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Exits: Waterfalls

Paul Clark
Paul Clark
Last updated: June 6, 2024
Greenville bridge

Nothing happens in investing without flowery metaphors. When we discuss “exits” we are talking about getting our money back out of an investment. This can happen in several different ways.

Typically, we are talking about a company being acquired, either by another one (a strategic exit) or by a professional investor of some kind (a financial exit); this is what the rest of this series focuses on. (There are other ways – IPOs, secondary transactions, and more – but we’ll ignore those for now.)

Now we know we are making an exit, we mix metaphors and start looking at waterfalls. The “waterfall” describes how the proceeds from an acquisition “flow down” to the various stakeholders.

At the very top of the waterfall, we have the initial problem: how much water (cash) is there going over this cliff?

The “headline” acquisition price, “purchase price,” or other similar terms is the starting point, the amount that the acquiror is promising in “consideration.” $100 million in this example.

The optimistic investor then multiplies $100 million by their share ownership according to the cap table to calculate their proceeds. Reality is going to hit (like standing under a NC waterfall) over the next few posts: a lot of water is going to evaporate before it reaches the equity holders in the plunge pool at the bottom. (Here is one example of reality hitting a badly informed investor when selling a gin company!)