Find the flip
Above one sale price, a non-participating investor converts to common, and its preference stops. Learn to find that price for one investor and for a full cap table.
In this lesson you will learn
- How to calculate the sale price at which a preferred series converts
- Why each added dollar goes to the common holders between the preference and the flip
- How multiples, participation, and caps move the flip
- How to find the flip of each series in a cap table with several series
A non-participating investor has two choices in a sale: get its money back, or convert to common stock and get its share of the price. At a low price, it wants its money back. At a high price, it wants its share. Somewhere between the two is one sale price where the choice changes. This lesson calls that price the flip. The glossary calls it the conversion point.
When you know the flip, you know the sale prices where your ownership is your payout, and the prices where it is not. Start with one investor.
Predict first
Harbor Analytics has one investor. A fund paid $10M for 25% of the company, with a 1x non-participating preference. Above what sale price does the fund convert?
Type a guess before you continue. A guess first, even a wrong one, makes the answer easier to remember.
The fund converts above $40M. At that price, 25% of the sale is $10M, the same as its preference. At a higher price, 25% is worth more than $10M, so the fund converts. At a lower price, it keeps its $10M.
Two choices, one flip
Write the two choices as two amounts. Then find the sale price where they are equal:
Keep the preference $10M, at every sale price of $10M or more
Convert 25% × sale price
The flip 25% × X = $10M
X = $10M ÷ 25% = $40M
The general rule for one non-participating preferred series:
Flip = preference ÷ ownership (as converted)
The flat zone
Look at the investor’s payout at five sale prices:
| Sale price | The fund gets | Everyone else gets | The fund’s choice |
|---|---|---|---|
| $5M | $5M | $0 | Preference (the whole price) |
| $10M | $10M | $0 | Preference |
| $25M | $10M | $15M | Preference (25% is only $6.25M) |
| $40M | $10M | $30M | The two choices are equal |
| $80M | $20M | $60M | Converts (25% is $20M) |
From $10M to $40M, the fund’s payout does not move. It stays at $10M. Thus every dollar that the price adds in this zone goes to the common holders. Above $40M, the fund gets 25 cents of each added dollar, and the common holders get 75 cents.
Now change the terms. Watch the investor’s line bend at the flip, and watch where the flip moves.
Simulator
Find the flip
One investor owns part of a company. Change its terms and the sale price, and find the price above which the investor converts.
- Flip point
- $40M
- $10M ÷ 25%
- Investor gets
- $10M
- 33.33% of the money
- Everyone else gets
- $20M
- 66.67% of the money
- Preference
- $10M
- 1x × $10M
- Investor
- Everyone else (common)
The investor keeps its $10M preference, because 25% of $30M is only $7.5M. In this zone, each added dollar of the sale goes to everyone else. The investor converts above $10M ÷ 25% = $40M.
Multiples move the flip out
A preference multiple of 2x gives the investor two times its money before the common holders. It also doubles the flip:
2x preference 2 × $10M = $20M
Flip $20M ÷ 25% = $80M
A 3x preference moves the flip to $120M. At every sale price from the preference to the flip, the investor gets only its preference. Thus a high multiple moves money from the founders in a wide range of sales. In the widget, select 2x and compare the two lines at a $60M sale.
Participation removes the flip, and a cap moves it
Participating preferred gets its preference and then also its share of what stays. It has no reason to convert, because a conversion stops the preference. Thus participating preferred with no cap has no flip. In the widget, select “Full”. Above the preference, the investor’s line increases at every price and never goes flat. The “Flip point” readout shows “None”.
A participation cap limits the total. Then the investor has a reason to convert again. Here is an example with a 3x cap, where a fund paid $10M for 20%:
Preference + share $10M + 20% × (X − $10M)
The cap 3 × $10M = $30M
Cap reached $10M + 20% × (X − $10M) = $30M → X = $110M
Flip 20% × X = $30M → X = $150M
From $110M to $150M, the fund is at its cap, and every added dollar goes to the common holders. Above $150M, the fund converts. With a cap, the general rule is flip = cap ÷ ownership.
Work it out
A company has one investor. It paid $20M for 20%, with a 1x non-participating preference. Above what sale price does it convert?
Flip = $20M ÷ 20% = $100M. At $100M, 20% of the sale is $20M, the same as the preference. Above it, conversion pays more.
The flip with several series
With several series, preference ÷ ownership gives the wrong answer. Take Northwind’s Series A: $10M for 15.38%. The simple formula gives $10M ÷ 15.38% = $65M. But the Series A converts at $85M. The cause is the senior Series B. It gets its $30M before the other holders share anything, so one Northwind common share is worth less than 1/13 of the price.
