top of page
  • 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.

108 views0 comments

Recent Posts

See All

Founder Superpowers - Laser Focus

This month’s Superpower - Laser Focus We all know focus is important. But how good are we at truly exhibiting it? This week we share a note about the Superpower of Focus from two of our portfolio comp

Founder Superpowers - Goal Setting

This month’s Superpower - Goal Setting In honor of the New Year, this first tip in the series comes from our own Underdog Labs founder, David Hehman: I have always been a goal setter as a way to focus


bottom of page