Waterfall Rights

Definition

The order in which classes of stock get paid in an exit event, determining who gets what money from the sale. The reason cap table lawyers exist and make inexplicably high hourly rates.

Example Usage

Our $100M exit seemed great until we looked at the waterfall and realized only $8M actually reached common stock after all the preferred holders got paid.

Origin

Financial term describing sequential payment orders, adapted to venture capital's multi-class stock structures.

Fun Fact

Complex waterfall rights have caused more startup disputes than any product disagreement ever could.

Source: Venture capital and M&A terminology

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