Liquidation Model - Waterfall Analysis
Originally published: 29/08/2016 09:58
Publication number: ELQ-98950-1
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Liquidation Model - Waterfall Analysis

Educate employees, founders, and others in how liquidation preferences affect financial distribution in exit scenarios

In 2014 "Heidi Roizen wrote a great post titled How to Build a Unicorn From Scratch – and Walk Away with Nothing. The post illustrates how liquidation preferences (among other things) affect investors, founders, and employees through the story of a fictional, high-flying startup called Pied Piper.

While I couldn’t understand why the tech world just now decided to talk about something that has been in term sheets for as long as I can remember, I have for some time believed that employees are often undereducated in regards to what their options may be worth in reality.

So, " To that point, I’ve built a liquidation model to perform what is known as a waterfall analysis. I used the bones of a model from a 2011 Fred Wilson post, but went on to add a seed round, change the terms to more closely mirror financing conditions in 2015, and automate the majority of the doc.

Note: " In my model, all inputs are in red text. Change the size of any round or the share price on the cap table, or the exit amount on the waterfall analysis tab, and the rest of the document will update."

- Michael Dempsey, May 13 2015,

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Further information

"The waterfall analysis takes into account a variety of exit scenarios and shows how liquidation preferences can affect where the proceeds of an exit go. This data can be used for both employees and founders to better understand how they can be affected by things such as stacked liquidation preferences over the course of their company’s financing history." (Michael Dempsey, May 13 2015,

"While this type of granular data may be hard to come by for employees at later-stage companies, I believe that things like my model and posts like Heidi’s are a great step towards better transparency, education, and awareness of some of the more nuanced parts of our venture capital and startup ecosystems." (Michael Dempsey, May 13 2015,

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