9 Cap Table Management Mistakes That Could Cost Your Company
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Transcript of 9 Cap Table Management Mistakes That Could Cost Your Company
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9 Cap Table Pitfalls
That Could Cost Your Company Big
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Table of Contents
Mistake 1 – Handshake Agreements
Mistake 2 – Fully Vested Founder Shares
Mistake 3 – No Round Analysis
Mistake 4 – Exercising Option Grants Late
Mistake 5 – Mispriced Option Grants
Mistake 6 – Poor Record Keeping
Mistake 7 – Taking Too Much Funding
Mistake 8 – Expanding Option Pool Poorly
Mistake 9 – Not Getting Expert Advice
v
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Handshake Agreements
Don’t Make Verbal Equity
Agreements with Co-Founders
1
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Mistake
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Even i f you trust each other…
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You Can’t Trust Memory
So write it down!
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Even Better…
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Once You’ve Agreed on the Initial Split…
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Build Your Cap Table
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Build Your Cap Table
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Fully Vested Founder Shares
Eventually one of your
co-founders is probably going
to leave or change focus.
2
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Mistake
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Nothing is worse than a large equity holder…
Who no longer contributes
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Vest Founder Shares
Over Several Years
I t ’s just l ike a salary.
The amount is agreed upon up -front
but i t is only paid as they cont inue to
work for the company.
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Not Correctly Analyzing Rounds
Most founders don’t know how
to correctly model the impact of
a new financing round.
3
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Mistake
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Step 1
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Learn the Basic Terms
Inc luding: l iqu idat ion preference,
part ic ipat ion r ights and part ic ipat ion caps.
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Especially take the time to
learn how preferred stock
affects the value of your
equity
“
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Step 2
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Use the Right Tools!
A tool l i ke Capshare .com wi l l a l low you to eas i ly
ana lyze d i f ferent terms and scenar ios to see how
your cap tab le wi l l be af fected .
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Exercising Your Options Too Late
You may get taxed at income tax
rates, rather than long-term
capital gains rates.
4
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Mistake
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Incentive Stock Options (ISO’s)
Can be exercised without paying taxes.
Taxes are only paid upon the sale of that stock.
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Exercise Your Options at
Least 1yr Before Selling
Stock must be exerc ised & then held for over 1
year to qual i fy for long -term capita l ga ins taxes.
An acquis i t ion or ex i t can force an ear ly sa le .
Make sure you…
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Mispriced Option Grants
The price of exercising an option
(strike price) must match up with
the value of the company.
5
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Mistake
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Granting options at too low a
strike price can result in
harsh tax penalties for
yourself and employees.“
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On the Other Hand…
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If you grant options at too
high a strike price,
employees can be ripped off
on a ton of value.“
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Get a 409A Valuation at
Least Annually
Choose a reputable f i rm.
If you need a 409a valuat ion, 409A.com is a
great p lace to get started.
To get your opt ion grants pr iced r ight…
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Poor Record Keeping
When it comes time for equity
holders to cash out, missing
records can really cost you.
6
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Mistake
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Your Cap Table Determines Who
Gets What…
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But Your Cap Table is Not Just a Spreadsheet…
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It’s a Collection
of legal documents,
agreements, and records that
tell a story of how ownership
has evolved.
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When a team of lawyers starts
pouring over your records, they’re
going to use them to rebuild your
cap table from the ground up.“
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If you’re missing documents and
records…
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You may lose equity and holdup a
company exit.
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Keep Track of Every Record
& Signed Agreement
Use a tool like Capshare to ditch paper, generate
new docs, get electronic signatures and keep
everything in one place.
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Taking Too Much Money Too Early
You may lose control of your
company and risk your entire
stake in your company.
7
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Mistake
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Resist the urge to take more
money than you really need.
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A big round won’t suddenly
make your business more
viable.
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With a large round you may lose control of your company and lose your stake in the company.
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The founder & CEO of Get
Satisfaction laments taking a big
bet when the company was still
young, and walking away with
nothing.
“
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Eventually he lost control, got
pushed out, and wound up empty-
handed when the company sold in a
firesale.“
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“
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You Have 2 Options
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Option 1
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Swing for the Fences with
a Big Round
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Option 2
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Raise As You Go
In Small Increments
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Option Pool Mistakes
Allocating too many shares, too
early to option pools will dilute
your equity too much.
8
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Mistake
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capshare
Every term sheet has a provision for an option
pool allotment.
This is expressed as a percentage of
the cap table.
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If you carve out say, 10% of the cap table, only
existing shareholders will get diluted.
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Tip 1
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Negotiate for a
Post-Money Option Pool
Rather than a pre-money opt ion pool .
Then your investors wi l l carry an equal
share of the d i lut ion
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Tip 2
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Only Carve Out the Option
Pool You Need
If you aren ’ t p lanning on doing much hi r ing
between rounds, scale i t back. That way you can
spread the d i lut ion out with future investors .
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Failing to Seek Professional Advice
Don’t get bitten by what you
don’t know.
9
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Mistake
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You will inevitably encounter
nuances and legal complexities as
your company grows. Remember, you
don’t always know what you don’t
know.
“
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Never underestimate the value of advice from lawyers, investors,
mentors, etc.
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Don’t be afraid to spend a few hundred or even
thousand dollars to get your cap table right.
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Get Your Cap Table Right
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