What is Recapitalization?
A restructuring of the cap table - often in a distressed round - that resets ownership, preferences, and sometimes wipes prior equity.
A recapitalization (recap) rebuilds the capital structure, usually when a company is struggling and needs new money on fresh terms. Common forms include a down round with a new senior preferred class, a pay-to-play that converts non-participating investors to common, or a 'cram down' where new investors take a large stake at a low valuation and prior equity is heavily diluted or restructured. Why it matters to you: a recap can be brutal for founders and early holders - existing ownership can be slashed to keep the company alive, and management option pools are sometimes rebuilt to re-incentivize the team. It's survival financing. If you're facing one, focus on the new option pool and any management carve-out, because that's where your forward-looking equity gets reset.
Example
- A company out of runway recaps: new investors put in $5M at a $5M pre-money, prior preferred converts to common under pay-to-play, and a fresh 15% option pool is created for the team.