Common Cap Table Mistakes to Fix Between Financings
Your startup's cap table plays a critical role in tracking ownership and attracting potential investors. However, errors in managing it can lead to significant problems down the road.
Don’t wait for a lead investor or VC to invest before addressing these mistakes. The time between financings (i.e., especially seed rounds) is the time to fix these issues.
Avoid these common errors:
Excessive advisor equity allocations. After major milestones, reduce new advisor allocations.
No founder vesting schedules leading to dead equity if they leave. Consider a 4-year schedule with a 1-year cliff.
Selling too much equity too early can mean loss of control. Focus on traction before substantial investments.
Inadequate tracking of ISOs and NSOs. Use tools to properly manage them.
Over-dilution across multiple rounds with varied terms. Model scenarios to prevent unexpected dilution.
Inconsistencies between legal documents and cap tables causing credibility issues. Continuously synchronize them.
To underscore the significance of these six mistakes and their repercussions, allow me to share a personal experience. I once encountered a promising company preparing for a substantial seed round. They were contemplating allocating a staggering 7% equity to a single advisor. I chose not to work with them, as it signaled that the CEO might not be adequately prepared for the journey and could potentially make additional errors down the road.
If you require help in rectifying issues with your cap table, consider forming a task force comprising advisors, board members (if applicable), finance and legal professionals, and seek expert guidance from founders and CEOs experienced in conducting these types of adjustments.
It's crucial to avoid common cap table mistakes to safeguard your startup's future success. These errors can deter potential investors and lead to long-term consequences. By understanding and sidestepping these pitfalls, you can protect your startup and increase its chances of thriving in the competitive landscape.