Ensuring Your Return: Waterfall Analysis and Exit Strategies for Startup Investors
Episode Summary
In this enlightening episode of "Venture Declassified," hosts Ben Pidgeon, Mike Kelly, and Jacob Schpock tackle the subject of waterfall analysis, offering listeners a clear understanding of its role in the investment process. The topic comes to life through a real-life scenario where their portfolio company faced an acquisition offer, leading to choices between cash, equity, or a mix of both.
Ben starts by defining waterfall analysis, explaining the allocation of returns and the considerations for investors, like liabilities, deferred wages, and fees. Mike emphasizes the importance for angel investors to ask for detailed breakdowns and understand the financial health of the acquiring company. Jacob underscores conducting due diligence and evaluating various payout options such as cash, equity, and earn-outs.
Adding to the complexity, they explore liquidation preferences, convertible notes, and safes, and how these elements can significantly affect investor returns during an exit event. Jacob emphasizes the importance of understanding these factors to make informed investment decisions.
This episode of "Venture Declassified" is packed with valuable insights for both novice and experienced investors, making it essential listening for anyone involved in the startup investment ecosystem. Tune in to gain a deeper comprehension of waterfall analysis and navigate the nuanced world of investment returns more effectively.
Key Topics
• Definition and explanation of waterfall analysis
• Breakdown of options: Cash, equity, earn-out, seller’s notes and buyer’s notes
• Understanding financials and capital structure of the acquirer
• Evaluating the acquiring company: Private equity vs. venture-backed firms
• Situational analysis for decision making:
• Keeping money in vs. cashing out
• Impact of overall portfolio performance and liquidity needs
• Evaluating industry growth and leadership team
Connect
Mike Kelly
• Website
Ben Pidgeon
Jacob Schpok