The exit waterfall is the chronological order in which shareholders are paid during a sale. In most startups, creditors and lenders are paid first, followed by preferred shareholders (usually investors), and finally common shareholders (founders and employees). Because investors often have "liquidation preferences," they are guaranteed to get their initial investment back—and sometimes more—before common stockholders receive a single dollar. Understanding the waterfall helps you see the "real" value of your equity at different exit price points.

A liquidation preference is a clause in a term sheet that protects investors by ensuring they get paid first in an exit. A "1x preference" means the investor gets 100% of their investment back before others. However, some deals include 2x or 3x preferences, which can significantly "thin out" the remaining pool for founders if the company sells for a lower price than expected. Our calculator allows you to toggle these preferences to see exactly how they shift the payout dynamics.

This is a crucial distinction for founders. Non-participating preferred stock means the investor chooses between getting their liquidation preference back OR their percentage of the company as common stock. Participating preferred stock (often called "double-dipping") allows the investor to get their liquidation preference back first, and then also receive their proportional percentage of the remaining proceeds. Participating stock is much more dilutive for founders and employees during an exit.

Not necessarily. While a higher valuation is generally good, the "terms" of your funding rounds—like high liquidation preferences or participation rights—can mean that a founder might take home less money in a $100M exit than they would have in a $80M exit with cleaner, more founder-friendly terms. Using an exit calculator during fundraising helps you understand if a high valuation is worth the trade-off of aggressive investor protections.