{"id":32351,"date":"2026-02-18T11:16:35","date_gmt":"2026-02-18T16:16:35","guid":{"rendered":"https:\/\/breakingintowallstreet.com\/?post_type=biws_kb&p=32351"},"modified":"2026-02-18T11:18:09","modified_gmt":"2026-02-18T16:18:09","slug":"flow-of-funds","status":"publish","type":"biws_kb","link":"https:\/\/breakingintowallstreet.com\/kb\/venture-capital\/flow-of-funds\/","title":{"rendered":"The Flow of Funds (Cap Table Waterfall) in Venture Capital, M&A, and More"},"content":{"rendered":"

Flow of Funds Definition:<\/strong> In venture capital and M&A modeling, the \u201cFlow of Funds\u201d refers to a model that calculates the exit proceeds in a deal to each investor group and determines the proper conversion decisions for all the investors; it is relevant primarily for acquired private companies because public company shareholders rarely have complex terms attached to their ownership.<\/p><\/blockquote>\n

\u201cFlow of Funds\u201d can refer to many concepts in finance, from macro indicators about the banking system to the closing documents and wire transfers in a deal.<\/p>\n

But in this article, we focus on the schedule that shows how much each investor group earns when a venture capital-backed startup sells<\/strong>, which is also known as a \u201cCap Table Waterfall\u201d:<\/p>\n

\"Flow<\/p>\n

This schedule is relevant mostly in M&A exits because in IPOs<\/a>, VC-held preferred shares normally convert to common shares and lose their special terms, such as Liquidation Preferences<\/a>.<\/p>\n

Also, in M&A deals, each group\u2019s conversion decision<\/strong> (i.e., stay in preferred or convert to common) affects the optimal decisions of the other groups, which requires a specialized approach.<\/p>\n

If the company has only 1 \u2013 2 investor groups, we can easily write formulas to determine the optimal decision for each group:<\/p>\n

\"Simple<\/p>\n

But this becomes unwieldy as more groups invest and VC investment terms become more complex.<\/p>\n

In theory, we could write a formula to handle a case with 5 VC groups and different investment terms, but it would be very difficult to audit and understand.<\/p>\n

So, we normally approach this task by analyzing all possible conversion decisions <\/strong>and picking the set that maximizes overall proceeds to the VC investors.<\/p>\n

To illustrate, we\u2019ll walk through an example with 3 VC investor groups, company founders with common shares, and employees with an options pool:<\/p>\n

Files & Resources:<\/strong><\/h3>\n