Lifecycle Events

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.

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 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 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. A Smart Company will only be liquidated if it is approved by the company's governance system.

Acquisition 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.

	Solvent	Delinquent	Defunct
Defined as	Normal operations	Bad standing for missing payments	Non-operational
Enters state by	Formation, recapitalization, or exiting delinquency through repayment	Failure to make an obligatory payment, like interest or repayment of principal upon maturity	Completion of liquidation process
Exits state by	Failure to make an obligatory payment or choosing to liquidate	Paying missed obligatory payments or the completion of recapitalization	No exiting this state

Recapitalization & Liquidation Summary

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

	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)