Exit waterfall

An exit waterfall is the complete algorithm that turns a single exit value into a specific payout for every shareholder — common, preferred, and option holders alike. It runs in three ordered stages, and the outcome for any individual holder can change dramatically depending on where the total exit value falls relative to the total preference stack.

Stage 1 — liquidation preferences by seniority

Preferred series are paid their liquidation preference in seniority order, most senior first. Series sharing a rank are paid pari-passu — pro-rata by preference amount — if there isn't enough proceeds to cover the whole rank. Whatever remains after every non-converting series' preference is paid becomes the residual.

Stage 2 — convert-to-common decisions

Non-participating preferred can choose, at each series' option, to give up its preference entirely and convert to common instead — whichever path produces more money for that holder wins. Because one series' decision changes how much residual is left for everyone else, Foundily's engine iterates this decision to a stable fixed point rather than assuming everyone converts (or doesn't) up front.

Stage 3 — residual distribution

Whatever's left after preferences flows pro-rata by share count to common stock, the option pool, any series that chose to convert, and any participating preferred (which collects here in addition to its Stage 1 preference). If a participating series hits a participation cap partway through, it's 'locked' at the cap and the remaining residual is redistributed among the still-open holders.

Why the same cap table gives different answers at different exit sizes

A modest exit can leave common stock with nothing once preferences are paid; a large exit can flip a non-participating series' decision from 'take the preference' to 'convert to common' because the as-converted value now exceeds it. This is exactly why 'what's my equity worth' has no single answer — it depends entirely on the exit value you're modelling. Run a few exit scenarios through the calculator rather than trusting one number.