Make Informed Financing and M&A Decisions

In what we call the Rational Holder Algorithm, the model simulates what happens at the closing table with each party vying to maximize their share of the proceeds by applying their legal rights in a zero-sum game. The model will automatically and concurrently apply for every security the impact of accrued interest & dividends, conversion ratios, anti-dilution adjustments, vesting, net-exercise calculations, and more. As a result, we accurately model the actual proceeds each security holder receives in a future liquidity event, which can be far different than assumed based on fully-diluted percentages.

We work with executives of late-stage venture backed companies, partners of law firms, and other corporate advisors. We focus on businesses that have completed multiple rounds of financing where different investors have complex and conflicting rights and interests. If you have a cap table consisting of:

• Convertible Notes
• Preferred Stock with a dividend, multiple, preference payment, anti-dilution, or other preferential treatment
• Warrants
• Options Vesting

then the Fully-Diluted ownership of your company is a misleading metric and probably overstates what you expect to put in your pocket if you are the holders of common stock or options.

Here is a great article that goes into the fully diluted metric being misleading: My Company Sold for $100 Million and I Got Zilch

• When planning a new financing capital raise, because the deal you make today has ramifications when the busines is sold.
• When evaluating a possible M&A transaction.

Capital Waterfall helps clients structure better deals, accelerate closings, maximize security holder value, and reduce deal execution risk. We allow you to see the impact on each security holder of multiple scenarios and deal structures in real time and let you know exactly what your securities are worth and how the legalese in investment documents impact your share of the waterfall.

The Capital Waterfall Scenario Modeling Solution solves the problem of managing complex capital tables through the deal process. Our solution applies the actual legal provisions in investment documents, rather than just assumed pro forma impacts. You can’t close a deal with pro forma reports. There can only be one correct distribution waterfall and our solution is the best way to achieve accuracy in applying the legal provisions affecting your capital table in both financings and M&A.

Popular cap table management software systems are capable of running projections for companies with simple cap tables, but when there are multiple financing rounds involved with each investor entitled to certain legal rights, such as preference payments, anti-dilution, dividends, debt to share conversions etc. these existing tools are unable to properly calculate the impact of such provisions on how much cash you put in your pocket.

A good law firm is essential, and all of our clients have had one on retainer for their M&A advisory. Law firms would fully admit, however, that financial spreadsheet modeling is not their core competency, whereas our product is available now to produce comprehensive, professional reports for analysis and decision making.

We have invested well over 1,000 hours in building the best model possible for quickly and accurately producing professional, insightful reports for decision making at deal time. Crucially, our model is set up to handle various provisions and clauses within security holder documents that impact the amount of the check that each person will receive. We believe our model is unparalled in the industry for solving the complex interdependent circular logic of every security holder’s legal rights and for delivering useful reports.

Simply export your company’s security data from Carta, Pipedrive, or other cap table management software to excel and send it to us. We can load your securities list into our scenario modeling engine, and our legal review team can work with you or your law firm to discuss security class attributes and buried legal rights. Our model is already configured to handle common security holder rights for convertible notes, preferred stock, warrants, and options, then it applies the Rational Investor Algorithm to determine for each security holder which legal rights to exercise to maximize economic return at various valuations.

At the heart of the Capital Waterfall model is computational logic that concurrently applies each security holders’ legal provisions to maximize their share. You don’t know the results for any one security holder until you know the results for every security holder, which is a massive circular logic challenge.

In what we call the Rational Holder Algorithm, the model simulates what happens at the closing table with each party vying to maximize their share of the proceeds by applying their legal rights. The model will automatically and concurrently apply for every security the impact of accrued interest & dividends, conversion ratios, anti-dilution adjustments, vesting, net-exercise calculations, and more.

As a result, we accurately model the actual proceeds each security holder receives in a future liquidity event, which can be far different than assumed based on fully-diluted percentages.

Our reports help clients answer the following questions:

• Distribution Waterfalls – Display the decision of our “Rational Investor” for each security holder.
• Scenario Modeling – See what key security holders would receive across multiple scenarios.
• Financing Terms – Model preferred or convertible note deals to see impact on future liquidity event payouts.
• Board Approval – Provide accurate report for each class, group, and individual security holder.
• Security Holder Approval – See IRR and return multiples for each security holder.
• Options Analysis – Measure impact of net exercise and vesting of options.
• Breakpoint Analysis – Determine the breakpoints for each security class.

We understand that deal leaders need accurate information that can be clearly reviewed by counsel and deal advisors. So, we provide supporting validation reports showing the calculation logic that was used in generating each deal report. These reports enable the entire deal team to drill down to verify any assumption that impacts who gets what and why in the distribution waterfall.

The implementation cost depends on the complexity of the cap table, the quality and organization of the investment documents, and the number of unique formulas to be configured into the Scenario Modeling Engine. We can provide a proposal based on these factors. We typically find that once we begin an engagement, our clients identify additional reports or situations for which our consulting services deliver additional value.