Cap table red flags

Q. What are red flags on a cap table?

A. The negatives are a long tail of small investors and ex-founders who own a large share of the business.

The former is bad because sometimes you need to ask all shareholders for approval. The latter is bad because you may need approval and you don't know how good the relationship is with the remaining founders. Also, the remaining founders may not own enough of the business.

Q. How can you prevent these?

A. Bring smaller angel tickets in via SPV using Vauban from Carta or Odin and make sure you have reverse vesting if you have co-founders. Then you are protected if one of you leaves. If you raise a round with a VC lead they will generally insist on reverse vesting anyway.

Q. What is reverse vesting?

A. Typically you will accrue the rights to your shares over four years. This protects investors against founders raising a round and then leaving the business and protects founders against co-founders leaving.

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