Seniority and stacked waterfalls

With more than one preferred series, order matters as much as the multiple. Pari passu means Series A and Series B share preference proceeds pro-rata to their preference amounts, same priority. Stacked / senior means a later series (often Series B) is paid its preference first. Earlier preferred waits. Common is last.

The big idea

Picture a waterfall with extra ledges. Cash hits debt and fees first, then the senior ledge, then the junior ledge, then common. A short river never reaches the bottom pool.

The analogy breaks on conversion elections. Real charters specify who chooses first and whether a class converts as a group. Model with a waterfall spreadsheet, not vibes.

Walking through a stack

• Series A: $10M in, 1× non-participating, junior to B
• Series B: $20M in, 1× non-participating, senior
• Exit: $25M

Series B preference = $20M → paid in full
Remaining = $5M
Series A preference = $10M, only $5M left → A gets $5M
Common gets $0

Series A "owns" plenty on a cap table and recovers half its capital. Common is wiped.

$50M exit, as-converted ownership B 30%, A 20%, common 50%, B still senior, both non-participating:

B preference $20M vs convert 0.30 × $50M = $15M → B takes $20M
Remaining $30M
A preference $10M vs convert 0.20 × $50M = $10M → $10M either way
Remaining $20M → common $20M

Pari passu instead, A $10M + B $30M = $40M of claims, $25M exit:

A share = 10/40 × $25M = $6.25M
B share = 30/40 × $25M = $18.75M
Common = $0

At $100M, aggregate preference $40M vs preferred as-converted 50% × $100M = $50M → preferred converts as a group. A $20M, B $30M, common $50M.

An acquirer offers $35M. A naive common holder with 2% fully diluted expects 0.02 × $35M = $700k. With $40M of 1× preferences ahead, residual is $0. That is how preference overhang kills employee outcomes in "successful" acquihires.

Common mistakes

• Ignoring senior later rounds when modeling what Series A common is worth.
• Quoting ownership × exit with no stack.
• Forgetting to track overhang after every financing. It is as basic as runway.

Check yourself

B is senior with a $20M 1× preference. A has $10M 1×. Exit $25M. What does common get?

$0 — B takes $20M, A takes the remaining $5M.

What is preference overhang if A invested $10M and B $30M, both 1×?

$40M — the sum of the preference claims above common.

Key takeaways

• Pari passu shares one ledge; stacked seniority adds ledges.
• A sale below overhang can zero common even when the headline looks fine.
• Track overhang as a single dollar figure after each round.
• Charter election order matters at the edges — spreadsheet it.

Further learning

Kirsty Nathoo on preferred vs common in practice:

Next: the liquidation preference map.