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Cap table mistakes to avoid at all costs

Cap table mistakes to avoid at all costs
Cap table mistakes to avoid at all costs

Last updated: 3 May 2024.

Every day, we help businesses unlock the power of equity to incentivise employees, reward key players and ultimately, grow. So, as you can imagine, we've seen plenty of companies make mistakes with their cap table.

It’s easily done, but also easy to avoid.

In this article, we’re going to take a look at some of the most common cap table mistakes to prevent you from falling into the same traps. But first, let’s start with what a cap table is and why it’s important so we're on the same page.

Cap tables explained

A capitalisation table (or ‘cap table’) is a breakdown of a company’s ownership.

It's a record of all shareholders, the percentage of their stake and related information (e.g. dilution, value and vesting schedules). Typically, you can expect to see founders, directors, investors and early employees on a cap table.

Why is my cap table important?

Equity is precious. Whether you’re just starting out or scaling up, you need to know who has a stake in your business, who has what rights and the impact that has on all shareholders. 

Your company’s cap table can affect future investment, who gets what in the event of an exit and even dictate who has the final say when it comes to making crucial decisions.

With this in mind, we’ve highlighted the most common cap table mistakes that we see to help you keep your cap table in tip-top shape.

Common cap table mistakes and how to avoid them

This is by no means an exhaustive list, you can find that in our Ultimate Guide to Cap Table Management (free download), but here are five pretty common mistakes:

1. Picking the wrong people

When deciding who gets to be on your cap table, choose wiselyBuild relationships with your investors. And before you bring anybody on board, just think...

Are they aligned with your values and vision for the company? Consider what else they bring to the table in addition to financial investment. You want to set a precedent with your cap table. 

Ask yourself:

  • Is my cap table truly diverse? 
  • Is equity distributed fairly and proportionally? 
  • Are early employees a part of it? 
  • Will future hires get a slice of the pie too?

What investors won't want to see is a load of "dead equity" - in other words, shareholders not aligned with or remotely involved in the business.

Everybody on your cap table ought to add (or have already added) value in some way.

You can reduce the risk of too much dead equity by: 

  1. Retaining a sufficient stake in the business.
  2. Preserving a proportion of equity for your employee option pool.
  3. Awarding shares in a way that’s proportionate to people’s actual contributions.
  4. Including terms in shareholder agreements such as buyback provisions, leaver clauses and vesting schedules. 

2. Giving too much equity away too soon

Many founders have confessed to (and regret) selling too many shares too quickly or giving too much equity away, which can cause complications later.

Tools such as our Equity Sharing Calculator can help you work out how much to hold on to and how much to set aside for others.

Ultimately, it's a balancing act. Pejman Nozad, founder of seed funding specialists Pear VC, sums it up nicely:

We want to make sure that founders own enough and make sure that there is a healthy option pool to attract employees.

3. Rounding errors

Spreadsheets are useful for all manner of things, yes, but not when it comes to managing your equity safely and effectively.

Spreadsheets have a habit of rounding figures. Though this might not be harmful to a business in the early stages, it may have consequences later down the line.

Rounding errors, albeit small and seemingly insignificant, start to add up as a company grows.

For instance, a rounding error could lead to an incorrect allocation of shares, conflicting with what shareholders were promised. And, though usually rectifiable, that could make things awkward.

Speaking from experience, more than half of businesses going through funding rounds have incorrect cap tables. And rounding errors are commonly the culprit.

4. Human error

Equity is complex. Capturing all the information you need and making sense of it in a spreadsheet is tricky. As the company grows, inevitably will the list of shareholders and, in turn, your spreadsheet.

A lawyer, accountant, or even local authority may need to take a look at one point. If you have a spreadsheet set up already, ask yourself, would they be able to make sense of it? 

What’s more, if you’re sharing your spreadsheet with lawyers and accountants, you may end up with several variations instead of a single, non-disputable source of truth.

All too often, founders update their cap table on an ad-hoc basis (or even file it away and forget about it). This manual (and tedious) process leaves room for human error. 

5. Missing information

If your spreadsheet is messy, overcomplicated or lacking key information, this could cause problems, particularly with Companies House.

You want to avoid discrepancies between Companies House and your company’s internal records. 

If crucial information is missing, such as (but not limited to) company valuations, share allocations and nominal values, it could have costly implications later down the line. And potentially render an employee share scheme non-compliant.

We offer a free cap table template intended for non-complex companies, but there's a better way.

What's so great about a digital cap table?

A digital cap table is a no-brainer. Why?

  • No more paperwork
  • No more unruly spreadsheets
  • An accurate reflection of company ownership
  • Reduces the risk of non-compliance

So bid farewell to Excel, say goodbye to Google Sheets and wave hello to your new digital cap table! With our Free Plan, you can connect Vestd to Companies House to view your cap table and so much more.

Get your free digital cap table

It's easy to upgrade, but if you want to discuss setting up a share scheme now, our specialists are happy to help - book a free, no-obligation consultation at a time that suits you.

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