A liquidation waterfall is the calculation that determines how exit proceeds are distributed across preference stack, share classes, and option pools at exit. Exit proceeds include acquisition cash, public offering proceeds, and dissolution distributions. The waterfall is modeled as a series of "buckets" that fill in priority order until the proceeds are exhausted. It is the math that determines what each shareholder actually receives, and the analysis founders most consistently postpone until it's too late to change.
The waterfall fills in roughly this order: secured debt first (rare for venture-backed startups, but present if there's outstanding venture debt with collateral), then unsecured debt and trade obligations...