Module 6
Exit Waterfall
The startup exits. Now the exit value flows downhill through liquidation preferences before anyone touches common stock.
Exit Value
Money Flow at $500.0M Exit
Waterfall Mechanics
At this exit size, investors are better off converting to common and taking their pro-rata share (50.0%) rather than their 1x liquidation preference — a sign the exit created real value for everyone.
Investors
$250.0M
50.0% of exit
Founders
$175.0M
35.0% of exit
Employees
$75.0M
15.0% of exit
Why This Matters
Liquidation preferences determine payout order at exit — investors are typically paid before common stockholders, which matters enormously at smaller exit values.
Common Misconception
People assume ownership percentage alone determines payout. In reality, preference stacks mean investors can receive more than their ownership percentage would suggest, especially in modest exits.
Key Takeaway
The size of the exit changes who benefits most — small exits favor preference holders, huge exits reward everyone roughly by ownership.