Waterfall

Worked example

A worked example of proceeds flowing through a waterfall (illustrative figures):

1. A company is acquired for $80 million. It has one round of preferred stock outstanding with a 1x non-participating liquidation preference, representing $30 million of original investment.
2. The waterfall pays the preferred stack first: $30 million goes to preferred holders (or they convert to common if that yields more — in this case it doesn't, since their as-converted share would be worth less than $30M).
3. The remaining $50 million ($80M − $30M) is split pro-rata among common shareholders — founders, employees, and anyone who holds common stock, including through a prior secondary purchase.
4. A secondary buyer of common stock is, in effect, buying a claim on whatever is left after the waterfall clears the preference stack — which is exactly why understanding a company's full preference stack (not just its headline valuation) is step one of pricing any common-stock secondary purchase.