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.

 

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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Thank you for joining your host Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.

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Disclaimer:
Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.