A distribution waterfall defines the order and conditions under which proceeds from a company sale or liquidation are allocated among different shareholder classes — preference shareholders, ordinary shareholders and option holders. It models sequentially: (1) repayment of investor liquidation preferences, (2) conversion or participation of preferred shareholders based on type (participating vs non-participating), (3) residual distribution to ordinary shareholders. Modelling the waterfall across all exit prices is essential for understanding who receives what at each valuation level — critical for fundraising term negotiations and exit planning.

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Example: a startup with founders 58%, Series A 22% (1x non-participating preference, CHF 2.2M), seed 12% (1x participating preference, CHF 1.2M) and ESOP 8% sells for CHF 15.0 million. Waterfall: (1) seed receives CHF 1.2M preference then participates (12%); (2) Series A chooses between CHF 2.2M and conversion — conversion (22% × 15M = CHF 3.3M) > preference, so converts; (3) residual distribution: Series A 22% × CHF 13.8M = CHF 3.04M, seed CHF 1.2M + 12% × CHF 13.8M = CHF 2.86M, ESOP 8% × CHF 13.8M = CHF 1.10M, founders CHF 6.76M.

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Hectelion models distribution waterfalls in every fundraising and sale mandate, simulating all exit scenarios across every share class to inform negotiation and exit planning.