“Sunny days wouldn't be special if it wasn't for rain / joy wouldn't feel so good if it wasn't for pain”

  -50 Cent 

To paraphrase the philosopher, ‘Death gotta be easy, ‘cause Recaps are hard / they'll leave you physically, mentally, and emotionally scarred’. Maybe no physical scarring but show me someone who’s escaped a recap mentally and / or emotionally unscathed and I’ll show you a masochist. 

Recap is shorthand for recapitalization, which is the corporate process of restructuring a company’s capital structure by redistributing the company’s equity, reorganizing the company’s debt and in some cases bringing new capital in the form of new investors into the business. 

There are a few potential reasons why a company or investors might pursue a recap. In some instances, a company may pursue a growth recap. A company may be performing well and may want to provide early employees and investors with liquidity; in this case, new investors would buy some portion of the existing shareholders’ equity interest. Another instance would be a restructuring recap. In this scenario, a company might have held several rounds of equity financing and as a result, its capitalization table may be “upside down” or hold a series of complex preferred equity rights & preferences that have created misaligned incentives across its investor base. Put differently, everyone may not be rowing in the same direction or aiming for the same outcome. 

The last scenario worth noting is a recap that is pursued because of a “down round”. A down round is an equity financing round where a company raises capital at a valuation lower than its previous financing round. There are a few of reasons why a company may have to raise a “down round”; some are market driven, such as a deteriorating market, and some are company specific - a company may take longer to execute on strategy or find product-market-fit (PMF) and unable to raise a bridge round to stabilize the company to get to higher ground, the team may raise financing on less favorable terms than prior rounds. In this situation, if the founder(s) is(are) still energized, there is willingness from the company’s investor base or new investors and there’s still belief in what the business can achieve, then the name of the game is survival. For the purpose of this writing, we’ll focus and refer primarily to down rounds when referring to recaps.. 

In my humble opinion, if a recap is the only option on the table and there’s still belief in what’s possible, most founders will decide to continue building. I didn’t say all, I said most. The question for the company’s existing investors then becomes - is the restoration of the potential promise of the business via a capital infusion big cap or should they run it back? For the uninitiated, cap means untrue, a lie or unlikely - used in a sentence, “That’s cap”. There are no easy answers or decisions in these scenarios, especially when faced with highly volatile operating conditions and challenging capital markets; water becomes most sought after during a drought. 

This isn’t a prescription of whether an entrepreneur or investor should pursue a recap; these decisions are and should be case specific. I am also not saying that there is a great way to do a recap. Recaps, generally, suck. What I am saying is there is a right way to do a recap and ensure the process is less painful for everyone involved and that starts with honesty and transparency.  

Firstly, there should be an honest examination of the current state of the business and difficult questions should be considered like what actions and circumstances led to this point, are the right resources and personnel in place to right the ship, what is the outlook for the business with a capital infusion and sans capital, etc. - this isn’t an exhaustive list but a great starting point for examination and to set the foundation for what additional questions and actions the company and its board should take next. It's paramount that all parties involved are operating from the same source of truth and looking at the facts and circumstances on the ground with sober judgement. 

Secondly, there should be open and transparent dialogue between the company and existing investors (hopefully a healthy and constructive relationship already exists between both groups before a recap scenario arises; if not, expect more pain). If the company is unable to raise outside capital and the existing investors do not want to participate in a recap or think a recap will meaningfully change the business’ odds of success, then investors should communicate their preference to the executive team. The company should then work with its board of directors to determine the next course of action - i.e. pursue an acquisition or ultimately unwind the business - if no capital infusion is forthcoming. 

If there is a willingness amongst existing investors to continue supporting the company, then the investors should transparently communicate their interest and work with the company and the board to outline terms and conditions. In a perfect world, most (if not all) existing investors will come together to continue supporting the business. If this isn’t the case, investor(s) who (is)are leading the process can endure pain upfront by proactively reaching out and collaborating with other existing investors, where possible, to shore up support and ensure buy-in for a timely and smooth closing. I cannot stress this sentiment enough - making sure there is a clear and transparent line of communication between investor and the company as well as between investor and participating investors is crucial and can help avoid unnecessary bottlenecks especially since capital and time are like manna from heaven particularly when, you know, both happen to be in limited supply. If everyone is on the same page, then there is no need to get everyone on the same page. 

There’s no way around it, if you find yourself involved in a “down round” recap, you can expect some level of discomfort. But if you have a supportive investor base (from the company’s perspective) and a committed and energized management team + company (from an investor perspective), there are ways to make it through to the other side where all parties build more trust, commitment and belief in what’s possible. And if you happen to have the support of your stakeholders and can make it to the other side, congratulations, ‘it’s clear that you’re here for a real reason’ - so keep grinding, ignore the noise and make the earth shake. 

