Waterfall IQFrom headline price to cash in hand
An offer of $100 million rarely means $100 million in shareholders' hands on the closing date. Parts of the price are held back, paid later, or paid only if targets are met. To compare offers fairly you need three numbers, not one.
The pieces of a price
- Cash at close. Paid on the closing date, after debt and costs.
- Escrow or holdback. A portion held back, often for 12 to 18 months, to cover claims the buyer may raise. Usually released in full, but not always.
- Earnout. Extra price paid only if the business reaches agreed targets. The least certain part.
- Price adjustments. Changes after closing, for working capital or debt, that can move the total either way.
The three numbers
- Cash on the day. What you can count on at closing.
- Expected cash. Every payment weighted by how likely it is to be paid.
- Value at closing. Expected cash with each later payment discounted back to the closing date, because money later is worth less than money now.
Two offers compared
Offer A has a bigger headline but more of it is contingent. Offer B is smaller and almost all cash. Use a 10% discount rate.
| Offer A | Offer B | |
|---|---|---|
| Cash at close | $80.0M | $95.0M |
| Escrow, 12 months, 90% likely | $8.0M | – |
| Earnout, 18 months, 40% likely | $22.0M | – |
| Headline | $110.0M | $95.0M |
| Expected: 80 + 8×0.9 + 22×0.4 | $96.0M | $95.0M |
| Value at closing (10% a year) | $94.2M | $95.0M |
Offer A looks $15M better on the headline, about $1M better in expectation, and about $0.8M worse once the wait is priced in. The answer also moves with the earnout: if its likelihood were 60% instead of 40%, Offer A's expected value rises by $4.4M, to $100.4M, and it wins on expected cash and on value at closing ($98.0M). It still loses on cash on the day.
Questions to ask about any earnout or escrow
- Who controls the business after closing, and so the metrics the earnout depends on?
- Is the escrow released in a lump or in stages, and what claims can use it?
- How is each payment shared between the classes? An earnout paid on top of a preference is shared differently from the closing cash, because the preferences have already been paid.
- What discount rate reflects the risk of waiting? Safe money and equity-like money are very different.
Who gets the later money?
Because preferences are paid from the first dollars, later payments are usually shared by whoever is still taking part in what is left: common stock, converted preferred and participating preferred. A class that is only protected by a fixed preference may receive nothing more. Escrow is the exception: it is normally released in the same proportions as the closing cash. Waterfall IQ runs each payment through the waterfall in date order, so a preference is never counted twice and each class's share of each payment is shown.
Figures are illustrative. This guide is general education, not legal, tax or investment advice.
See your own numbers
Enter your cap table in Waterfall IQ and watch who gets paid change as you move the exit price. Free to explore, no card needed.
Try the tool