Ask HN: Cap table is a mess
Hi,
Will keep it simple: - 16% of our Cap Table is owned by people no longer involved in the company - We have $2M in the bank - We are pivoting to something completely different - The $2M is from note holders (so they currently are not on the cap table)
What is the best way to get that equity back? - Buy out the owners - Start new company and refund investors - Do a recapitalization - Other idea?
Thanks
Sadly, this question cannot be answered based on this information.
When you say "pivoting to something completely different," are you going to be using IP developed as part of the current company? If so, starting a new company will be very difficult.
And the note holders don't want their money back, most likely. I mean, if you dissolve, they'll have no choice but to take it. But they were investing to get equity down the road. Query how you raised $2M and apparently haven't spent any of it. How long ago did you enter into these notes? I would have to imagine it was pretty recent. And you didn't know about the pivot then? That's possible, of course. But it's a concern the noteholders may have.
There are lots of strategies to move forward. But it's pretty fact specific. I think fab1an's advice is really the best.
IANAL, and this depends on many many factors, and probably many more than you currently have on your radar given the way you've phrased your question.
Best way forward here is likely to sit down with a great lawyer and talk through the technical options you have, which will vary based on jurisdiction and setup.
If you have a good relationship with the 16%, there is probably a way to readjust the ownership levels in good faith - they will want you to be properly incentivized. You will have to make a good case for this and explain how the readjustment will work best on a technical level, and why this is going to be win-win.
Don't know what your goals are here, but if you have $2M banked then you're presumably shooting for a relatively large ~$100M+ market valuation. At this point, your primary focus should be the success of your pivot, and nothing is more valuable than cash.
If the extra 16% equity is necessary to ensure your ability to fundraise and retain talent, then it is a fatal condition. You must find a way to show the equity holders that their 16% will be worth zero unless they give some back.
If the extra 16% is _extremely annoying_, and you really wish you could get it back because you think this new venture will be HUGE... then I'd advise you to consider leaving it alone as "dead equity". Yeah it sucks, but your options here are Victory or Zero. Giving up cash (or time, and mental anguish) for a slightly larger Victory doesn't really help you, and increases the probability of Zero by a non-trivial amount. Check your ego and be wise here.
IANAL. Your Mileage My Vary.
I don't know that HN can give a satisfactory answer with the information provided. For instance, does the traction of the business indicate the value will continue to increase (i.e., is buying out worthwhile to you)? Is the outside ownership shares or options; if options, do they have expiration? Are there opportunities to fundraise or sell? Is the outside ownership a problem to potential investors? etc
No longer involved, but provided something of value in the past?