Recapitalization

A recapitalization (recap) involves significantly restructuring a company's capital stack. In venture, recaps most often occur during distressed situations: a company's cap table has become dysfunctional (too many investors with misaligned preferences, underwater option pools, or excessive liquidation preferences that discourage new investment). A recap might involve: canceling or converting existing preferred stock to create a cleaner structure, issuing new equity to attract investors, restructuring debt, or dramatically expanding the option pool to re-incentivize employees. Recaps are painful — existing investors and sometimes founders face significant dilution or write-downs. But a well-executed recap can save a fundamentally good business that's been hamstrung by a bad cap table.