Waterfall Analysis

A waterfall analysis models how proceeds from a liquidity event are distributed among shareholder classes. Senior preferred shareholders get paid first, then junior preferred, then common shareholders. ESOP holders typically sit in the common layer.

This ordering matters because in exits where proceeds don't satisfy all shareholders, the waterfall determines who gets paid and who doesn't. Your options might be "worth" $200K based on FMV, but the waterfall might deliver less.

Understanding the waterfall is critical when evaluating whether to exercise options, especially during an acquisition.