Smart Startups Have Smart Cap Tables

Every company has a cap table – i.e., a record of the pro-rata stock ownership of the company’s founders and other shareholders. A fully-diluted cap table also includes rights to acquire or convert into stock ownership – such as options, warrants and preferred shares. As a startup, your cap table – not the written representation of it, but the actual ownership and rights to acquire ownership in your company – is the most important “asset” you have. Manage it wisely and guard it carefully, because no matter how valuable your company becomes, that value belongs to the people in the cap table.

I am continually amazed at how carefully some startups protect their IP and business plans but how careless (or sometimes, carefree) they are with their cap tables – handing out stock like it’s a free sample at the grocery store or a sale item in the bargain bin. The problem is, those free samples and discount prices entitle the recipient to a permanent stake in the company and all of the related upside.

Think of stock as the lifeblood of your company. It’s not something to pass out to impress or thank your friends or to issue the landlord in lieu of rent. It’s not a cheap substitute for money just because your company is cash poor – all startup companies are cash poor. It IS money; but it’s money that will hopefully increase in value exponentially over the life of your company as a result of your ideas, dedication and hard work. Make sure you retain enough ownership to enjoy the fruits of your labor.

Let me be clear – I’m not suggesting that it’s realistic to believe most startups can (or should try to) succeed with the founder retaining 100% ownership. What I am suggesting is that you carefully manage your cap table and only share ownership with those investors and key employees who provide the essential ingredients for your success.

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