Following up on my exit analysis blog post, Steve Kane brings up a great comment point:  entrepreneurs should clearly understand how exit proceeds would be allocated.

Participating stock structures can be complicated (e.g. “participating preferred with a 2x multiple and 3x cap“), and they can route a surprising chunk of the exit proceeds away from the common stockholders and to the investors.  In many deals, a 1% common shareholder gets nowhere near $1m in a $100m exit.

Cutting through the complexity is easy:  make a payoff table showing what each share class gets for a range of acquisition cases (say, in $5m increments), then graph it.   If you’re contemplating a few options, you should be able to clearly see the difference in return at various price points.

If you’re considering a term sheet and don’t understand (or like) what you see, send your graph to your investor:  “is this what you meant?“