Your cap table is so much more than just a breakdown of who owns your company and how much they own. It tells a story of how your company is being run and how it has reached this point. And it’s an integral part of effective equity management.
This is what investors will look for in your cap table and what it says about you…
1. Firstly, investors want to see a ‘clean’ cap table.
With as little toxic debt and founder dilution as possible.
Of course, businesses need to borrow money, but if you aren’t able to pay it back on time or you intend to use their investment to service the debt, instead of growing the business, then that’s a red flag you will do well to recover from.
2. Then, the founder’s shares. How much has been sacrificed to get the project this far?
Your equity will, inevitably, be diluted even further after the next few rounds of funding. Dilution, by the way, isn’t always something to avoid.
That said, if you don’t currently hold a substantial amount, will you still have the impetus needed to keep driving the business forward? And what do your decisions here say about your judgement?
Similar questions may arise if your shares have been fully vested. Where is your incentive to stick around and put in the hard yards?
Investors make their choices based on the credibility, competence and motivation of the founder as much as the business idea itself, and either of these eventualities can put serious doubt in their minds.
3. If the cap table reveals that lots of people have left, investors may wonder why.
And if there is a viability issue that has escaped their attention. Or a high turnover of staff who have received option grants subsequently left.
Is there a problem with the culture (or the executive management) that doesn’t show up in the black and white of the document? Is that impacting the team? Or are there even grievances or potential lawsuits on the horizon? Have members of the founding team fallen out?
4. They will note if you have set some aside for your employee option pool.
Share options are a valuable recruitment tool for startups, a precious incentive when they can’t offer the salary that their competitors or big names in the industry can. If you don’t have a provision here – or an adequate provision – they may question your foresight.
5. More is definitely not merrier.
Investors are attracted to quality over quantity; ideally, everyone is still adding value to the project, with as little ‘dead equity’ as possible. A straggling bunch of partners, who all want their say, can seem like a potential headache for investors, so choose wisely.
6. Attention will be paid to the makeup of your investment team.
A diverse set of investors and advisors bring with them not only the breadth of their different skill sets but also open up the potential for further diversity of network and investment; doors that remain closed to more uniform or insular teams.
In the clamour to attract that precious early funding preferential terms can be negotiated which set an unwanted precedent, complicating further rounds; even to the extent of scaring off potential investors.
It’s a good rule of thumb to keep things as standard and simple as you can if you will need to raise further capital later.
7. The numbers will be scrutinised, so make sure they add up!
Errors are all too common in cap tables, especially as they get more complicated with extra funding, employee share options, dilution of existing shares etc.
Spreadsheets also have a nasty habit of rounding figures. What might seem harmless and inconsequential can snowball as a company scales and looks to an investor like a critical lack of attention to detail.
A digital equity management platform is your best bet to record an accurate representation of your company, both internally, to investors and, indeed, to Companies House.