A rule that always works compares prices for each share:
A 1x non-participating series converts when
one common share is worth more than the price that the series paid for each share.
The price at which a series converts is its flip price. For a 2x preference, it is two times the price paid. For Northwind, the flip prices are $1.00 for the Seed, $5.00 for the Series A, and $15.00 for the Series B.
Worked example · step 1 of 4
Where does Northwind's Series A flip?
- 1
Find the series that keep their preferences
The Series B is senior and paid $15.00 for each share. It keeps its $30M preference until one share is worth $15.00, much more than at the Series A flip.
Series B keeps $30M
The chart below shows this rule. The green line is the value of one common share at each sale price. Each flat line is the flip price of one series. Where the green line crosses a flat line, that series converts. Move the slider to see the crossings at $49M, $85M, and $195M.
Simulator
Where each Northwind series converts
The green line is the value of one common share. A series converts where the green line crosses its flip price.
- Founders get
- $49.09M
- 40.91% of the money
- Founders own
- 46.15%
- of all shares
- Per common share
- $8.1818
- Preference stack
- $42M
- paid before common
Who gets the $120M
- Founders
- Employees
- Seed
- Series A
- Series B
| Holder | Owns | Choice | Gets | Share of the money |
|---|---|---|---|---|
| Founders | 46.15% | Common | $49.09M | 40.91% |
| Employees | 7.69% | Common | $8.18M | 6.82% |
| Seed | 15.38% | Converts | $16.36M | 13.64% |
| Series A | 15.38% | Converts | $16.36M | 13.64% |
| Series B | 15.38% | Preference | $30M | 25% |
| Total | 100% | $120M | 100% |
- One common share
- Seed converts above
- Series A converts above
- Series B converts above
The Series B keeps its preference, because conversion pays less. The Seed and the Series A convert to common. Each common share gets $8.1818.
The founders own 46.15% but get 40.91% of the money: $49.09M of $120M.
The next change comes at $195M, where the Series B converts.
Change the cap table
The green line also bends at each of these points. When a series converts, its preference stops, and its shares become common shares. In the “Payouts” view, the same points are the bends in the founders’ line.
Work it out
Suppose that Northwind's Series A has a 2x preference ($20M). The Series B is still senior with $30M. At what sale price does the Series A convert?
The flip price of the Series A is 2 × $5.00 = $10.00. The Series B keeps its $30M. The Seed converts first. When the Series A converts, 11M shares share the rest. (X − $30M) ÷ 11M = $10.00 gives X = $30M + $110M = $140M. The 2x preference moves the Series A flip from $85M to $140M.
The newest series flips near its post-money valuation
There is a useful rule of thumb. If the newest series has the highest price, is senior, and is 1x non-participating, it converts at approximately its post-money valuation. For Northwind, all 13M shares at the $15.00 Series B price give $195M, the Series B post-money valuation.
This rule has a cost that founders often do not see. A high valuation in the last round sets a high flip. Below the flip, the newest investors get their money back first, and the founders get less than their ownership. The lesson on two offers compares a high valuation with dirty terms against a lower valuation with clean terms. The next lesson shows what occurs when the company is worth less than the stack.
How to use the flip
The flip is a quick tool. You can use it in three situations:
- When you read a term sheet, divide the new preference by the new investor’s ownership. Then compare that flip with the sale prices that you think are likely. If most of them are less than the flip, the preference terms are as important as the valuation.
- When you get an acquisition offer, compare the price with the flip of each series. You then know which investors convert and which ones get their preference, before you do the full waterfall.
- When you value common stock, remember that each common share gets the value from the waterfall, not the last round price. At sale prices less than the flip of the newest series, one common share is worth less than the price that the newest investors paid.
An example shows the first use. A term sheet offers $20M for 25%, 1x non-participating. The flip is $20M ÷ 25% = $80M. If you think that a sale at $50M to $100M is most likely, the new investor gets its $20M first in most of those sales. A 2x preference moves the flip to $160M, more than all of those prices.
Quiz · question 1 of 5
Test what you learned
An investor paid $6M for 20%, with a 1x non-participating preference. It is the only preferred series. Above what sale price does it convert?
Key takeaways
- 1.For one non-participating series: flip = preference ÷ ownership. A $10M preference on 25% flips at $40M.
- 2.Between the preference and the flip, the investor’s payout stays flat, and every added dollar goes to the common holders.
- 3.A 2x preference doubles the flip. Participation with no cap removes the flip. A cap moves the flip to cap ÷ ownership.
- 4.With several series, a 1x non-participating series converts when one common share is worth more than the price that the series paid for each share.
Sources
- 1.2026 WilmerHale Venture Capital Report. WilmerHale, April 2026.
- 2.Q2 2026 Venture Financing Report. Cooley, August 17, 2026.