These 5 cap table mistakes make your start-up uninvestable. Here’s how to avoid (or fix) them

A cap table is more than a financial document, it tells the story of a company – how it is managed, what are its future perspectives and how the founders are (or aren’t) able to think and plan long-term.

As a General Partner atFortech Investments, I’ve seen hundreds of cap tables. While some were exemplary, some were pretty messy, to say the least. The problem is that these messy cap tables make a start-up uninvestable, no matter how good their business or product is. Most are messed up in the beginning, when the founders made some wrong decisions. These early decisions end up having a significant negative impact on the cap table in the future.

The good news is that most of these cap tables can be cleaned up, but only when all shareholders are involved. Here are the most common mistakes I’ve seen, what they signal to investors, and a few tips on how to fix them:

Founder equity problems

Most mistakes I’ve encountered have to do with the ownership of founders, especially when they own too little of their company. When investors see this, they worry that the founder will not be motivated enough to lead their company in the long run. Since we invest in the early stages, the founders are our biggest bet and we want them to take their venture as far as possible.

It’s alarming when founders own less than 70% before their seed round, as they will have to give away much more equity as they grow. Ideally, by Series A, they need to own at least 50%.

Another red flag is when the equity is shared unevenly among founders, making us question if they all bring value to the company.

Fundraising rounds not being planned

A cap table is not something you can figure out as you go. Even from day 0, founders need to plan the evolution of their company, in terms of rounds, valuations, and equity. The cap table should be used to perform future scenarios, all the way to the exit value. By doing this, they will be able to reverse engineer it and figure out how much to give away at each round. They should always keep in mind things like dilution from follow-on rounds and downside protection.

AtFortech Investments we also create future scenarios using the start-up's cap table, to understand how the value of our shares will evolve. We have a simple Excel that we also provide to the founders, so they can easily plan their rounds too.

Dead weight on the cap table

Another common issue I see is dead weight on the cap table. Dead weight, or inactive equity, is defined as significant equity stakes (more than 10%) owned by founders, advisors, angels, or other shareholders who are not active in the company anymore.