Case 036Term sheets and waterfallsHard
Kalpvik Games sells for Rs 350 crore. Seed, Series A and Series B each hold preferred shares with different preferences, participation and seniority. Run the waterfall: who gets what?
1The situation
Kalpvik Games, a mobile games studio, agrees to sell itself for Rs 350 crore, with no debt and no cash. Three investor classes hold preferred shares. Seed invested Rs 6 crore for 12%, with a 1x non-participating preference. Series A invested Rs 30 crore for 20%, with a 1x participating preferenceThe investor first takes its money back and then also shares in what is left as if it held common shares, so it is paid twice. A cap limits the total it can receive this way. capped at 2x, Rs 60 crore in total. Series B invested Rs 90 crore for 18%, with a 1.5x non-participating preference, senior to both earlier classes.
Founders and the employee option pool hold the remaining 50% as common shares. Seed and Series A rank equally with each other, behind Series B. Each investor will choose to take its preference or convert to common, whichever pays it more.
2Your task
Run the waterfall at Rs 350 crore: what does each class receive, which investors convert, and which single term decides the founders' outcome?
Quick check
Roughly what do the founders and the pool, with 50% of the shares, receive from the Rs 350 crore?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
Series B takes Rs 135 crore, Series A Rs 60 crore, seed Rs 30 crore, and founders and the pool Rs 125 crore, 36% of the sale for 50% of the shares. Series B's 1.5x senior preference decides it: converting would give it only Rs 63 crore. Series A takes its money back and participates until its 2x cap binds, and seed converts. With a 1x Series B, founders would get about Rs 159 crore.
Step 1In what order do you run a waterfall with several classes?
Picture a queue at a ration shop where some people hold priority cards. The priority cardholders are served first, up to what their card allows, and only then does the general queue share what remains. A liquidation waterfall pays the most senior preference first, then the junior preferences, then splits whatever is left among common shareholders and anyone who chose to convert. Each investor also has a choice to make: take its preference, or give it up and join the common queue. You check that choice for each class against what the others do.
Start at the top. Series B is senior with 1.5x on Rs 90 crore, so its preference is Rs 135 crore. Converting would give it 18% of Rs 350 crore, about Rs 63 crore at most, so it takes Rs 135 crore. That leaves Rs 215 crore for everyone else, before the founders have seen a rupee. Seed's preference is only Rs 6 crore; converted, its 12% share of what remains is worth far more, so seed converts. Series A takes its Rs 30 crore back and then participates as if it held 20% of the common.
After Rs 135 crore and Rs 30 crore come out, Rs 185 crore is split among founders 50, Series A 20 and seed 12 parts. Series A's share would be Rs 45.1 crore, taking its total to Rs 75.1 crore, above the 2x cap of Rs 60 crore. So Series A stops at Rs 60 crore, and the excess goes back to founders and seed in their 50 to 12 ratio. Converting outright would give Series A only Rs 52.4 crore, so it stays participating. Final split: Series B Rs 135 crore, Series A Rs 60 crore, seed Rs 30.0 crore, founders and pool Rs 125.0 crore.
| Class | Owns | Choice | Receives, Rs cr | Multiple on money in | If B were 1x, Rs cr |
|---|---|---|---|---|---|
| Series B | 18% | takes 1.5x preference | 135.0 | 1.50x | 90.0 |
| Series A | 20% | 1x back, participates to cap | 60.0 | 2.00x | 63.4 |
| Seed | 12% | converts | 30.0 | 5.00x | 38.0 |
| Founders and pool | 50% | common | 125.0 | 158.5 | |
| Total | 100% | 350.0 | 350.0 |
Step 2Which single term decides the founders' outcome, and when does it stop mattering?
Series B's 1.5x senior preference. It takes Rs 135 crore, more than double its Rs 63 crore ownership share, and moving it to 1x would hand the founders about Rs 34 crore more, because Series A would then convert and seed's share would rise too. The founders' line climbs with the sale price but runs well below their 50% until Series B prefers to convert, which only happens above a sale of about Rs 750 crore, where 18% of the company is worth more than Rs 135 crore.
Say what this means for the people in the room. In a modest sale, the employees whose options sit in the common pool get far less than their percentage suggests, which is why a sale like this often comes with a carve-out, a slice of the price set aside for management to keep them through closing. The limitation of the model is that it assumes the pool is fully granted and vested; unvested or ungranted options would leave more for the founders.
Where candidates lose it
The common loss is paying everyone their ownership percentage, or paying the preferences in the order the rounds happened. Series B is senior here, and getting the order wrong moves tens of crores between classes.
The second is forgetting the cap on Series A's participation, or forgetting that capped participants and non-participating holders must each test whether converting pays more. A waterfall is a set of choices, not a single subtraction.
What the interviewer asks next
- At what sale price does Series A switch from participating to converting?
- How would a Rs 15 crore management carve-out paid ahead of everyone change the founders' take?
- If Series B were pari passu with A and seed instead of senior, what would each class receive at Rs 120 crore?
Company names and figures are illustrative.