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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Sometimes You Really Can Do It Alone

One of the most common questions asked by startups and more mature businesses looking to grow is – how do I raise money from outside investors?  There are a number of answers to that question.  However, before you ask yourself that question, I would suggest there is a more important one – should you raise money from outside investors?  The answer to the second question, in turn, requires you to ask yourself some others.  Don’t worry – eventually you’ll get to answers, but the point is, the decision to raise money from anyone other than yourself (even friends and family) should not be made lightly.

Some of the questions you need to ask are as follows:

  • What do I need the money for?
  • How much do I really need?
  • When do I really need it?
  • Do I have it on my own; and if so, why would others put their money at risk if      I won’t?
  • Are there grant funds or other public or private assistance available?
  • Can I borrow the money rather than diluting my ownership?
  • Am I comfortable with all that accompanies outside investment (e.g., loss of      control, dilution, etc.)?
  • And . . . only after answering all of those questions and determining that you      need outside investors – who are my ideal investors?

The point is, the most expensive, complicated, intrusive and dilutive money that you bring into your business is outside equity investment.  So, when you ask and answer the above questions, consider what you can do to structure your company and business plan to maximize the growth you can achieve with your own dollars before bringing in outside investors.  While it may seem more expensive and risky in the short term, you may find the opposite to be true in the long run.