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  • Writer's pictureDavid Hehman

Soft Landing, part II: Down Round or Recap Done Right


This article focuses on another difficult situation, raising money without washing out your capitalization table. A washout financing refers to prior shareholders losing most or all of their investment when a new financing effectively dilutes their interest.


You may have your back against the wall and find that new investors are pushing for a complete recapitalization of the business before they put new money into the company. Instead of this type of “washout” financing, consider and fight for preserving 10%-30% of the capitalization table for the prior shareholders, and, always offer them an equal opportunity to invest on the same terms being offered to the investors.


Your first investors may not like what is happening, but they will respect this gesture and it is fair to fight for early investors that stepped up and took enormous early risk.


Another option is to create a long-term liability promissory note, which would pay back early investors if/when things are successful (to be defined) down the road. Both of these options will not likely impede your new financing event and can be used to demonstrate how you will treat your new investors.


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