How To Use the Exit Waterfall Tool in the Cap Tableby@sarathcp92
2,664 reads
2,664 reads

How To Use the Exit Waterfall Tool in the Cap Table

by Sarath C P September 6th, 2022
Read on Terminal Reader
Read this story w/o Javascript
tldt arrow

Too Long; Didn't Read

A capitalization table or cap table is a spreadsheet businesses use as a financial metric to help them organize their share capital and details of how it is divided among shareholders. In this article, we will learn about the exit waterfall tool in the cap table.

Company Mentioned

Mention Thumbnail
featured image - How To Use the Exit Waterfall Tool in the Cap Table
Sarath C P  HackerNoon profile picture

A capitalization table or cap table is a spreadsheet businesses use as a financial metric to help them organize their share capital and details of how it is divided among shareholders of the company. The purpose of a cap table is to represent the capitalization of the company in order to reflect the relative ownership interest of the founders, investors, and employees in the company and to analyze and visualize how the money is being divided and allocated as well as for tracking changes in share ownership. Hence, exit waterfall is the process of financial analysis that shows the values of each preference round along with how the exit value is to be split between each round of investors. In this article, we will learn about the exit waterfall tool in the cap table.

Understand waterfall analysis

To get a more accurate reading of the value of an investment, you should use waterfall analysis. A waterfall analysis can be broadly defined as a calculation to find out the value of the total amount each shareholder would receive at the time of exit of the company. In other words, a waterfall analysis involves evaluating the amount a company generates at the time of an exit and distributing it between the different shareholders in accordance with their investment. It makes sense to split the proceeds from the company sale in accordance with the original investment. Having said that, with the help of the cap table, a waterfall analysis can be established in order to accurately reflect the distribution of money as a percentage of ownership. Thus, maintaining a cap table can help you conduct a waterfall analysis of the company.

Importance of using waterfall analysis

Using the waterfall analysis tool can help you to better understand the future value of your investment. As such, the waterfall analysis allows you to calculate how much each shareholder can expect to get from the proceeds generated from the sale of the company. Following are a few benefits of using a waterfall analysis:

  • The waterfall analysis tool can help you to reach the desired results by customizing the exit scenario with transaction fees, dividends, and other factors.
  • It helps you to identify the amount of preference liquidation for investors, which is the amount that would be paid out to the investors in case of voluntary or involuntary liquidation.
  • This tool helps you calculate the conversion and the proceeds received as a result of converting or exercising options, warrants, debentures, and convertibles into shares.
  • The waterfall analysis tool offers the opportunity to review the final results for each share class, which would determine if preference has been granted and how the liquidation preferences and capital repayment are applied in each share class.
  • The waterfall analysis tool allows you to see the effect of any dividends or interest payments made on preference shares since their date of creation.

Who can use waterfall analysis?

The entrepreneurs, the investors, and the employees can all use this type of analysis. Of course, if you are a shareholder of a company, you might want to know how the total proceeds generated from the sale of the company will be apportioned among you and other shareholders after the company has been sold. Moreover, those who are required to make financial decisions for the company may use waterfall analysis so that they can execute the decision well. Following is the list of the types of people who can use the waterfall analysis tool:

