Waterfall
The contractual order in which proceeds from a sale or liquidation are distributed among debt holders, preference shareholders, and equity holders.
Also known as: Distribution waterfall, Proceeds waterfall
One-line definition
The waterfall determines who gets paid first, and how much, in any exit scenario — senior creditors at the top, common equity at the bottom.
Typical order
- Senior secured debt (principal + accrued interest).
- Mezzanine / subordinated debt.
- Preference shares (with any accrued preferred return).
- Equity (common shareholders, including management).
TS relevance
In distressed situations or thin-margin exits, the waterfall determines whether management equity is worth anything — a critical input to management incentivisation analysis.
Related terms
Preference Shares
Shares that rank ahead of ordinary shares for dividends and/or proceeds in a liquidation or exit, often used in PE structures to return capital to the fund before management.
Equity Value
The value of the shareholders' stake in a business, derived by subtracting net debt from enterprise value.
Mezzanine Debt
A hybrid financing instrument ranking between senior debt and equity, typically carrying a higher interest rate and often including equity warrants.
Senior Debt
The highest-ranking debt in a capital structure, with priority claim on assets and cash flows, typically provided by banks or institutional lenders.