Recapitalization
A major restructuring of a company's equity and debt, often resetting ownership after a crisis.
Definition
A recapitalization (recap) is a fundamental restructuring of a company's capital structure, involving changes to the ratio of debt and equity, or changes to the classes and rights of existing shares. In startups, recaps often happen during severe down rounds or rescue financing, where existing preferred shares are converted to common or cancelled to make room for new investors. Recaps can dramatically alter the cap table.
Why it matters
A recapitalization can be devastating for common stockholders. In a typical rescue recap, preferred shareholders may negotiate to wipe out or significantly dilute common stock (employee equity) as a condition of providing new capital. Your options could become nearly worthless.
Example
A struggling company needs $10M to survive. New investors agree to invest only if all existing preferred converts to common at a 10-to-1 ratio. Founders and employees are heavily diluted but keep a small slice. The new investor owns 60% of the restructured company.