Cap Table From Day One

As a founder who’s just incorporated a C-corp in Delaware, you’ve likely been asked to answer questions: How many shares should your company issue? What should each share cost? How should you divide these shares among co-founders? It’s tempting to push these questions aside, thinking they can wait until you’re fundraising. But stop right there. Understanding your capitalization table (cap table) early on is critical for your startup’s future.

What is a Cap Table and Why Does It Matter?

A cap table is a detailed record of your company’s ownership structure. It tracks who owns what portion of your company, including founders, employees, advisors, and investors. Many founders overlook the importance of maintaining a cap table from the start, but doing so can save you substantial time, money, and stress later on.

Why You Should Care About Your Cap Table Now

In the early stages of a startup, especially when bootstrapping, you might offer equity shares to employees, advisors, or consultants as compensation or to attract talent. This is common practice, but if you’re not keeping a close eye on your cap table, you might not realize how much of your company you’re giving away.

Additionally, without a vesting schedule, an employee who leaves early could walk away with a large chunk of equity, which can hurt your company’s equity distribution and control.

As you move towards fundraising, you’ll encounter instruments like SAFEs (Simple Agreements for Future Equity) and convertible notes. These aren’t actual shares until the next financing round, complicating the cap table if not managed properly.

Common Mistakes Founders Make with Cap Tables

1. Not Keeping Track

Failing to update your cap table regularly can lead to confusion and potential disputes. Equity distribution can quickly become unclear, which is problematic during fundraising or when offering new equity. Regular updates ensure accuracy and transparency.

What to Do: Start with simple tools like spreadsheets or invest in cap table management software. Platforms like Carta or Pulley can simplify tracking and provide real-time updates.

2. Giving Too Much Away in the Beginning

It’s easy to be generous with equity in the early days. However, offering too much equity too soon can lead to significant dilution. This can deter future investors and reduce your control over the company.

What to Do: Carefully evaluate the equity grants for each employee or advisor. Consider their contributions and how their equity will impact your ownership structure.

3. Not Knowing the Difference Between Pre-Money and Post-Money Valuations

Understanding the difference between pre-money and post-money valuations is crucial when negotiating with investors. Pre-money valuation refers to the value of your company before new investment, while post-money valuation is after the investment is added.

What to Do: Always clarify these terms during investment negotiations to avoid giving away more equity than necessary. This understanding helps in maintaining control and fair valuation.

4. Not Talking About Founder Share Percentages

Avoiding discussions about founder equity splits can lead to disputes. Clear agreements on equity distribution among founders help maintain harmony and fairness as the company grows.

What to Do: Document each founder’s equity percentage and the conditions under which they vest. Use legal agreements to formalize these arrangements.

5. Not Creating Common vs. Preferred Shares

Differentiating between common and preferred shares is essential. Preferred shares often come with rights that common shares do not, such as preference in dividends or liquidation.

What to Do: Understand the implications of issuing common versus preferred shares. Consult with a legal or financial advisor to determine the best structure for your company’s needs.

6. Not Bringing on a Lawyer to Help

Navigating the complexities of equity distribution and cap table management can be challenging. Attempting to handle everything without professional guidance can lead to costly mistakes.

What to Do: Engage a lawyer with experience in startup equity and corporate structure. They can help you set up your cap table correctly and ensure compliance with legal requirements.

Get into the habit of updating your cap table from the start. For more, visit, the-startupideation.com.