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How to check someone else's waterfall

You receive a spreadsheet or a PDF showing who gets what from a sale. It looks right. Is it? Most differences between two waterfalls come from a handful of causes, and you can find them without reading a single clause, by testing them one at a time.

Step 1: match the starting point

Before comparing classes, compare what is being shared. Differences usually start here.

• Is the starting number the enterprise value or the equity value?
• Were debt, transaction costs and any convertible repayments deducted, and the same amounts?
• Are options counted in, and are they net of their strike?
• Do the totals add up to the amount being shared? If not, the other party's sheet has an error before any term matters.

Step 2: compare class by class

Put their figures beside yours and look at the pattern of the differences, not just their size. A single class off by a round amount is a different problem from every class slightly off.

Step 3: test the usual causes, one at a time

Change one term, recalculate, and see how much of the gap it closes. The causes that come up again and again:

1. Participation. One side treats a class as participating (preference plus a share of the rest) and the other as non-participating. This is the most common cause of a large gap in a mid-range sale.
2. Seniority. Classes ranked equally in one model and in order in the other. It only matters when the money does not cover all the preferences.
3. Dividends. Accrued dividends added to the preference on one side only, or compounded on one side and simple on the other, or measured to a different date.
4. The multiple. A 1.5x or 2x preference treated as 1x.
5. Options and warrants. Left out, counted gross of the strike, or counted when out of the money.
6. SAFEs and notes. Discount applied or not, converted before or after the preferences, or interest left off a note.
7. Deductions. Debt or expenses omitted.

If one change closes the whole gap, you have a strong lead. If two together do, look at both. If nothing does, the share counts or amounts are probably wrong, or a term is defined differently from anything you tried.

Step 4: take it back to the document

A match tells you which interpretation the other side used, not which is correct. The governing documents decide: the articles of incorporation, the shareholder agreement, the SAFE or note. Ask the other party a specific question: "did you treat Series B as participating?" It is a better conversation than "your numbers are wrong".

This guide is general education, not legal, tax or investment advice.