Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.
The Cap Table is an important part of any diligence process.
In reviewing a startup’s Cap Table, look for these signs of a problem:
- The current team has little equity and thus little incentive to see it through to an exit.
- The Cap Table is complicated with multiple share classes.
- The early rounds came with complex rights and terms including liquidation preferences, ratchets, and clawbacks.
- Founders who left the company still own substantial amounts of equity.
- There’s no options pool which means all compensation will need to be paid out of cash.
- There are too many individuals on the Cap Table.
- Convertible notes, options, warrants, and other items are not listed in the Cap Table but exist in the business.
- Existing investors retain sign-off rights on additional funding.
The Cap Table is a standard due diligence document so don’t invest without first reviewing it.
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