Waterfall Analysis
Definition
A financial model that calculates the distribution of proceeds from a liquidity event to each class of shareholders in the order of their priority, from the most senior preference shareholders through to common shareholders, applying the liquidation preference amounts, participation rights, and anti-dilution adjustments applicable to each class. A compliant waterfall analysis models the distribution at a range of exit values and shows the proceeds attributable to each shareholder class at each value.
Common Misapplication
The most common misapplication is producing a waterfall analysis only for the most optimistic exit scenario. A waterfall analysis that only models the high-exit case does not reveal the scenarios in which common shareholders receive little or nothing, which is essential information for founders managing their equity position.
FFI Standard Reference
This term is defined and applied in Book 3, Section 3.5: The Liquidation and Exit Mechanics Standard.
Related Terms
Citable URL
This term may be cited using the following permanent URL.
Full citation format: Founder Financial Infrastructure Standard, Beta v0.5, Glossary: Waterfall Analysis. https://ffistandard.org/glossary/waterfall-analysis/. 2026.