Distribution Waterfall

The order in which sale proceeds are paid out: typically debt, transaction costs, preferences and then remaining shareholders.

Example

A 60,000,000 sale leaves 53,000,000 for equity after 5,000,000 of debt and 2,000,000 of costs.

Ownership percentage times headline price overstates what most shareholders receive.

Liquidation Preference — A contractual right for preferred shareholders to receive a stated multiple of their investment back before common shareholders receive anything, in a sale or wind-down.
Escrow Holdback — A portion of a sale price held back by the buyer or an agent for a set period to cover possible claims under the sale agreement.
Trade Sale — The sale of a private company to another company or to a financial buyer such as a private equity fund.

With several preferred classes, each one decides whether to convert — When a company has several classes of preferred shares, exit proceeds are divided in order of seniority, and each class chooses between its preference and converting. Working through exits of different sizes shows how common shareholders are affected. (12 min)
The headline sale price is not what investors receive — Proceeds from a sale flow through debt, transaction costs, preferences, escrow and earnouts before reaching each shareholder. The waterfall decides what a headline price is worth to you. (13 min)
Small shareholders mostly sign, but what they sign matters — An acquisition involves warranties, indemnities, escrow and a drag-along that can compel minority holders to participate. Understanding the documents before signing is the last chance to know what you are agreeing to. (11 min)