined hierarchy.
Q: What happens if exit proceeds are less than the total preferred payouts? A: In such cases, the calculator will distribute the available exit proceeds proportionately among preferred shareholders based on their liquidation preferences, potentially leaving common shareholders with nothing.
Q: Can I input different participation rights for each class of shares? A: Yes, the tool accommodates different participation rights, allowing you to specify whether preferred shareholders participate in the remaining proceeds after their liquidation preference is paid out.
Q: How does the calculator ensure accurate results when multiple exit scenarios are analyzed? A: The calculator systematically applies the defined parameters for each scenario, ensuring that calculations are consistently based on the entered data, avoiding assumptions outside of the provided inputs.
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