This is a simple one. They can get very hairy.

Cap Tables (and how to avoid my very expensive mistake).

In the world of startups, few things are as consequential as the Capitalization Table. Conceptually, it’s a very simple document— it’s just a list of who owns what percentage of the company. But it can get complicated in a hurry, with cofounder agreements, stock options issued, lawyers who hold stock warrants, investors who own preferred shares, advisors who were promised equity, and many other twists and turns.

It becomes a sacred document, and every investor you talk to for each round of financing will ask for a current Cap Table. Your lawyers will need it. The bank will ask for it. Contracts with large customers will often require that you provide a copy. And you will be asked to sign affidavits, attesting to its accuracy. It’s the rosetta stone for your company’s equity structure.

And then, of course, when you sell the company, the Cap Table defines how much money everyone gets! And that’s when the shit hits the fan.

One of the most embarrassing (and expensive) experiences in my career was when I sold a company, everything with the transaction was going great, and we all felt great about it. Then, suddenly, an angel investor from many years earlier said “Hey, remember, you said you’d give me some extra shares for that additional help I gave you?”. I had no memory of it, and it wasn’t represented on the Cap Table, but he produced some documentation that I had indeed promised that. When I brought this up to the other shareholders they shrugged and said “That’s not our problem — it’s not on the Cap Table”. So, in the end, I had to pay the guy $130,000 out of my own pocket to make him whole on the promise I had made but never entered on the Cap Table. Ouch.

This happens a lot. In the heat of the action all sorts of promises are made and for most startups it’s many years between the founding of the company and a liquidity event. Some employees came and left, and some cofounders came and left. The cap table was kept by the initial law firm, but then you changed lawyers, and then some copies were made of the spreadsheet and now you don’t know which version of the cap table is the most recent.

Meanwhile, you’ve been providing copies of the Cap Table to various regulators and tax authorities for a long time, so if it hasn’t been accurate you might have perjured yourself. And in every financing you signed documents attesting to the accuracy of the Cap Table, and if it was wrong you may now be guilty of fraud.

The good news is that what was once a hairy Excel file being forwarded around is now typically kept centralized in an online service like Carta. Pretty much everyone is doing it this way these days, which at least makes the Cap Table easier to manage (and there’s one canonical copy).

But you still have to keep it up-to-date. And you still have to make sure you never promise equity over a glass of wine and then forget to put it on the Cap Table. Learn from my mistakes, people. That $130,000 would have bought me a really really nice vacation somewhere. And some delicious wine, too.



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Bret Waters

Bret Waters

Silicon Valley guy. I teach entrepreneurship at Stanford, run the 4thly Startup Accelerator, and coach startup CEO’s at Miller Center. Also, I love fish tacos.