The Flow of Funds: How to Make Cap Tables Flow Like Water

Why It Matters

Accurate flow‑of‑funds modeling ensures venture investors capture maximum returns and helps founders anticipate dilution, making it essential for any multi‑stage financing or exit scenario.

Key Takeaways

• Flow of funds schedule maps proceeds to each investor group.
• Liquidation preferences and participating preferred affect conversion decisions.
• Excel model simulates all conversion combos to maximize VC returns.
• Employee option exercise depends on implied share price versus strike.
• Complex cap tables require simulation to avoid unwieldy manual calculations.

Summary

The video explains how a flow‑of‑funds schedule translates a startup’s exit proceeds into payouts for each stakeholder in a venture‑backed transaction. It walks viewers through building the schedule in Excel, starting with the exit enterprise value—derived from a revenue multiple (e.g., $400 M revenue at 4× yields $1.6 B)—and then subtracting net debt to obtain equity value available for distribution. Key components include the cap table, liquidation preferences, and participating‑preferred terms. The presenter demonstrates linking each investor group’s preferred or common conversion decision to formulas that allocate liquidation preferences first, then apply participation caps (e.g., a 35% ownership share capped at $800 M). By iterating through every possible conversion combination, the model identifies the scenario that maximizes VC proceeds while accounting for employee option pools and founder equity. A concrete example shows series C investors staying in preferred stock, receiving both their $400 M liquidation preference and a 35% share of remaining proceeds, subject to an $800 M cap. The model also calculates the implied common‑share price ($29 in the example) to determine whether employees will exercise options, feeding back into the total proceeds and creating a circular reference that must be managed. The broader implication is that as cap tables grow beyond two investor tiers, manual calculations become infeasible. A systematic flow‑of‑funds simulation enables founders and investors to understand payout dynamics, negotiate term sheets, and make data‑driven decisions about conversions and option exercises, ultimately protecting value in M&A exits.

Original Description

Learn more: https://breakingintowallstreet.com/venture-capital-modeling/?utm_medium=yt&utm_source=yt&utm_campaign=yt31

This tutorial will walk you through a Flow of Funds analysis for a VC-backed startup selling itself in an M&A deal and explain how to calculate the proceeds to each investor group and the optimal conversion decisions.

Files & Resources:

https://breakingintowallstreet.com/kb/venture-capital/flow-of-funds/

Table of Contents:

0:00 Introduction

1:59 Part 1: Flow of Funds: The Short Version

3:34 Part 2: Cap Table Data, Exit Price, and Conversion Combos

5:08 Part 3: Liquidation Preferences

6:56 Part 4: Participating Preferred Logic

9:35 Part 5: Common Share Counts and Options

13:43 Part 6: Net Proceeds and Multiples

15:38 Advanced Features

17:10 Recap and Summary