  • Founders - As a founder, you should care about the amount of value generated by the company and how this value is to be distributed. If you are looking to sell your company, you should be aware of how much money each shareholder is likely to get from the sale as well as other factors that can affect the total value.
  • Venture Capitalists (VCs) - VCs often use the waterfall analysis tool to help them in terms of evaluating the investment they are likely to make and know how much money they can expect from their investment. In other words, VCs have a keen interest in knowing how things will work out for them.
  • Angel Investors - People who invest in startups are also interested in how the company will bring them value through selling and distributing equity to itself and other shareholders. This also helps them to make smarter decisions as they are able to understand how much money they can get by selling their shares at a particular moment in time.
  • Employees - For the employees, the waterfall analysis tool is useful as a way to demonstrate that they are getting a fair return on their investment in the form of additional stock options and other benefits.
  • Lawyers and Accountants - Lawyers and accountants are responsible for providing the right advice to entrepreneurs, investors, and employees. They should know everything about the company's financial position, which makes the waterfall analysis an ideal tool for them.
  • Bank Institutions - If a company is applying for a bank loan, the loan officer will be analyzing the efficiency of the company's capital structure as well as that of its distribution. As such, it is significant to know how much money each shareholder will likely get after the company's sale.
  • Directors and Company Managers - As a director or company manager, you will be concerned about the company's future. It is your duty to make judgments and decisions that will help fulfill shareholders' future expectations.

Waterfall chart and example

A waterfall chart is a simple and easy-to-understand graphical representation of how the money would be divided among different stakeholders at the time of the exit of the company. Basically, by calculating the liquidation preference, measuring returned capital by rounds, and returned capital by investors. It can help you to make better decisions based on the liquidation scenario that you want to achieve. This is mainly because some stakeholders may be very interested in getting their dues or return from the company based on how the board of directors or the management has treated them. Thus, waterfalls are graphs that offer you a bird's-eye view of how much money will be paid when certain events occur. The following image is a sample waterfall chart in excel format:

Image Source: Eqvista

Cap table and exit waterfall analysis

A cap table is the most important and fundamental tool of an entrepreneur. It is a document that shows all the shareholders, the value of their stock holdings, the number of shares they hold, and other information regarding their shareholdings. With a cap table, the exit waterfall analysis can be done in a simplified manner. It helps you to see the whole picture of your company and is going to make your decisions easy. Cap table management is a critical aspect when it comes to the company’s sales or mergers. For this, you have to make sure that your stakeholders are mentioned in the cap table and that they have been given appropriate shareholding. But, how to use waterfall analysis? Read on to know more!

How does exit waterfall analysis work?

The concept of exit waterfall analysis works in a simple way. It takes the cap table and identifies the distribution of proceeds to different or each class of shareholders that is based on various liquidation preference structures, conversion scenarios, and the seniority of different share classes. In essence, it is a quantitative analysis of the cap table that divides the money systematically to meet the requirements of each class of shareholders depending on various factors. It is crucial because you want to know the cash flows for each class of shareholders and how the proceeds would be split between them. Thus, the exit waterfall analysis helps you to figure out how you will win your share of the proceeds in the event of a sale of your company.

How to use exit waterfall analysis properly in a cap table?

The cap table is used to walk through the exit waterfall analysis method. It helps you to determine the cash flows systematically depending on what actions have been taken by the company and its shareholders. In order to make this important analysis, a company's cap table must be maintained in good condition and updated regularly. To begin with, you must have a clear understanding of the ownership structure of the company. After that, you should record the information about each shareholder's holdings in the cap table. Once this is done, you can begin with the exit waterfall analysis by identifying how much money each class of shareholders will receive. This can be done in a simple manner through the use of a spreadsheet. Hence, it is important for the stakeholders to record their holdings in the cap table so that the process of exit waterfall analysis can get started.

How can cap table management software help perform the waterfall analysis?

The use of cap table management software makes the process of performing exit waterfall analysis a simple and easy task. With technological advancements, different software is available to record and manage the cap tables in a better manner. Cap table management software is designed for investors, companies, and entrepreneurs who are involved in the world of business. With this software at hand, you can perform exit waterfall analysis without much of a hassle. By simply putting the basic data into the software and performing the analysis, the user can easily get the required results on schedule.


The article has explained the concept of exit waterfall analysis in a simple and easy-to-understand manner. It is an important analysis tool that helps you to figure out how the proceeds from a sale of your company will be distributed to different stakeholder classes. However, keep in mind that the exit waterfall analysis must always be performed with the use of accurate and valid data in order to get the best results.