Exit Waterfall

Exit Waterfall Skill

A cap table is a promise about percentages; an exit waterfall is what actually happens to the money. The difference — liquidation preferences, participation, option strikes — routinely stuns founders at the worst possible moment. This skill computes the waterfall across exit prices and, more importantly, translates it: the price below which your shares are worth nothing, and the price where everyone finally converts.

What This Skill Produces

• The payout table — every stakeholder's dollars at each exit price, with conversion decisions shown
• The cliff points — where preferences stop dominating, where options come into the money
• The plain-English reading — "you need a $X exit for your common to mean anything" stated as a sentence

Required Inputs

Ask for these if not provided:

• Share classes — for each: name, share count, type (common / preferred / options); for preferred: amount invested, preference multiple, participating or not; for options: strike
• Exit prices to test — or default to a spread around the last round's valuation (label it as a default)

Programmatic Helper

The math ships as a deterministic script — run it rather than arithmetic-by-hand:

python3 scripts/exit_waterfall.py cap.json
python3 scripts/exit_waterfall.py cap.json --exit 50000000 --json

Input shape and worked example are in the script docstring. It brute-forces the conversion equilibrium (each non-participating preferred converts only when as-converted beats its preference) and applies the treasury method to options. Stated simplifications: preferences are pari passu (no seniority stacking) and participation is uncapped — flag both when the real cap table differs, and say the numbers shift accordingly.

Formula (readable form)

• Non-participating preferred takes max(preference, as-converted value) — preference = invested × multiple
• Participating preferred takes preference + pro-rata of the remainder (why "participating" is the term sheet word worth fighting)
• Options exercise only when per-share common value > strike; strike proceeds join the pool
• Remainder splits pro-rata among common + converted + participating shares

Output Format

Exit Waterfall: [Company]

Payout Table

[The script's table: exit price × stakeholder, with the converts column]

What This Means

• Below $[X]: preferences consume everything — common gets zero
• At $[Y]: [class] converts; the structure starts behaving like percentages
• The sentence: "Your [n]% is worth [n]% only above $[Z]; below $[W] it is worth nothing."

Assumptions & Limitations

[Pari passu, uncapped participation, valuation of the classes as supplied — every deviation from the real documents named.]

Educational model, not financial advice — verify with a licensed professional before acting on it.

Quality Checks

• Conversion decisions are computed, not asserted — the table shows who converts at each price
• The zero-for-common threshold is stated explicitly as a price
• Every simplification the model makes vs the real documents is named
• Payouts at each price sum to the exit value (plus/minus rounding)
• The disclaimer line appears in the artifact

Anti-Patterns

• Do not present ownership percentages as payout percentages — the gap between them is this skill's entire reason to exist
• Do not model participation caps or seniority stacking silently — the script doesn't; say so
• Do not average across exit prices — the cliff structure IS the information
• Do not run the numbers without the plain-English sentence — founders remember sentences, not tables