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- ♞ Red Flags on Cap Tables
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What red flags make VCs run away from your cap table?
Today, I want to address a few of the red flags that are relatively common for founders to have on their cap table, which cause them to lose investors. This can seem like something that isn’t important to address early in your company, but the reality is that if you don’t have a clear plan for your cap table, then you risk letting it get to a state where you become uninvestable. So let’s go through these red flags:
Giving away 20%+ pre-seed - I have seen numerous companies that give away 25-33% pre-seed and then have investors walk away at the seed stage. If you have given away too much this early, then investors are concerned that by the time you get to Series B/C/D you will no longer have enough equity to incentivize you to stay. You’ll be at a point where you can leave and make more elsewhere. Maintaining equity in the early stages is vital, as dilution adds up quickly as you grow.
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Messy Cap Table - If you have too many investors on your cap table, then institutional investors won’t want to deal with them. The reality is that when you need 10+ people's approval to do anything, it makes it hard to run a company. Investors much prefer a clean and tidy cap table with a few investors that they can build relationships with, instead of a mess of smaller investors. An easy way to avoid this problem is to create a small holding company for the smaller investor so that they all vote as a block and appear as a single name on your cap table.
Dead Equity - If you have 5%+ of the company owned by cofounders, employees or others who are no longer involved in the company, then this is a massive red flag for investors. A common scenario here is university-backed companies that get some sort of accelerator services from their school in exchange for 5-10%, and then the school has zero value added and provides minimal capital. These companies essentially just have 5-10% of dead equity.
Dominant Shareholders - If you have an investor who purchased too much equity early on or has the right to acquire too much equity moving forward, this can scare future investors. They don’t want to be left at the mercy of one dominant investor who ultimately makes the decisions instead of the founders or a more collaborative group of shareholders.
Does your cap table have any of these red flags? |
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Are you looking to grow your business? Here is how I can help:
📱 Book a Strategy Call to get 1:1 feedback on your pitch, pitch deck and/or fundraising strategy. (If you need general startup advice, then reply to this email, and I’ll let you know if/how I can help.)
Onwards and Upwards,
