Meaning
Allocation schedules define the sequential method by which investment proceeds are distributed to various classes of equity holders and creditors during a liquidity event. The distribution waterfall specifies the exact order and amounts that each share class receives before the next tier is entitled to any cash. It translates complex legal rights from the corporate charter into a mathematical payment model.
This process ensures that preferential terms such as liquidation preferences and accrued dividends are honored in full before common shareholders receive any capital. By establishing this clear pathway, the model removes ambiguity during the final settlement of a corporate sale.
Liquidity Event
Corporate transactions trigger the execution of the payment schedule to distribute the proceeds of a sale or merger. During these events, the distribution waterfall governs the flow of capital from the escrow account to individual bank accounts. This calculations must be approved by the board of directors and legal counsel to avoid post-closing litigation.
It provides a single verified record of the transaction.
Preference Right
Investor protections determine how the proceeds are divided among different funding rounds. The distribution waterfall incorporates specific multipliers and participation caps that alter the flow of funds depending on the total exit value. This structure means that early investors might receive their initial capital back while later investors receive a multiple of their investment.
The calculations reflect the negotiated terms of each financing round.
Capital Return
Common shareholders usually occupy the final tier of the repayment schedule. Under the distribution waterfall, these participants only receive funds if the exit value exceeds the total preferences held by senior investors. This positioning means that founders and employees are highly dependent on achieving a valuation that clears the prior hurdles.
