How does the Cup work exactly?

[Zachary Joshua Holmes]

How many teams? Rounds? Can I expect to perform well with a level 2 team with a 16.4 average quality?

[Chris Rath]

"Rules and prizes" tab in the cup menu says it is 7 rounds.

Players in the cup have around the same quality as you. If you have a lucky draw with lots of inactives you stand a chance even with 16.4, elsewise you should get active on the transfer market and upgrade your starting 11. Click into the profiles of your cup opponents (esp. those who win by big margins) to get an overview.