Raising
Recapitalizations
A new financing that reshuffles rights — senior money in, old preferred cut down, and pay-to-play for those who follow.
When the cap table is badly broken — stacked preferences, zombie investors who will not follow on, or a valuation so high that no new lead will enter — companies sometimes run a recapitalization ("recap"). A new financing reshuffles rights. Some old preferred converts into common or a weaker preferred. A new senior class goes to investors who put in fresh money.
Pay-to-play often travels with the recap: existing preferred must invest their pro-rata (or a set amount) or lose rights — commonly, forced conversion into common, which drops liquidation preference and other privileges. Harsh for non-participants. Often company-friendly in a crisis, because it clears dead equity and rewards capital that shows up. See pay-to-play.
The big idea
A building refinance that wipes junior mortgages and writes a new first lien is the picture. People who put in new cash sit in front. People who refuse the call become unsecured. The analogy breaks on employees: they did not choose the old stack, and a "successful" recap can still leave them with near-zero exit proceeds under a 2× senior preference.
Warning
Recaps can wipe out common and early preferred economically even when "shares" remain. Always model the liquidation waterfall under the new stack, not just headline ownership %.
Walking through it
Old Series A has a 1× preference on $10M. The company is worth a fraction of the last post-money. A new lead will only invest $6M if they receive a new senior 1× (or 1.5×) preferred, and if old Series A either follows or converts to common.
Investors who write their pro-rata keep a piece of the new senior or a restated preferred. Investors who pass become common. Founders and employees still hold common — now junior to a fresh preference stack. Headline ownership might still show founders at 35%. A $20M sale may pay the new preferred first and leave common thin. That is why you model $50M / $150M / $400M exits before celebrating that the company "got saved."
Common mistakes
- Reading the new ownership % as the outcome. The waterfall is the outcome.
- Surprising the old syndicate with a weekend pay-to-play. Reserves take time. Enemies remember.
- Skipping an employee refresh. Underwater common plus a new senior stack is how the team leaves after the save.
Check yourself
Why can a recap that "saves" the company still zero employee equity?
New senior preferences can eat typical exit prices. Shares remain; proceeds do not.
What does pay-to-play force an old investor to do?
Follow on, or lose anti-dilution and often preferred status.
Key takeaways
- A recap reshuffles rights so new money will enter a broken table.
- Pay-to-play clears silent capital and rewards who shows up.
- Model the new waterfall at several exit prices, not the new ownership pie.
Further learning
Related
Down rounds, bridges and venture debt
A map of flats, bridges, clean downs, recaps, debt and structured "flats" — what to do when the last price will not hold.
Pay-to-play
Follow on in the next round or lose anti-dilution — and sometimes lose preferred status.
Liquidation preferences and waterfalls
Who gets paid first in an exit — the map of 1× non-participating, participation, multiples and stacked seniority.