♞ Importance of a Strong Cap Table

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Important of a Strong Cap Table

Recently, I’ve been working with a few different founders who are raising capital but are struggling due to the state of their cap table.

Today I want to talk about a few of the biggest issues that I see with cap tables at the Pre-Seed to Series A stages that really impact founder’s chances of raising venture capital.

1. Stacking SAFEs - SAFEs have become the standard investment tool at the pre-seed stage. Unfortunately, many founders don’t actually understand what a SAFE is, and they continue to use them for their first 2-3 rounds, which creates a horrible situation for them when they go to raise their first priced round.
   
   See if you give a $300k SAFE at a $2M cap (pre-seed) then a $2M SAFE at a $10M cap (seed) and then raise a $5M at a $20M price (Series A) then after your series A you’ll be left with 48.75% of the company after your Series A. That is because when you raise the Series A, you’ll first convert all your SAFEs (giving 15% to pre-seed investors and 20% to seed investors), and then all of you get diluted by 25%, leaving you with less than 50%.
   
   If, instead, that seed round had been a prices round, your pre-seed investors would have been diluted twice, which means even with the same amount raised at the caps after your series A, you would own 51%. Most founders would pick the SAFE over the priced round at Series A but the truth is that it’s not always the best option.

2. Crowded Cap Table - Some founders raise from multiple different sources and can have a lot of different investors (20+) on their capable by the time they get to their Series A. This can make it hard to manage and operate the business because you need to involve many more people, and decisions require the input of a larger group. This can turn off investors, especially in a situation where the founder owns 40-49%. This means that often, to get 50% of the votes, either side needs to convince a bunch of people who may own 0.5-2% of the company. This adds additional complexity for a VC who would much rather prefer dealing with 2-5 other investors and not 20+.

3. Founder SAFEs/Convertible Notes - Many founders “invest” in their own company by providing money through SAFEs and/or Convertible Notes. The reality is that most VCs don’t like this, and many are turned off. The “standard” way to provide money to the company as a founder is to use shareholder loans. If you do it this way, then as part of your raise, you can negotiate with VCs whether new funds can be used to repay shareholder loans, if they need to be forgiven or if there are specific conditions under which they can be repaid.

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Onwards and Upwards,

Liam Gill

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