The waterfall has been constructed to ensure that on a company sale the appropriate payments are made to the various holders of shares whilst ensuring that the company remains SEIS and EIS compliant, in the sense that Ordinary Shares cannot be deemed to have any preferential treatment (a key condition for qualifying for SEIS and EIS).

This is the reason that the various clauses are constructed to ensure that payment is not made first to the Ordinary shares, rather immaterial amounts are first given to holders of V shares and Deferred shares.

Once that has been established the net capital value (after repayment of any debt) of the sale is shared between those shareholders that have rights to each tranche of value.

As V shares are growth shares this means that they may have been issued at different “hurdles” which reflected the value of the company at the time. The V share only gives them rights to growth in value over this hurdle.

For example, those that were issued when the company was worthless share in their percentage of all the sale value, whereas those that were Earn-outs when the company was worth £1m only share in their percentage of the value realised over £1m.


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