Cap Table Modelling Advanced Features: Exit Analysis


Capitalization tables are a necessary component of the financing/investment process for both founders and investors. For founders and previous shareholders, cap tables identify the effect on ownership of new capital raised, for investors, cap tables show what they are getting for what they are putting in. Although necessary, basic cap tables do not offer value beyond answering the simple question of who owns what before and after a financing round. However, advanced cap table models allow investors to analyze the impact of various complex deal structures and exit scenarios on return and resulting ownership. One of the more valuable features of advanced models is exit analysis, which is used to assess the impact on ownership of liquidation preferences, participation, and seniority. With an understanding of resulting ownership, founders and investors can assess the threshold of exit valuation in which they lose money, break even, or achieve a target return.

To understand the complexities of modeling exit scenarios, a simple case example will be used to illustrate how proceeds are distributed amongst investors with different rights and in different exit scenarios. If needed as a refresher, a brief overview of the economic terms that affect ownership at exit is given in Exhibit 1.


Let’s assume a situation where Company X sold to a strategic buyer and had previously raised capital from three investors over three rounds. To illustrate the impact of different preferred rights, Investor A has a 1x liquidation preference (LP) and 2x participation cap, B has a 1x LP and no participation and C has no LP. For comparison purposes, each investor put the same amount of money in and owns the same portion of the company before exiting.

Before modeling there are a few important things to remember:

  • Turn iterative calculations on
  • Keep track of leftover proceeds once LP is paid out as well as once LP and Participation are paid out
  • Break down calculations into columns to reduce errors and increase clarity

In the first scenario, all investors are paid out in proportion to their ending ownership. This means that each investor converted their preferred shares into common. For example, Investor A could have either taken 25% of $200 ($50) as a common shareholder or 2 x $20 ($40) as a preferred shareholder, thus they converted to common. The takeaway here is that liquidation preferences do not affect much in the upside, but as we will see later, can have a significant impact in the downside.

In the second scenario, we now see Investor A’s liquidation preference and participation come into play. The reason is that 2x their original investment ($40) is greater than what they would have made if they converted to common (25% * $150 = $37.5). For every other shareholder, their ownership is calculated by taking their % share of the proceeds less Investor A’s LP + Participation. For example, Investor B brings home 33% (25%/75%) of $110 ($150 – $40) which is $37.

In the third scenario, we see that Investor A has taken participation of $13. This is calculated by taking their share of the leftover proceeds after the liquidation preferences are paid out which is 25% of $50 ($90 – $20 – $20) or $13. Notice because of this participation right, Investor A ends up with around 14% more ownership than Investor B with no participation.

In the worst-case scenario, assuming the pari-passu method is used, the investors with liquidation preferences split their proceeds in proportion to their initial investment, leaving the other investors with nothing. Since both investors invested the same, they get an equal share of the proceeds.

Finally, in the worst-case scenario, but now assuming the waterfall method, Investor B is paid out first, then the leftover flows to investor A. If the waterfall method is used, the later series investors are more senior than early-stage investors. Since Investor B invest in the series B round, they achieve seniority over Investor A who invested in Series A. Thus, Investor B get’s their full LP of $20, and Investor A gets the remainder.


Referring to the above, we see the impact that preferred rights have when determining ownership upon exit. Going into the exit, each investor had the same share, however, in sub-optimal scenarios, the preferred investors with greater rights greatly outperform the shareholders without, often leaving the other shareholders with nothing. For founders and investors, this analysis sheds light on exactly how valuable preferred rights are in different scenarios giving you an edge in the negotiation process.

Note: This analysis should not be used to forecast returns, but rather to assess the impact on returns of different rights and scenarios.

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