Receiving a Series A term sheet is an ego boost, but the valuation number is often a trap. You need to understand the waterfall logic to see how much cash actually lands in your pocket during an exit.

A liquidation preference framework defines the strict hierarchy of payout distributions during a liquidity event, ensuring investors recover their capital before common shareholders see a dime. It acts as downside protection for VCs and dictates whether founders get rich or just get acquired.

Key Bullets:

• Benchmark: Standard Series A terms are 1x non-participating preferred. According to recent data from Cooley, over 96% of deals follow this structure. Anything higher is aggressive.
• Rule: Always model the "downside scenario" (selling for less than the post-money valuation) to see if you get wiped out.
• Warning: "Participating preferred" creates a double-dip scenario where investors get their money back plus their percentage share, drastically reducing founder returns.

How to read this: Use this guide to audit your term sheet against market realities.

Use this waterfall visualizer to map out exactly how an exit proceeds. This logic separates "Paper Wealth" from "Bank Balance."

The Waterfall Visualizer
This framework assumes a hypothetical $40M Exit where you raised $10M Series A for 20% of the company, with $2M in venture debt.

1. The Creditor Wall (Debt)
Debt always eats first. Before any equity holder (you or the VCs) touches a cent, secured creditors are paid in full.

• Logic: Gross Sale Price - Outstanding Debt = Distributable Proceeds.
• Sample math: $40M (Exit) - $2M (Debt) = $38M remaining.

2. The Preference Hurdle (Preferred Stock)
This is where the term "Liquidation Preference" activates. Investors execute their right to get their principal back.

• Standard Logic (1x Non-Participating): The VC chooses either their 1x money back ($10M) or their % ownership of the remaining pot ($7.6M). They choose the higher amount.
• Predatory Logic (Participating): The VC takes their $10M off the table immediately and still owns 20% of the remaining pot.
• Sample math (Standard): VC takes $10M (since $10M > 20% of $38M). Remaining pot: $28M.

3. The Seniority Check (Stacking vs. Blending)
If you have multiple rounds (Seed + Series A), you must determine who stands in line first. Check your Cap Table SaaS Framework to see how this impacts your specific ownership.

• Standard: Pari Passu. Seed and Series A split the preference pot pro-rata based on capital invested.
• Stacked: Series A gets paid their full preference before Seed sees a dollar.
• Impact: In a low exit (e.g., $15M), a stacked Series A might wipe out the Seed investors entirely.

4. The Common Pool (Founders & Employees)
This is the residual value. It is distributed to Common Stock holders according to ownership percentage.

• Logic: (Remaining Pot) * (Founder Ownership %).
• Sample math:
• Pot: $28M.
• Founder Share (e.g., 40%): $11.2M.

Note: If the VC had "Participating Preferred," the pot would be smaller, and they would also take 20% of this final $28M, further diluting you.

Summary of Outcomes

To negotiate effectively, you need to know what is "market." You cannot argue from emotion; you must argue from data. Here is the reality for Q4 2024 and beyond:

• 1x Liquidation Preference: This is the overwhelming standard. Carta data indicates that 96–98% of Series A deals carry a simple 1x preference. If an investor asks for 2x, they are signaling that they view your business as high-risk or distressed.
• Non-Participating Preferred: Approximately 96% of deals are non-participating. This means investors get their money back OR their share of the company, not both.
• Participation Caps: In the rare 4% of cases where participation is included, it is almost always capped at 2–3x. Uncapped participating preferred is a "walking dead" term — if you see it, run or Renegotiate hard.