In looking at cap tables, there are several red flags to watch out for.
Look for shares that are actually issued and not just verbally promised.
Is the cap table up to date with cancellations and repurchases? Many startups consider their cap table to be a work in progress so don’t be surprised if it contains “what ifs” and other “redos.”
The cap table is typically available in three versions:
First: The capitalization as it currently exists,
Second: The capitalization of the business as a fully-diluted version including any options, warrants, contracts, convertible debt, that could become shares,
Third: A proposed version including new employees, pending lawsuit settlements, or planned raises.
Check to see if there’s an attorney behind the scenes who is following up on the details as the management team is generally distracted by sales, development, and other issues.
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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.