What is a VC recapitalization?
A recapitalization (recap) in VC context is a restructuring of a company’s capital stack — typically conducted when the company is distressed, must raise at a significantly lower valuation (down round), or when existing preferred-stock liquidation preferences create misalignment between common and preferred holders. The most aggressive form is a cram-down: new investors demand and existing shareholders accept materially worse terms than prior rounds, often eliminating prior preferences and significantly diluting non-participating existing investors.
Recap structures
- Pay-to-play: existing investors must participate pro-rata in new round; non-participating investors get their preferred converted to common (losing liquidation preference).
- Reverse stock split + new issuance: existing shares consolidated (10:1, 100:1), then massive new issuance at low price — extreme dilution of non-participants.
- Preference wipe: all prior preferred converted to common; new investors get full new preference stack.
- Bridge-to-recap: short convertible bridge with terms that crystallise into cram-down recap.
Cram-down triggers and dynamics
- Failed financing: company runs low on cash, cannot raise at prior valuation; new investors have leverage.
- Liquidation preference overhang: if exit value is below total preference stack, common holders get nothing — cram-down clears stack.
- Board approval: typically requires investor and board consent; preferred class votes per Certificate of Incorporation.
- Fiduciary considerations: board must balance duty to all shareholders; conflicted investors should recuse.
Cram-downs done defensibly
Recapitalisations that wash out non-participating holders sit at the top of the litigation-risk table because the conflicted-transaction features are structural: insiders set a low price and benefit from it. The defensibility checklist mirrors inside-round hygiene at higher stakes: genuine external price-testing documented before terms are set, approval by disinterested directors and where possible disinterested shareholders, a rights offering giving every holder the chance to participate on identical terms, pay-to-play mechanics applied uniformly, and contemporaneous board minutes recording the insolvency-alternative analysis. Under Turkish law add the TTK m. 376 overlay and rüçhan-rights mechanics — a cram-down structured as a capital increase with pre-emptive rights formally intact, but priced and timed against a real alternative, is the version that survives both shareholder suits and the next round’s diligence.