The valuation is the number everyone argues about. It is rarely the number that decides who actually gets paid.
A cap table looks like a spreadsheet — names, share counts, percentages. But underneath the arithmetic is a stack of contracts, and those contracts, not the headline valuation, govern the return waterfall: the order and amount each party collects when the company is sold. Read the spreadsheet and you know who owns what today. Read the documents and you know who gets what at exit. Those are different questions, and only the second one matters to a return.
Why terms beat valuation
Consider two offers on the same company. Offer A is a $100M post-money round with a 2× participating liquidation preference and full-ratchet anti-dilution. Offer B is a $70M post-money round with a clean 1× non-participating preference. The founder's instinct is to take the higher number. But at a modest exit, Offer A can leave common shareholders — founders and employees — with materially less than the lower-headline Offer B, because the preference stack eats the first dollars out and then participates again alongside common.
That is an illustration, not a claim about any specific company. The point is structural: the same exit value produces wildly different founder outcomes depending on terms that never appear on the headline slide. Diligence that stops at the valuation has diligenced the trophy, not the deal.
Four places the gaps hide
1. Liquidation preferences
The single most consequential set of terms. Watch three dimensions: the multiple (1× is standard; 2×–3× is aggressive), participating versus non-participating (a participating preference collects the preference and shares in the remainder — "double dipping"), and seniority (stacked/senior preferences pay out before junior ones, so a later round can leap ahead of an earlier one). A stacked 2× participating preference can consume the first large slice of every exit before common sees a dollar.
2. SAFE and convertible-note overhang
Uncapped versus capped, the discount, and "most-favored-nation" clauses all change how much of the next priced round these instruments silently claim. A pile of uncapped SAFEs converting at a low cap can dilute founders far more than the summary model assumes — and the dilution lands precisely at the moment of the priced round, when attention is elsewhere.
3. Anti-dilution
Full ratchet versus broad-based weighted average. In a down round, a full ratchet re-prices earlier investors' shares as if they had always paid the lower price — a severe transfer of ownership away from founders and common. Broad-based weighted average is the market-standard, far gentler formula.
4. Control and protective provisions
Board composition, protective vetoes, drag-along rights, and pay-to-play provisions determine who can block — or force — a sale, and on what terms. Ownership percentage tells you the economics; these terms tell you who holds the steering wheel when the exit conversation starts.
What good diligence actually does
It reads the executed documents — the charter, the stock purchase and investors' rights agreements, every SAFE and note — not the founder's summary slide. It rebuilds the ownership waterfall across low, base, and high exit scenarios and asks a simple question at each: who collects, in what order, and how much. And it flags the terms that move the outcome so the buyer or investor is pricing the deal that exists, not the one on the cover page. This is the legal read paired with the math — the two halves of the same instrument.
The headline valuation is a negotiation trophy. The return waterfall is the truth. Anyone underwriting a medtech investment should be able to read both.
At Vantage, cap-table cleanliness and an illustrative dilution and return-waterfall model sit inside the Organizational read of every investor-tier deliverable — diligenced against the actual documents and cited to them, never inferred. It is one of the places where a few hours of careful legal-plus-quantitative reading changes what a term sheet is worth.
References
- National Venture Capital Association. "Model Legal Documents" (term sheet, stock purchase, investors' rights, charter). nvca.org
- Y Combinator. "The SAFE (Simple Agreement for Future Equity) — Post-Money SAFE User Guide." ycombinator.com
- Cooley GO. "Understanding Liquidation Preferences" and "Anti-Dilution Protection." cooleygo.com
See the Waterfall Before You Sign
Our investor-tier deliverable includes an illustrative cap-table & dilution model — ownership waterfall and return scenarios, cited to your own documents. Every claim traceable to a real source; nothing fabricated.