-Peace

“Sunny days wouldn't be special if it wasn't for rain / joy wouldn't feel so good if it wasn't for pain”

  -50 Cent 

To paraphrase the philosopher, ‘Death gotta be easy, ‘cause Recaps are hard / they'll leave you physically, mentally, and emotionally scarred’. Maybe no physical scarring but show me someone who’s escaped a recap mentally and / or emotionally unscathed and I’ll show you a masochist. 

Recap is shorthand for recapitalization, which is the corporate process of restructuring a company’s capital structure by redistributing the company’s equity, reorganizing the company’s debt and in some cases bringing new capital in the form of new investors into the business. 

There are a few potential reasons why a company or investors might pursue a recap. In some instances, a company may pursue a growth recap. A company may be performing well and may want to provide early employees and investors with liquidity; in this case, new investors would buy some portion of the existing shareholders’ equity interest. Another instance would be a restructuring recap. In this scenario, a company might have held several rounds of equity financing and as a result, its capitalization table may be “upside down” or hold a series of complex preferred equity rights & preferences that have created misaligned incentives across its investor base. Put differently, everyone may not be rowing in the same direction or aiming for the same outcome. 

The last scenario worth noting is a recap that is pursued because of a “down round”. A down round is an equity financing round where a company raises capital at a valuation lower than its previous financing round. There are a few of reasons why a company may have to raise a “down round”; some are market driven, such as a deteriorating market, and some are company specific - a company may take longer to execute on strategy or find product-market-fit (PMF) and unable to raise a bridge round to stabilize the company to get to higher ground, the team may raise financing on less favorable terms than prior rounds. In this situation, if the founder(s) is(are) still energized, there is willingness from the company’s investor base or new investors and there’s still belief in what the business can achieve, then the name of the game is survival. For the purpose of this writing, we’ll focus and refer primarily to down rounds when referring to recaps.. 

In my humble opinion, if a recap is the only option on the table and there’s still belief in what’s possible, most founders will decide to continue building. I didn’t say all, I said most. The question for the company’s existing investors then becomes - is the restoration of the potential promise of the business via a capital infusion big cap or should they run it back? For the uninitiated, cap means untrue, a lie or unlikely - used in a sentence, “That’s cap”. There are no easy answers or decisions in these scenarios, especially when faced with highly volatile operating conditions and challenging capital markets; water becomes most sought after during a drought. 

This isn’t a prescription of whether an entrepreneur or investor should pursue a recap; these decisions are and should be case specific. I am also not saying that there is a great way to do a recap. Recaps, generally, suck. What I am saying is there is a right way to do a recap and ensure the process is less painful for everyone involved and that starts with honesty and transparency.  

Firstly, there should be an honest examination of the current state of the business and difficult questions should be considered like what actions and circumstances led to this point, are the right resources and personnel in place to right the ship, what is the outlook for the business with a capital infusion and sans capital, etc. - this isn’t an exhaustive list but a great starting point for examination and to set the foundation for what additional questions and actions the company and its board should take next. It's paramount that all parties involved are operating from the same source of truth and looking at the facts and circumstances on the ground with sober judgement. 

Secondly, there should be open and transparent dialogue between the company and existing investors (hopefully a healthy and constructive relationship already exists between both groups before a recap scenario arises; if not, expect more pain). If the company is unable to raise outside capital and the existing investors do not want to participate in a recap or think a recap will meaningfully change the business’ odds of success, then investors should communicate their preference to the executive team. The company should then work with its board of directors to determine the next course of action - i.e. pursue an acquisition or ultimately unwind the business - if no capital infusion is forthcoming. 

If there is a willingness amongst existing investors to continue supporting the company, then the investors should transparently communicate their interest and work with the company and the board to outline terms and conditions. In a perfect world, most (if not all) existing investors will come together to continue supporting the business. If this isn’t the case, investor(s) who (is)are leading the process can endure pain upfront by proactively reaching out and collaborating with other existing investors, where possible, to shore up support and ensure buy-in for a timely and smooth closing. I cannot stress this sentiment enough - making sure there is a clear and transparent line of communication between investor and the company as well as between investor and participating investors is crucial and can help avoid unnecessary bottlenecks especially since capital and time are like manna from heaven particularly when, you know, both happen to be in limited supply. If everyone is on the same page, then there is no need to get everyone on the same page. 

There’s no way around it, if you find yourself involved in a “down round” recap, you can expect some level of discomfort. But if you have a supportive investor base (from the company’s perspective) and a committed and energized management team + company (from an investor perspective), there are ways to make it through to the other side where all parties build more trust, commitment and belief in what’s possible. And if you happen to have the support of your stakeholders and can make it to the other side, congratulations, ‘it’s clear that you’re here for a real reason’ - so keep grinding, ignore the noise and make the earth shake. 

-Peace