payout waterfall

Liquidation Priority

Senior creditors usually occupy the top tier of the distribution flow. These participants receive repayment of principal and interest before any secondary claims are processed. Investors holding preferred equity often follow, sometimes with participation rights that modify their share of remaining assets.

Founders typically sit at the end of this sequence, accessing capital only when previous layers in the hierarchy are fully satisfied.

Financial Structure

Complex hierarchies create distinct risks for the founder in the shareholder seat. Each level of preference reduces the residual value available for common stock at the exit. High volumes of debt or aggressive liquidation preferences consume the proceeds during a modest company sale.

This arrangement demands careful attention during initial capitalization as the terms determine the actual take-home value for the operator.

Allocation Logic

Rigid adherence to the defined tiers ensures that the legal exit follows the prearranged path. Proportional distribution occurs only after the mandatory senior tiers achieve their contractual requirements. Disagreements regarding the interpretation of these tiers often arise when exit proceeds fail to clear the entire stack.

Proper documentation prevents ambiguity by specifying the exact treatment of convertible instruments and warrants before a transaction occurs.