Use LLC rules to model C corp waterfall

You can use LLC waterfall rules to model a C corp waterfall resulting in the exact distribution to affected holders at any equity value. To provide guidance on how this is achieved we have set up a fictional example.

Fictional example

Preferred company classes

Class	Price per unit (PPU)	Number of units	Liquidation preference	Participation
Series seed	$1	1,000,000	1 x investment	Yes No cap
Series A	$2	2,000,000	2 x investment Precedes previous class	No

There are also 1,000,000 Common shares and an option pool to Common with 50,000 vested options at an exercise price of $3.

Breakpoints for the C corp waterfall

If the equity value is above the highest breakpoint of $17,050,000, all shares (4,050,000) participate equally. Example: At an equity value of $21,100,000, every share receives exactly $1 in addition to the sums in the above table.

Breakpoint	Breakpoint amount	Proceeds to Series Seed in the step	Proceeds to Series A in the step	Proceeds to Common in the step	Proceeds to options in the step
Series A liquidation preference	$8,000,000 ($2 x 2,000,000)	0	$8,000,000 PPU = $4	0	0
Series seed liquidation preference Common starts participating after this step	$9,000,000 ($1,000,000 Seed preference + previous breakpoint)	$1,000,000 PPU = $1	0	0	0
Options exercise	$15,000,000 (Seed and Common classes participate until Common reaches the exercise price of 2 million shares x $3)	$3,000,000 PPU = $4	0	$3,000,000 PPU = $3	0
Series A converts at Common price $4	$17,050,000 (Seed and Common, including the exercised options, participate until Common price reaches $4: $1 x 2,050,000)	$1,000,000 PPU = $5	0 Total PPS is still $4, equal to the Common PPS in this step, which is why Series A is converting here	$1,000,000 PPU = $4	$50,000 PPU = $1

Create classes

To set up the LLC waterfall, based on the above examples, you must create the classes in the table below.

Class	Price per unit (PPU)	Number of units	Liquidation preference
Common	Anything you choose	1,000,000	Off
Series seed	$1	1,000,000	Off
Series A	$2	2,000,000	Off
Options to Common at $3	Anything you choose	50,000	Off

Create LLC waterfall steps

Create waterfall steps based on the example above.

1. In Diligent Equity go to your company Waterfall.

2. Select Customize.

   The Customize page opens where you can add your distribution steps.

3. Create the following steps outlined in the table below.

   Distribution step	Threshold type	Setting	Distribution setting
   1	Return multiple	Multiple = 2	Percentage = 100% to Series A Pro rata based on = Either Units / Investments (Doesn’t affect result) Distribution type = Either Narrow / Wide (Doesn’t affect result)
   2	Return of Capital	Don't select Dividend	Percentage = 100% to Series A Pro rata based on = Either Units / Investments (Doesn’t affect result) Distribution type = Either Narrow / Wide (Doesn’t affect result)
   3	PPU	PPU = $3 Class = Common	Percentage = 100% to Series Seed and Common Pro rata based on = Units Distribution type = Wide (Narrow is not an option in this step)
   4	PPU	PPU = $4 Class = Common	Percentage = 100% to Series Seed and Common Pro rata based on = Units Distribution type = Wide (Narrow is not an option in this step)
   Residual	N/A	N/A	Percentage = 100% to all existing classes Pro rata based on = Units Distribution type = Either Narrow / Wide (Doesn’t affect result)