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You've got a startup, and you're aiming high - we get it. But first, you need to ensure your cap table isn’t a mess. So many startups make wrong choices early and make themselves uninvestable. With investors being so picky lately, a messy cap table might scare them away. It is quite difficult to fix, so making the right early decisions is so much better. Let’s see what makes a cap table fundable and why it’s important.
✅ Founder Ownership: Are You in Control?
Founders are the backbone of any startup, often working around the clock. In the early stages, they should own the majority of the company. As funding rounds progress, their share will get diluted, so it's crucial that founders don’t lose control too early. Sometimes, founders leave in the early stages of a startup. When they leave equity behind without contributing, it becomes a major problem. This dead equity is a liability on your cap table and a red flag for investors. Equity is your company's most precious asset, and everyone holding it should actively contribute to its value. Ensure significant equity is in the hands of active contributors. Additionally, each founder should hold more than 10% ownership. This shows they have enough skin in the game and are committed to the team, which is vital for investors.
✅ Investor and their Terms: Any Hidden Conditions?
How much of the equity is currently owned by your investors and how much are you willing to give in the next rounds for you investors?
We have seen too many cap table, especially in CEE region, when first investors want to get 50% of the company in the pre-seed round. This is just wrong - it makes company a zombie as co-founders do not have motivation to continue building great product for next 6-10 years. Do not give more than 10-15% at the pre-seed - if you need more so early - ask yourself why? Try to keep 10-20% dilution in Seed Round, too. Think how much ownership and say you want to have when you get post series A - it should preferably be 50% or more split between founders and the team.
Investors sometimes impose additional terms, such as preferred terms or liquidation preferences, which can deter future investors and impact your startup's fundability. Be cautious of the terms you agree to, as they may have long-term repercussions. In varying market cycles, certain negotiation terms become more common. For example, in the past two years, tougher funding conditions have led to the acceptance of more "predatory terms." These terms can make your company less attractive to future investors.
✅ Stock Options: Are You Planning Ahead?
Employee stock options are crucial for attracting and retaining top talent. Without a solid stock option plan, you risk losing out on the best and brightest minds. Investors know this, and they expect to see at least 10% of equity reserved for options. Having an option pool shows that you're serious about building a strong team and are ready to share financial success with those who help you build the company.
✅ SAFEs and Convertibles: Understanding the Impact
SAFEs and convertible notes can be valuable tools for early fundraising. However, delaying their conversion can lead to complications. Over time, it becomes increasingly difficult to track and recall the details of the diluted cap table, as well as the final ownership stakes of founders and investors. Keep an eye on your fully diluted cap table to understand the impact on equity both now and in the future.
✅ Vesting Shares: Are Founders Earning Their Shares?
Investors commonly expect founders to earn their shares over time through reverse vesting. This mechanism ensures that founders and key employees stay committed to the company for a certain period. When shares are issued upfront, they come with a vesting schedule, typically spanning several years. If a founder or key employee leaves the company before the vesting period is complete, they return the unvested shares to the company. This arrangement keeps everyone motivated and aligned with the company's long-term goals. Fully vested founders from day one can raise concerns among investors, as it may signal a lack of future commitment.
Conclusion
Your cap table reflects your startup's health, structure, and growth potential. Think of what % of your ownership will keep you motivated to continue grinding for 10 years ahead. No brainer: keeping it well-organized is crucial, especially for early-stage teams. Be mindful of the decisions you make early on and tidy up your cap table before the next funding cycle begins.
