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Preparing Your Cap Table for a Downside: Modeling Litigation and Commodity Shocks

UUnknown

2026-02-17

10 min read

Spreadsheet playbook for founders/CFOs to model how litigation or commodity shocks affect dilution, runway and investor talks in 2026.

Facing a legal verdict or a sudden commodity squeeze? Build a cap-table-first plan that saves runway and preserves negotiating leverage.

Founders and CFOs tell us the same thing: when downside hits, the first questions are always cash and control — how much runway do we actually have, and how much dilution will a rescue round force on founders and early investors? This step-by-step, spreadsheet-driven playbook walks you through modeling both a litigation scenario (large damages + legal spend) and a commodity shock (sudden margin compression), so you can quantify dilution, decide financing structure, and brief investors with confidence in 2026's higher-volatility environment.

Why this matters in 2026

Two lasting market patterns make downside-cap-table planning essential right now:

Legal risk has produced larger, protracted verdicts in 2025–26 — recent high-profile awards (for example, a multimillion-dollar damages award in early 2026) underscore that even mid-market companies can face seven-figure liabilities.
Commodity and input-price volatility remains elevated after 2024–25 supply shocks; ags, industrials and CPG firms must plan for rapid margin stress and inventory revaluation.

Investors now expect downside stress tests: cap table scenarios, bridge options, and clear founder-reserve plans. Below is the pragmatic spreadsheet framework CFOs can copy and customize.

Overview: the spreadsheet architecture (6 tabs)

Inputs — static company data, current cap table, cash balance, monthly burn, insurance limits.
P&L & Cash Flow — immediate shock impacts (legal expense, settlement, margin loss), monthly cash flow and runway.
Financing Options — priced round, convertible, debt, insurer recovery assumptions.
Cap Table — pre- and post-financing ownership, option pool, warrants and convertible conversion mechanics.
Sensitivity — two-axis scenario table (damage magnitude vs. recovery rate; margin compression vs. pass-through).
Investor Memo — auto-generated one-pager summarizing need, dilution projections and mitigation plan.

Tab 1 — Inputs: set the single source of truth

Start with clean, labeled inputs. Keep assumptions separated from formulas so you can re-run scenarios quickly.

Cap table core: total issued shares, founders, option pool (issued + unissued), preferred holders.
Financial: cash on hand, monthly net burn, receivables, available credit lines.
Shock parameters: litigation damages estimate, legal spend to date and monthly legal burn, probability-weighted settlement window; commodity shock inputs — % margin compression, timeframe, inventory markdown %, hedging status.
Insurance & recovery: policy limits, retentions, expected payout % and timing.
Financing terms: target pre-money valuation, new investment amount, convertible cap/discount, interest rate, warrants, debt covenants.

Example Input snippet (cells)

B2: Current cash = 2,500,000
B3: Monthly burn = 300,000
B5: Litigation exposure (expected) = 18,300,000
B6: Legal fees to date = 750,000
B7: Insurance limit = 5,000,000
B10: Margin compression = 20% (for commodity shock)
B12: Current issued shares = 10,000,000
B13: Option pool (reserved) = 1,000,000

Tab 2 — P&L & Cash Flow: turn shocks into runway impact

Translate shock inputs into cash outcomes over 12–24 months. Two separate sub-models: litigation and commodity shock. Both feed the same cash runway calculation.

Litigation scenario model

Immediate cash hit = legal fees to date + expected settlement portion not covered by insurance.
Ongoing legal burn = monthly legal spend until settlement or verdict (input-driven).
Tax and indemnities — model potential tax deductions or third-party recoveries.

Key formula examples (spreadsheet-friendly):

Insurance Recovery = MIN(Insurance_Limit, Expected_Damages) * Payout_Rate
Net Litigation Cash Need = Expected_Damages + Legal_Fees - Insurance_Recovery
Months of runway after hit = Current_Cash / (Monthly_Burn + Monthly_Legal_Burn)

Commodity-shock model

Compute gross margin change: New_Gross_Margin = Old_GM * (1 - Margin_Compression%).
Translate to monthly EBITDA change and incremental cash drag from inventory markdowns.
Model partial pass-through (price increases) or cost-saving levers and time to recover margin.

Example formula:

Monthly EBITDA impact = Revenue * (Old_GM - New_GM)
Inventory markdown cash need = Inventory_Value * Markdown_%

Tab 3 — Financing Options: pick structure, quantify dilution

Once you know the cash need, model several realistic financing paths and compare dilution and covenant risk:

Price round (equity): simple dilution calculation based on pre-money and raise size.
Convertible instrument (note/SAFE): model conversion at cap/discount and include accrued interest.
Structured bridge (convertible + warrant): add warrant overhang to dilution math — for example a convertible bridge can create short-term coverage but introduce conversion and payment compliance considerations.
Debt (term/asset-backed): include covenants, interest, and potential dilution if convertible features exist.

Key dilution formulas

Use these base formulas in your Cap Table tab.

New shares issued = Raise_Amount / Issue_Price
Post-money shares = Existing_Shares + New_Shares + New_Option_Grants
Dilution % = New_Shares / Post-money_Shares

Example: if you need $15M to cover a net litigation gap and your pre-money valuation is $30M, issue price = $30M / 10M shares = $3/share, so New shares = 15M / 3 = 5M shares. Post-money shares = 10M + 5M = 15M. Founder dilution = 5M/15M = 33.3%.

Tab 4 — Cap Table: build a convertible-aware waterfall

Map every instrument that can convert and include conversion triggers. That includes outstanding SAFEs, convertible notes, warrants, and option pools. For litigation-driven raises, investors often insist on additional options or anti-dilution protections — simulate those too.

