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How to Make Your Startup Uninvestable?


Nothing says “I’ve lost control” like a cap table that’s undergone overloaded dilutions than a high school chemistry experiment. In case you are unfamiliar with the term: A Capitalization (Cap) table shows the equity ownership structure for a company – i.e. who owns how much.


Cap tables can make or break your company. Depending on how messed up the cap table is, your startup could end up on the uninvestable list.

  • Using our CapTable template, manage your team's equity ownership, ESOPs, Dilution, and Value of Equity at each round.

Most first-time founders never dealt with this and rely on advice that is not necessarily in their best interest. Here's a synopsis on what to avoid:


a. First Investors Hold Too Much of Equity

Sometimes you can't start with non-dilutive money, but avoid giving away a majority stake (>50%) in Pre-seed or Seed.

Remedy with convertible notes, vesting, or include an agreement for future stake reduction.


b. Spin-off Over Dilution

Often seen in Deeptech: Startups spin out of universities / scientific institutions, venture studios, etc., with > 50% institutional ownership.

Spinout CEOs: refuse to accept and aim for max. 10-15% exposure (if necessary, give tag-along rights.)


c. Dead Equity

Stakes (>5%) owned by founders, management team, or advisors who have left or will not be involved heavily in the future.

Implement reverse vesting/buyback provisions to have quitters sell their shares.


d. Too Many Small Investors

A cap table becomes fragmented (or a zoo) when several small investors (shareholders) hold relatively small ownership (typically < 5%) percentage in the company. In such instances, you as a CEO/founder often find yourself in the challenging role of constantly chasing after individual investors to obtain signatures and striving to bring everyone into alignment when making decisions.

20+ investors can be a huge distraction: Limit the number of investors on board and/or pool smaller investors into a single legal entity.


e. Strategic Investors/Advisors with Large Shares

Having a CVC/corporate investor early is great, but it can make you unattractive for future clients in the same vertical – carefully consider the implications. For advisor shares, there are best practices at Founders Institute.


Accelerators and Angels (avoid having lots of them) should ideally have < 15% equity on your cap table. Most importantly, never ever give them any actual or de-facto veto rights.


f. Investors' Favors or Sweeteners

Yes, you need money but learn to say NO. Potential deal breakers: unusual securities, 3+ classes of common shares, single investor liquidation preferences, multiple convertible notes, or special voting rights.


How to Fix Your Cap Table?

There are ways to fix your cap table. Here are some examples based on true stories:

How to Fix Your Fragmented Cap Table?

Summary

Your startup could be your life for the next 5-10 years, so avoid losing control and equity motivation early on.

A basic rule of thumb is that the founding team should still be the majority owner post-seed.

Also, educate yourself on how VCs calculate exits and make room for a stock option pool (ESOP).

 

Resources:


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