Liquidation Preference Calculator
How to calculate the distribution of liquidation proceeds (i.e., the “Waterfall”) of your company
A liquidation preference is part of practically all shareholder agreements of VC backed companies and is meant to serve as protection for investors. It provides for the investors first getting their money back before the remainder of the proceeds is being distributed amongst all shareholders.
In one of my previous blog posts I talked about how important it is to profoundly understand the effect of “your” particular liquidation preference (see Participating liquidation preference can be a huge failure…). The two most common liquidation preference concepts are the 1-time participating and the 1-time non-participating liquidation preference. However, in practice one can see many other concepts (e.g. 2- or 3- time liquidation preferences or interest bearing liquidations preferences, etc.).
While all these concepts are (in theory) well understood we see that there is lots of uncertainty in practice when it comes to actually calculating the waterfall / liquidation preference (this is particular true if things get complicated, e.g. if the exit proceeds are small, in case “down-rounds” happened, etc.). However, being able to come up with exact numbers at any time is part of truly understanding “your” liquidation preference.
I have built a spreadsheet which I believe should work for almost any concept and scenario (please challenge me and report if you find (conceptional or any other) errors or inconsistencies). It is based on the following logic:
- For each financing round there is a separate level in the liquidation preference.
- Financing amounts contributed in the most recent financing round are at the highest level and amounts contributed in the initial financing round are at the lowest level of the liquidation preference.
- The shares issued in the relevant financing rounds are of different classes (Series Seed Shares, Series A Shares, etc.) and the financing amounts contributed are linked to the respective shares issued.
- After the liquidation preferences have been satisfied the remaining amounts are distributed pro-rata between all shares (common shares and preference shares). In case a preference is non-participating the amounts distributed as preference will be deducted.
Disclaimer: Every contract is different and your particular case/liquidation preference provision likely needs to be calculated differently. Make sure you discuss your specific calculation with your legal advisor. My concept and the linked spreadsheet may contain errors and you should not rely on it. Please provide feedback in the comment section if you detect errors.
You can find (and download to edit) the spreadsheet here:
Senovo Template Sample Waterfall
Shareholding + Investments At Foundation,Business Angel Round I (Pre-Seed),Business Angel Round II (Seed),Investor…
It contains three sheets (cells marked in yellow are input fields):
- “Shareholding + Investmenst”: In this sheet you can model the financing history (including the issuance of virtual shares and their respective strike price).
- “Preference Calculation”: This sheet calculates the preference amounts of each financing round and you can enter whether a preference is “participating” or “non-participating” and whether it is a 1x or multiple-x preference.
- “Waterfall Calculation”: This sheet does the math. You can enter the Exit Amount.
The sheet does not use any complicated formulas and if you take your time it should be easy to understand.
Keep liquidation preferences simple. Things can get quite messy if you try to add exceptions and “special treatments”. You should make sure that you and your shareholders have a clear and common understanding of how to calculate the preferences at all times.
PPS: A perfect way to ensure the common understanding amongst shareholders is to have an agreed spreadsheet that is always up to date. I recommend that the company is keeping the sheet and shares it with shareholders by using the phantastic Excel to App tool created by our great portfolio company OpenasApp.com ;-)