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
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.
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.
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.