Startup Funding Espresso – Toxic Cap Table [Video]

Toxic Cap Table

Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.

Investors funding a startup should review the cap table to determine the health of the startup.

Here are signs of a toxic cap table.

The founder owns the majority of shares and the cofounders own very little.

Without incentive, the co-founders will not give their best effort.

The founder owns very little of the company.

Similarly, the founder will not find enough incentive to see the business through to exit.

Too much equity has been given away in the pre-seed and seed rounds.

This leaves too little equity for the Series A investors.

The valuation was too high at the pre-seed or seed stage leaving no room for Series A investors to join who have a ceiling on the valuation they will accept.

There are too many investors on the cap table.

There’s a limit to how many investors can be on the cap table and giving up too many places could be a problem for future fundraise rounds.

There’s no option pool for investors at the Series A level or later.

This means all compensation to employees will come from cash.

This makes it difficult to grow and later scale the business.

There are too many liquidation preferences.

This will make it difficult to raise at the later stage rounds.

Look for these signs of a toxic cap table.

Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding. Let’s go startup something today.

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