About Limited Liability Company waterfall

The Limited Liability Company (LLC) waterfall is a method used to calculate shareholder proceeds during a liquidation event such as a merger, acquisition, or liquidation of a company. Calculations are based on share ownership and follow a set of distribution rules for different equity classes. To use the LLC waterfall your company type must be set as an LLC-Limited liability company. The LLC waterfall functionality is accessible from the cap table and introduces some terminology changes, like using “units” instead of “shares”.

LLC waterfall types

LLC companies have two types of waterfall to choose from. Diligent plans to unify these sometime in the future without any data loss to customers.

  • Distribution step based waterfall A waterfall based on a set of distribution rules used to calculate shareholder proceeds.

  • MOICC/IRR vesting based waterfall Our legacy LLC waterfall which is a subtype of LLC waterfalls, implemented in 2022. It's based on nominal share prices, multiple on invested capital (MOIC), and internal rate of return (IRR) based vesting with limited functionality. For more information on this waterfall type go to LLC waterfall user guide.

LLC waterfall compared to C corp waterfall

  LLC waterfall C Corp waterfall
Definition Defined by a series of increasing thresholds where distribution rules change. Defined by liquidation preferences and preferred stock participation settings.
Modeling capabilities Can model any LLC or C corporation (C corp) waterfall. Can model any C corp waterfall but can't model using the full range of an LLC waterfall’s functionality.
Distribution rules

Rules must be explicitly spelled out.

Common shares receive proceeds only after all liquidation preferences are satisfied.
Implicit rules No implicit rules. Everything is explicit. There are implicit rules, like converting preferred stock to common stock when it's financially beneficial.
Versatility More versatile, allowing for a wider range of threshold conditions and modeling more complex rules. Less versatile and typically follows a more straightforward approach.
Stock conversion Not applicable. Rules are explicitly defined without stock conversion. Converts preferred stock to common stock, allowing for participation on an equal footing with common shares.

Using the LLC waterfall

The LLC waterfall is dedicated for modeling LLC companies. However, you can model certain LLC distributions using the classic C corps waterfall, or use the use the LLC waterfall functionality to model C corps distribution rules.

Glossary

Term Definition
Share and Unit

Designed with start-ups and venture capital firms in mind, Diligent Equity uses "share" as a term for a part of ownership in the company. With the expansion of LLC functionality, the term "unit" is more commonly used.

  • Use one or other of these terms or use them interchangeably.

  • For this guide's purposes "share" and "unit" mean the same thing.
Holder

Refers to "shareholder", "stockholder", or "unit holder".
Breakpoint Refers to a rule that defines an increasing threshold amount.
Step Refers to the distribution step or tier. A step is a set of rules that set increasing thresholds and specify how amounts are distributed between them.

Prerequisites

  1. Set your company up as an LLC company in Diligent Equity. For more information go to Add and manage a Limited Liability Company.

  2. Select the Distribution step based waterfall as your LLC waterfall type for your company.

  3. Enter and save the cap table data for the company.

  4. Add each step one at a time. For more information go to Add waterfall distribution steps.