May 31

Your Cap Table: If You Get It Wrong The First Time, Will You Be Able To Do It Over?

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May 31, 2020
Avoid compounding problems and get your cap table right from the start.

One of the biggest challenges for startup founders and funders is making sure that the “cap table” (the spreadsheet or table that shows all of the equity ownership capital) is fair among all of the current and future stakeholders.

If you get the cap table right, it doesn’t guarantee that your venture will be successful. But if you get it wrong, it will dramatically increase the probability of problems and may even cause your venture to fail.

During the ideation stage of a venture, allocating founders’ shares can seem a bit like giving out Monopoly money at the start of a game. If there are two co-founders, should the shares be split 50/50, 51/49, 60/40, 80/20, or what?

What if there are three co-founders, or four co-founders? In terms of initial capital to organize the venture, do all co-founders need to pay the same price per share? What if one or more of the co-founders doesn’t have any money to invest?

It’s also different depending on where you are.

In some jurisdictions, the corporate laws require a minimum amount of share capital. For example, Switzerland requires 20,000 Swiss Francs for a GmbH (LLC) and 100,000 Swiss Francs for an AG (joint stock company). In other jurisdictions, the corporate laws have no prescribed minimum amount of share capital for LLCs or corporations (e.g., Delaware, USA).

In most cases, startups are organized with the minimum amount of share capital necessary to get the venture to where it can either raise capital from third parties or begin to sustain itself from cash flow from operations. That generally means that the co-founders are not planning to “pay themselves” until they get to that next stage.

Of course, those who are not co-founders are generally not willing (or able) to work without compensation. One way to incentivize them is through equity-based compensation (although that method doesn’t work as well in many countries as it does in the USA).

It’s one thing to organize a new venture; it’s quite another to take that venture to a point where it has a proven repeatable, scalable business model. That process can take years, during which time a lot of things can change in the the co-founding team.

What happens to the cap table if one or more of the co-founders decides to stop providing services (e.g., sweat equity) to the venture? Does it matter whether the termination of services is voluntary or involuntary?

Startups that don’t have enough liquidity and capital resources (from co-founder capital and/or cash flow from operations) to support their business need to raise money from third parties.

The most common source is friends, family and fools. Since that investor profile is generally not professional, and may be motivated by personal reasons, they might overvalue or undervalue the venture. In either case, that will negatively impact the market integrity of the company’s cap table.

In my experience, the market integrity of a company’s cap table dramatically influences the two major startup inputs: capital and labor.

For sophisticated capital (cash from investors), getting the cap table right ensures that:

1) The pre-money valuation for the equity purchased is “market.”

2) The company has the ability to attract, retain and motivate key talent with competitive compensation (which may include equity compensation).

Similarly, for labor (human capital, or talent), getting the cap table right enhances the probability that:

1) The company will be able to secure financing from sophisticated investors.

2) The company has the ability to attract, retain and motivate key talent with competitive compensation (which may include equity compensation).

John Wooden, the legendary college basketball coach, once said:

“If you don’t have time to do it right the first time, when will you have time to do it over?”

In my experience, if startups fail to get their cap table right the first time, sooner or later, they will have to figure out a way to “do it over.” The tools for doing that are blunt instruments, unfortunately, and sometimes the “do over” requires a major reorganization or recapitalization, or even dissolution and reformation.

Over the past 30 years I’ve worked with thousands of entrepreneurs, founders and funders of startup companies globally. I have also engaged in primary research, interviewing more than 200 tech startup founders headquartered outside the United States. We discussed their hopes, dreams, opportunities, challenges and failures.

I’ve seen more than a few ventures get their cap table wrong. In many cases, intentions were good, but the design and strategy were missing sophisticated venture finance expertise.

Although these mistakes can be made anywhere, including Silicon Valley (e.g., the recent WeWork example), I have seen these mistakes happening at a higher frequency outside the major tech startup hubs.

The truth is that many startups do not have the necessary knowledge and expertise to enable them to formulate, design and execute the strategies and tactics that lead to successful venture finance results.

Here’s the great news: there are roadmaps used by startups who successfully raise outside capital, which anyone can follow.

All you need to know is where to find it and how to apply it.

If you’re in need outside capital to help your startup reach its full potential, I invite you to take advantage of the roadmap I have created for founders just like you.

These programs incorporate over 30 years of professional experience from the perspective of startup founders, venture finance investors, and venture finance lawyers.

Accelerate your venture finance education and change the trajectory of your startups future today.

Don’t let another moment pass by without taking action on this topic.

Access your roadmap today.

Good luck and Godspeed!


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Capital Table


Brad Furber

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About the Author

Founder of Aery Advisors Seed Investor, Company Advisor, Entrepreneur, Lawyer

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