Originally published on Allegory Capital.
TLDR: When a company is sold, proceeds flow through a liquidation waterfall, not the ownership table, so a 25 per cent stake can return nothing — the M&A mechanic every founder and acquirer must model before a deal.
The waterfall, not the cap table, decides the payout
As Stanford’s Ilya Strebulaev shows in his breakdown of seniority, waterfalls and pari passu, a 25 per cent ownership stake does not guarantee 25 per cent of exit proceeds. At Kabbage’s roughly $430 million sale, six preferred series absorbed the proceeds in order and common stock — the largest stake at roughly 28 per cent — received nothing, only participating above roughly $435 million.
Why it matters in M&A
Acquirers price deals on enterprise value; sellers receive on the waterfall. A 2x liquidation preference negotiated in one round lifts the stack from $25 million to $40 million in Strebulaev’s example, and once one round wins 2x the next starts there. Model the full waterfall at every exit scenario, and treat the preference stack — fixed in the NVCA model term sheet and the Delaware certificate of incorporation — as part of the deal, not a footnote.
References
- Ilya Strebulaev (Stanford GSB). Who Gets Paid First? Seniority, Waterfalls, and Pari Passu. https://ilyastrebulaev.substack.com/p/who-gets-paid-first-seniority-waterfalls
