Cap Table Waterfall: Working Example
Slicing the Pie
We covered the concepts of cap tables and waterfalls in a previous post. Let’s look at some actual numbers to see how things pan out.
Scenario: Your startup Amazing Inc. is acquired for $50 million!
How is it divided up?
Assumptions
- Amazing Inc. has 10 million outstanding shares.
- Series A investors hold 2 million preferred shares with a liquidation preference of $5 per share.
- Series B investors hold 3 million preferred shares with a liquidation preference of $8 per share.
- Common shareholders (founders, employees, and early-stage investors) hold the remaining 5 million common shares.
Calculation
- Determine the total proceeds from the acquisition: $50 million.
- Calculate the distribution to each class of shareholders based on their liquidation preferences:
- Series A investors: 2 million preferred shares * $5 per share = $10 million.
- Series B investors: 3 million preferred shares * $8 per share = $24 million. - Subtract the total amount distributed to preferred shareholders from the total proceeds:
$50 million — ($10 million + $24 million) = $16 million. - Allocate the remaining proceeds based on their ownership percentage, so for common shareholders this will be:
- 5 million common shares / 10 million outstanding shares = 50% ownership.
- Distribution to common shareholders: $16 million * 50% = $8 million. - Distribution per share for common shareholders:
$8 million / 5 million common shares = $1.60 per share.
The above example is simplified for illustrative purposes and will not likely reflect the complexities and variations that can exist in an actual cap table waterfall calculations. However, the example highlights how a 50% common shareholder ownership, may end up with only 16% of proceeds from a liquidity event.
It is essential to consult legal and financial professionals for accurate and tailored calculations specific to your startup’s cap table structure. Understand fully the effects of the waterfall calculations on your ownership.
If you are a founder looking for help in negotiations with investors, reach out: https://evaate.com/contact/
