# Lifecycle Events

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*This section's functionality will **not** be available in the first version of Smart Companies.  A company's capital stack is the foundation for its recapitalization and liquidation and has been properly defined.  Once the implementations have been finalized, existing Mezzanine companies can easily add recapitalization and liquidation functionality via contract upgrades.  The below documentation is subject to change before it is available to Smart Companies.*
{% endhint %}

## Lifecycle Overview

There are a few major events that substantially change the ownership structure of a company, such as incorporation, liquidation, or acquisition. Currently, the terms of these events are scattered between operating agreements, company bylaws, shareholder agreements, side letters, corporate laws, and more. During these events, lawyers and judges from various parties read hundreds of pages of legal documents, then provide the outputs, as if they're processors interpreting code. Of course, lawyers have incentives to interpret the text in front of them differently, depending on who they represent. 

Smart Companies define critical lifecycle events and provide clear processes to entirely remove ambiguity and dishonest interpretations. The Ethereum Virtual Machine has no biases when it processes code. Currently, companies spend billions of dollars in legal fees clarifying "what happens in circumstance A?" or "what do I get in circumstance B?", when all parties could agree and consent to the same interpretations from the onset, by allowing the code to deliver the proper outcomes.

[***Recapitalization***](/protocol/lifecycle-events/recapitalization.md) is the process of programmatically transferring ownership from the former equity holders, who failed to uphold obligatory payment, to creditors, who become the new owners. After recapitalization, the company has no debt.  All debt will be converted to preferred equity. 

[***Liquidation***](/protocol/lifecycle-events/liquidation.md) is the process of dissolving a company and distributing assets remaining to creditors, investors, and shareholders in a predictable, sequential order. The liquidation waterfall algorithm reflects the organization's [capital structure](/protocol/capital-stack.md). A Smart Company will only be liquidated if it is approved by the company's governance system. 

[***Acquisition***](/protocol/lifecycle-events/acquisition.md) is the process of transferring all assets, debts, contracts, ownership, and control to a new owner, the *Purchaser*, by compensating shareholders of the *Target Company* with cash and/or equity of the purchaser. Normal operations do not cease, there are no changes to the treatment of outstanding contracts, including employment, services, and debt. The only change is the ownership and capital structures.

## Company States

Lifecycle events introduce possible changes to the *company state.* For example, liquidation results in a *defunct* company. Failure to pay debt results in *delinquency* which leads to recapitalization after the *grace period*. 

<table data-header-hidden><thead><tr><th width="123"></th><th width="167"></th><th width="237"></th><th></th></tr></thead><tbody><tr><td><br></td><td><strong>Solvent</strong></td><td><strong>Delinquent</strong></td><td><strong>Defunct</strong></td></tr><tr><td>Defined as</td><td>Normal operations </td><td>Bad standing for missing payments</td><td>Non-operational</td></tr><tr><td>Enters state by</td><td>Formation, recapitalization, or exiting delinquency through repayment</td><td>Failure to make an obligatory payment, like interest or repayment of principal upon maturity </td><td>Completion of liquidation process</td></tr><tr><td>Exits state by</td><td>Failure to make an obligatory payment or choosing to liquidate</td><td>Paying missed obligatory payments or the completion of recapitalization</td><td>No exiting this state</td></tr></tbody></table>

## Recapitalization & Liquidation Summary

For clarity, we outline the causes and outcomes of recapitalization and liquidation here:

| <p><br></p>       | **Recapitalization**                                                                                                            | **Liquidation**                                                                                  |
| ----------------- | ------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ |
| Triggered by      | Failure to make obligatory payments                                                                                             | Approval of board and shareholders                                                               |
| Results in        | Shareholders eliminated; creditors become new owners                                                                            | Value distributed in order of the capital stack                                                  |
| Order of Payments | Creditors receive preferred equity in order of the seniority of the debt that they hold; old shareholders are left with nothing | Value is distributed to creditors in order of seniority, then shareholders in order of seniority |
| Outcome           | A new company with preferred shareholders and no debt that may choose to liquidate or resume operations                         | The company distributes value according to capital stack, then becomes defunct                   |
| Initial State     | Delinquent                                                                                                                      | Normal                                                                                           |
| End State         | Normal                                                                                                                          | Defunct                                                                                          |
| New Control       | Creditors                                                                                                                       | None (defunct)                                                                                   |


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