How the waterfall works
On a sale, the price paid for the shares is not always split in proportion to ownership. Investors who came in with preference shares negotiated a liquidation preference in the shareholders' agreement: they are paid before ordinary shareholders. The calculation runs as a cascade:
- 1. Transaction costs are deducted.
- 2. Preferences are paid by order of seniority (pari passu at the same rank).
- 3. The remainder is shared pro rata to the number of shares: ordinary shares, participating or converted preference shares, exercised BSPCE.
- 4. Each non-participating investor chooses between its preference and conversion, whichever pays more.
Example: a sale at €12M
Two founders hold 59.3% of the share capital. The Series A investors put in €5M with a 1x non-participating, rank 1 preference: they receive €5,000,000, i.e. 41.7% of the price for 18.5% of the capital. The Seed investors are better off converting and receive €1,363,636.
The employees exercise their BSPCE and receive €181,818 net of the exercise price. Overall, the founders receive 45.5% of the sale price: the preferences cost them 13.8% of the proceeds. This is the scenario loaded in the calculator above. Move the price to see where the gap starts to close.
The clauses that make the difference
The multiple (1x, 1.5x, 2x) sets the guaranteed amount. Participation decides whether the investor gets both its preference and a share of the remainder, and the cap limits that combination. The rank determines who is paid first when the price is not enough to pay everyone back. In France, the 1x non-participating preference is the market standard at seed and Series A; tougher terms mostly appear in difficult rounds.
Preparing for an exit
Frequently asked questions
What is an exit waterfall?
It is the order in which the price paid for a company is distributed among its shareholders. Investors holding preference shares are paid first, up to their liquidation preference, and the remainder is then shared pro rata to the number of shares held.
How does a 1x non-participating liquidation preference work?
The investor takes the higher of two amounts: its money back once (1x), or its pro rata share after converting into ordinary shares. At a low sale price it takes the preference; at a high price it converts.
What is the difference between participating and non-participating preferences?
A participating preference gets the investment back and then also shares in the remainder pro rata (the “double dip”): it is the clause least favourable to founders. A cap (for example 3x the investment) limits this; above the cap, the investor is better off converting.
What happens to BSPCE on an exit?
BSPCE are French employee share warrants, the local equivalent of stock options. They only pay out if they are “in the money”, meaning the price per share on the sale exceeds their exercise price. The holder then receives the difference; otherwise they are not exercised and receive nothing.
What do seniority rank and pari passu mean?
When several rounds carry preferences, the shareholders' agreement (pacte d'associés) sets the order in which they are paid: rank 1 is paid before rank 2. At the same rank (pari passu), investors share the available amount pro rata to their preferences.
Does French law treat liquidation preferences differently?
French SAS companies (société par actions simplifiée, the usual form for start-ups) can issue preference shares (actions de préférence) with a priority right on sale proceeds, written into the articles of association and the shareholders' agreement. The mechanics are the same as in UK or US deals; the calculator applies them to whatever terms you enter.
Indicative simulation: excludes debt, earn-outs, escrow, ratchet clauses and capital gains tax. It is neither legal advice nor investment advice.