Must-have columns for each stakeholder

Stakeholder name
Security type
Shares owned (issued)
Fully diluted shares (incl. unissued pool)
% ownership pre and post each financing
Liquidation preference multiple and cap

Convertible treatment example

For a convertible note with a $10M cap, 20% discount and $2M principal with 8% interest accrued:

Accrued amount = 2M * (1 + 0.08 * years)
Conversion price = MIN(Pre-money / Cap, Pre-money * (1 - Discount)) per share basis — implement both and take the cheaper conversion price.

Tab 5 — Sensitivity: run the two-axis stress test

Create a matrix of outcomes. Two recommended matrices:

Litigation: Damage size (low/med/high) vs Insurance recovery rate (0–100%). Output: raise required, dilution %, runway months.
Commodity shock: Margin compression (5–40%) vs Recovery time (3–18 months). Output: cumulative cash loss, raise required, dilution %.

Use conditional formatting to highlight scenarios where founders' ownership falls below critical thresholds (e.g., founders & early team < 30%) or where runway < 6 months.

Tab 6 — Investor memo: one page that answers their first questions

Auto-populate a one-page memo from model outputs. Investors want clarity — not panic. Provide the numbers and a mitigation plan.

Memo structure

Headline: cash need, proposed structure, dilution estimate (range).
Scenario summary: best / base / worst case.
Mitigants: insurance, hedges, cost cuts, strategic buyers, supplier credit.
Ask: timeline and use of funds (itemized).
Founder commitments and retention plan (founder-reserve mechanics).

Example headline: We model a $15M net funding need under the base litigation scenario, implying ~33% pro forma dilution on a $30M pre-money priced round; alternative convertible bridge reduces immediate dilution to ~18% but converts at the next priced round.

Founder reserves and retention — practical mechanics

Preserving team morale during a downside event is as important as keeping control math tidy. Model an emergency top-up of the option pool and show the cost to founders in dilution terms.

Define a founder reserve bucket: separate from the regular option pool, earmarked for retention grants (size typically 1–5% depending on stage).
Model two approaches: (A) increase option pool pre-money (investor-friendly but increases dilution), (B) issue new post-money options at board approval (dilutes everyone proportionally).
Model cliff and vesting resets to limit dilution cost and align incentives.

Negotiation playbook: use the model as leverage

When briefing investors or lenders, present a clean side-by-side table of financing options. Show the most dilutive (priced equity) vs the least dilutive (debt with covenants) and the trade-offs (control, covenants, time to close).

Recommended negotiation language

“We have modeled a priced round and a convertible bridge. The priced round limits long-term dilution but requires a 30–45 day process; the bridge provides immediate coverage at lower short-term dilution but converts at the next qualified financing.”
“Insurance is expected to cover $X; we will use $Y of cash and seek $Z of short-term financing to maintain runway >= 12 months.”

Real-world example (anonymized): litigation + commodity mix

A mid-size adtech firm in early 2026 faced an $18.3M damages ruling (publicly reported cases in the sector provide reference points). Insurance covered $4.5M. The company had $2.5M cash and $300k monthly burn. Our modeled solutions:

Immediate gap: $18.3M + $0.75M legal fees - $4.5M = ~$14.55M.
Option A: priced raise $15M at $30M pre-money => 33% dilution.
Option B: $7M convertible bridge now (to buy time) + $8M priced in 6–9 months => staged dilution ~22% now, convert to ~36% after priced round — but preserves negotiating flexibility and reduces immediate valuation mark-down risk.

The company presented both paths in a 2-page memo with model outputs; investors appreciated seeing the sensitivity table showing insurer delay risk. That transparency reduced aggressive offer terms and led to a syndicate bridge that capped founder dilution until a targeted Q4 2026 series round.

Practical takeaways — what you must do this week

Stand up the spreadsheet with the 6 tabs above. Make Inputs the only sheet people edit.
Run base, bad, and worst scenarios and save them as named snapshots for board and investor review.
Prepare a one-page investor memo that leads with: cash need, structure choices, dilution range, mitigation plan.
Engage counsel and broker to validate legal exposure and financing market timing — model their timing assumptions into your sensitivity table.
Model founder-reserve outcomes for any financing option so your team sees the personal ownership impact before decisions are made.

Common pitfalls and how to avoid them

Avoid mixing assumptions and calculations on the same sheet — it breaks audits and investor QA.
Don’t hide insurance timing risk: expected recovery is not cash until paid; model the cash-flow hit until funds clear.
Watch convertible caps vs. valuation: a low cap can create unexpected overhang and very large conversion shares during the next round.
Don’t neglect accruals: legal accruals and contingent liabilities should be in your model even if they aren’t paid immediately.

What investors want to see in 2026

Post-2024 market discipline means investors expect scenario modeling. Your spreadsheet should answer: how does this event change ownership, when do we run out of cash, and what are the feasible capital structures? Provide clean charts: runway curves, ownership waterfall, and sensitivity heat maps.

Next steps & call to action

If you’re a founder or CFO preparing for downside scenarios, start with this: build the six-tab spreadsheet today, run three scenarios, and prepare a one-page investor memo. If you want a ready-to-use template mapped to the guidance above, download our customizable cap-table stress-test workbook and a sample investor memo that already contains the formulas, sensitivity tables and chart tabs described here.

Ready to protect your runway and control? Book the model review — we’ll run your two most likely downside scenarios and produce a one-page investor brief you can send to your board and potential bridge investors.

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