FAQ

Capital Waterfall Scenario Modeling Solution solves the problem of managing complex capital tables through the deal process. Our solution applies the actual legal provisions in investment documents, rather than just assumed pro forma impacts. You can’t close a deal with pro forma reports. There can only be one correct distribution waterfall and our Solution is the best way to achieve 100% accuracy in applying the legal provisions affecting your capital table in both financings and M&A.

Capital Waterfall bridges the gap between the attorneys who are expert at drafting and interpreting investment documents and the financial modelers who are expert at configuring Excel to produce distribution waterfalls. We have developed a proprietary process for converting legalese into Excel formula resulting in accurate distribution waterfalls.

Attorneys are experts at drafting and interpreting Investment Documents. However, they use complex word intensive provisions to explain how the financial formula operate. When requested to interpret these provisions, the typical response is a detailed memo that cannot be used by the financial modeler. Further, the process used by attorneys to validate securities data (the rates, dates, amounts, funding dates, etc. of each Investment Document) are not typically delivered in Excel or have an audit history. As a result, the pro forma deal model is often not accurate, and it is expensive and time consuming to validate the impact on the distribution waterfall.

A proforma model assumes that all equity derivatives (warrants, options, convertible debt) are exercised to create dilution. However, at the closing table of a deal, the actual terms of each security must be applied. For instance, a conversion formula in a convertible note may require multiple complex mathematical calculations that create different outcomes based on different enterprise valuations. Another challenge is that pro forma cap tables assume that all potentially convertible/exercisable securities are applied when in fact, underwater options and warrants will not be exercised and net exercise provisions will reduce the total number of shares actually issued. In other words, using the conventional “fully diluted” cap table will not provide an accurate picture of the actual closing securityholder waterfall.

Traditional capital table management software is designed to be standardized and used by thousands of companies, resulting in rigid software code and long product release times. Capital Waterfall is built on Excel and can be customized rapidly to fit the unique provisions in a client’s investment documents, rather than a standardized template.

As a result of this core difference, there are three big gaps that Capital Waterfall fills:

1. Actual Investment Formula - traditional software merely lists the pro forma impact of each security in a distribution waterfall, whereas Capital Waterfall actually applies the exact formula in the investment documents to provide accurate results, not theoretical.

2. Transparency with “Calculation Walkthroughs” - traditional software has no transparency into how the investment documents operate, whereas Capital Waterfall explains how the actual legal provisions in the investment documents impact the investor.

3. Comprehensive and Flexible Reporting - traditional software has limited reporting, whereas Capital Waterfall has extensive reports designed for each phase in the deal from formation, board approval, shareholder approval and actual securityholder distribution of merger consideration.

The Capital Waterfall Solution helps clients structure better deals, accelerate closings, maximize securityholder value, and reduce deal execution risks. Imagine seeing the impact on each securityholder of multiple scenarios and deal structures in real time. Know exactly what your securities are worth and how the legalese in the investment documents impact your share of the waterfall.

Our Solution transforms your investment documents into Dynamic Closing Binders, validated securities data, security class attributes, and excel formulas. This data and formula are then input into our Excel model that applies the “Rational Investor Algorithm” to determine for each securityholder which legal rights to exercise to maximize economic return at various valuations.

The Rational Investor Algorithm understands that the behavior of, and outcome for each security in the waterfall is inter-dependent on what legal rights other securities exercise to maximize how much consideration each is entitled to.

At the heart of the CapFall model is computational logic that keeps tabs on what every single security in the waterfall would receive while hypothetically evaluating ‘what if’ scenarios for securities exercising their rights to exchange for different kinds of stock, and how such actions then have ramifications for the rational action of every other security, in a conceptual circle of each security’s action both influencing and being influenced by every other security exercising legal rights, vying for its optimal place in the waterfall.

Amid this, the CapFall model calculates the impact of Anti-Dilution, Net-Exercise, and other legal provisos of corporate ownership that reshape the waterfall for all involved.

The waterfall that you receive from this exacting and comprehensive process is meant to mirror the reality of your future cap table, and can be a far different end-product from a waterfall based on an assumption of Fully Diluted shares.

Customizable reports are delivered from our Deal Report Center and mapped to each phase of the deal to provide timely insights:

Deal formation - model multiple valuations and gain insights from the data

Board approval - accurate report for each class, group and individual securityholder

Securityholder approval - see IRR and return multiples for each security

Representations and warranties - reduce disputes, holdbacks, setoffs and litigation risks

Rights analysis - measure impact of net exercise, and of assumption vs exercise of options.

We understand that deal leaders need accurate information with a validation history that can be quickly reviewed by counsel and deal advisors. So, we provide a supporting “Validation Report” that shows the securities data, deal assumptions and legal formulas that were used in generating your deal report. This enables the entire deal team to drill down to verify any assumptions or changes that impact a report.

The Solution is implemented quickly and cost effectively using our consultants and our offshore legal services support team following our standard procedures for scalable and auditable results. Because of the extensive effort to build and test our Solution, it can be implemented and generating reports in a few days with an upload of your capital table management software data. Once the basic solution is implemented, the Client can choose to add more functionality to the Model as the deal progresses and more detailed analysis is needed.

The implementation cost depends on the complexity of the cap table, the quality and organization of the investment documents and the number of unique formulas to be extracted, classified and then configured into the Scenario Modeling Engine. We can quickly provide a proposal based on these factors. We typically find once our clients configure their Scenario Modeling Engine, they identify additional reports or situations for which our consulting services deliver additional value.

Our Solution is a collaboration of TILT Analytics and Dynamic Deal Advisory with a combined 50+ years of Wall Street deal management, complex financial modeling and consulting expertise. Please reach out to see if we can be of service to ensure you get your share of the distribution waterfall.