Tool 04 · the lab · Read: Ch. 22 — Preferred Stock & Liquidation Preferences

Liquidation Preference Waterfall

Stack the preferences. The solver runs the seniority cascade — multiples, participation, caps, and the convert-to-common decision — and returns the proceeds split at the exit value you specify, plus a sweep showing where each holder's share peaks and drops.

01 Common & exit

Common shares (M)

Exit value ($M)

Sweep max ($M)

02 Preferred stack (senior at top)

Conventions: Seniority is top-down (Row 1 paid first). "Multiple" is the preference multiple (1x = invested capital back). "Participating" with no cap = double-dip; with a cap = capped participation. "Non-participating" = take the preference or convert to common, whichever is higher. Pari-passu within a row is not modelled — split into separate rows if needed.

03 Proceeds at exit value

04 Exit-value sweep

Each row shows the share that goes to common (founders + employees) at that exit. Watch for the convert-to-common breakpoint where preferred takes the prefs at low exits and converts at high ones.

05 Red flags

Why this matters Founders read pre-money valuations and miss preferences. A $100M pre with a $20M Series B at 2x participating preferred is not the same deal as a 1x non-participating. At a $100M exit, the second deal pays the founders ~$50M; the first pays them closer to $20M. Same headline, different outcome.

The convert decision, geometrically Non-participating preferred holders take the larger of (a) their preference, or (b) their as-converted common share. At low exits (a) wins, at high exits (b) wins, and at the breakpoint they're equal. Capped participating preferred has two breakpoints: where they stop preferring participation, and where they convert.