Liquidation

Liquidation Overview

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 shareholder governance.

If there are no assets in the company's treasury, then liquidation simply closes the company and freezes all operations. If there are assets in the company's treasury when liquidation is approved, then the company begins a process to return money. In either case, a company becomes defunct after liquidation.

Liquidation Process

The amount that shareholders and debtholders receive depends on their assets and each asset's place in the capital stack.

The distribution of the company's treasury assets comes in the form of its denomination asset, which will be a stablecoin. All of the company's liquid and illiquid assets should be converted to the company's denomination asset before its liquidation. Any working capital held by departments or modules will be sent back to the treasury. Upon liquidation, all of the company's employees are terminated, and all unvested employee shares and treasury shares will be burned.

Mezzanine companies are likely to have different types of debt and equity, each with a particular place in the capital stack. Different classes of shares and debt will express different risk profiles. More senior debt carries the least risk but also comes with the lowest expected returns. Equity carries the greatest risk but comes with the highest return possibilities. Safety is built-in by placing the asset higher on the capital stack than other assets, meaning that assets that are lower on the capital stack would have to be impaired before the most senior debt holders are negatively affected.

The company's assets will be redeemed via a redemption process. A redemption contract will be deployed per debt or share class with the corresponding number of assets owed. For instance, company Foo's bond A has 1,000 outstanding bonds that are owed $100,000. A redemption contract will be deployed such that bondholders can redeem each bond for $1,000. Assume that Foo has 1,000 preferred shares with a liquidation preference of two, 1,000 common shares, and $10,000 remaining. The holders of preferred shares should receive their liquidation preference of $2 * 1,000 = $2,000, and the remaining $8,000 should be distributed pro-rata to shareholders. A redemption contract for preferred shares is deployed with $6,000, and a redemption contract for common shares is deployed with $4,000.

The redemption of a company's assets has no expiry. Investors with continuing unlocks can continually redeem their shares for the company's assets. The Mezzanine team is heavily considering implementing the functionality of the redemption of vesting shares without waiting for the vesting duration.

Below are some examples of liquidation of a solvent company:

Liquidation After Recapitalization

Companies that have just been recapitalized do not have common shares or debt. It may be common for the remaining debt holders to simply choose to liquidate. The liquidation process may occur with the same order of operations, but it is simply triggered by the new owners (former debt holders):