Wed, 12 May 2021
Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.
The cap table tracks the ownership in the company.
In applying the company’s equity to the business there are several mistakes to avoid:
One - Not vesting the equity over time.
It’s important to set up a vesting schedule for the equity to vest over the duration of the project.
If the employee or contractor departs before the vesting schedule is completed, then the unvested shares return to the company.
Vesting should apply to the founders as well.
It’s not uncommon for investors to unvest founder shares and put them on a vesting schedule to ensure commitment from the founders.
Two - Not writing down all equity commitments.
Some startups use equity to pay for things such as website development and more.
This should be documented and placed on the cap table.
Make sure equity is given for specific projects and outcomes.
Three - Not keeping the cap table in one place.
It’s easy to sign a number of notes, agreements, and other documents, but it’s important to compile the results into a single cap table.
Four - Not keeping track of tax laws.
There are several tax implications around granting equity ownership, so it’s important to keep track of them.
The most common is the need for a 409A valuation in which you have a third party value the stock for tax purposes on options.
Watch out for the issues in managing your cap table.
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