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

Handshake Agreements

Don’t Make Verbal Equity

Agreements with Co-Founders

1

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Mistake

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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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.

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

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.

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 .

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…

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

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…

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…

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.

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.

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.

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

Option 1

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Swing for the Fences with

a Big Round

Option 2

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Raise As You Go

In Small Increments

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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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.

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

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 .

Failing to Seek Professional Advice

Don’t get bitten by what you

don’t know.

9

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Mistake

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.

Get Your Cap Table Right

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