Aleksey Krylov - Waterfall Analysis Case Study 7-21-2023

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Waterfall Analysis Startup VC Context

• October 28, 2020

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Aleksey Krylov

• 20 years of experience
• CFO for private/public companies with focus on
  strategic transactions (MA, JV, fundraise)
• 12 years with 4 different family offices VC,
  LBO, structured and distressed investing 25
  deals, 500M invested
• Started career in investment banking
• MBA Columbia Business School, BSBabson College,
  CFA Charterholder

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TOC
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Waterfall

• As the name implies The analysis shows the
  distribution of value at a liquidity event
• - Aleksey Krylov

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Liquidity Events

• IPO
• MA
• Liquidation

Startups work hard and for a long time to strike
gold on an IPO and MA, and unfortunately
liquidation can be forced on them quickly, -
Aleksey Krylov
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Clear cut vs. contested
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TOC
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Securities

• Common
• RSUs
• Convertibles notes/SAFEs
• Preferred
• Options/warrants
• Senior debt/senior secured debt/debentures

All securities have a role to play, and
experience finance professional can use them
skillfully to align interests of various
stakeholders, - Aleksey Krylov
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Financing transactions startups
Not all funding rounds follow this sequence, but
there is a logic to this progression which
reflects the companys growth - Aleksey Krylov
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Business will drive financing structures

• Sunrun example
• Seed
• Series A
• Senior Secured Debt

Particulars of a funding round often reflect
strategic goals the company is targeting in the
next 12-18 months, - Aleksey Krylov
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TOC
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Scenario 1

• 1) Founder launched the business with 0 CEO,
  Sales Marketing
• 1.1) Founder found a co-founder, took 0 CTO
  for 35 of the business
• 2) Angel investors put in 500,000 via
  convertible note, capped at 10M, 5 interest
• 3) Series A investors put in 5M via pref _at_15M
  pre
• 4) Series B investors put in 20M via pref _at_65M
  pre
• 5) IPO investors put in 50M via common _at_100M
  pre

One has to consider several funding paths and
optimize transaction structuring for downside
risk, - Aleksey Krylov
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Scenario 2

• 1) Founder launched the business with 0 CEO,
  Sales Marketing
• 1.1) Founder found a co-founder, took 0 CTO
  for 35 of the business
• 2) Angel investors put in 500,000 via
  convertible note, capped at 10M, 5 interest
• 3) Series A investors put in 10M via pref _at_50M
  pre
• 4) Series B investors put in 10M via pref _at_25M
  pre
• 5) IPO investors put in 50M via common _at_100M
  pre

Sometime the startup needs to raise capital at
the most inopportune time and incur strong
dilution, - Aleksey Krylov
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Protections

• ROFR ?
• Anti-dilution
• WA?
• Full-ratchet?
• Dividends ?

Negotiated protections can help protect investor
rights and economic interest, - Aleksey Krylov
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Scenario 3

• 1) Founder launched the business with 0 CEO,
  Sales Marketing
• 1.1) Founder found a co-founder, took 0 CTO
  for 35 of the business
• 2) Angel investors put in 500,000 via
  convertible note, capped at 10M, 5 interest
• 3) Series A investors put in 10M via pref _at_50M
  pre
• 4) Series B investors put in 10M via pref _at_25M
  pre
• 5)

Capturing upside through creative structuring is
a balancing act between being greedy and getting
deal done, - Aleksey Krylov
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Scenario 3 liquidation

• IP Value sold for 12.5M
• Liquidation waterfall triggered
• Series B gets 10M (remember dividends and/or
  liquidation preference)
• Series A gets 2.5M
• Angels get zero
• Common gets zero

No one wants to hit the brick wall but it
happens, - Aleksey Krylov