Cap table mistakes to avoid at all costs

Last updated: 22 Oct 2024. 

We help founders manage their equity daily, and we’ve seen plenty of cap table mistakes that can raise red flags. These issues can cause confusion, lead to ownership disputes, and make your business seem less attractive to investors.

A poorly managed cap table might not cause problems right away, but when investors take a closer look, cracks will start to show - and that can slow down your growth or even jeopardise funding.

But here’s the good news: a well-structured cap table is a powerful tool. It provides a clear view of ownership, keeps everything organised, and sets you up for future growth.

In this article, we’re going to take a look at some of the most common mistakes to help 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’) details who has ownership in a company. Every limited company in the UK is split into a certain number of shares. The holders of these shares have certain rights, as laid out by the company’s Articles of Association. 

One that is well-built will outline who has shares, how many shares they have and the value of those shares.

Why is my cap table important?

Your cap table tells the story of your company’s journey and reflects your attention to detail. As your business evolves, so will your cap table, influencing key decisions and forward planning. 

One that is clear and well-maintained makes it easy to assess ownership and determine whether your company is a solid investment or a potential risk.

It determines who gets what in the event of an exit and can 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 yours 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, but here are five pretty common mistakes:

1. Dead equity

Former employees or shareholders who no longer contribute to your business but still haunt your cap table pose a serious issue. This ‘dead equity’ drags down your ownership structure without adding any true value. 

This may also give them a say in company decisions, even though they are no longer aligned with your goals.

For investors, this poses a major red flag, as it adds uncertainty as to how these inactive shareholders may act in future. 

To minimise the risk of dead equity, you should incorporate leaver clauses into your articles of association.

These clauses outline what happens to an employee’s shares once they leave the company, ensuring that equity remains in the hands of those actively contributing to the company.

2. No vesting structures

Vesting is a process whereby somebody gains ownership of their allotted shares incrementally over time. Agreeing to performance metrics upfront ties shareholders into an equity-driven incentive, aligning them with the long-term success goals of the company. 

A cap table without a vesting structure poses many issues to investors. Without it, early shareholders or employees could leave with large equity stakes, even if they have only been with the company for a short time.

This could cause some serious conflicts down the road, so ensure you protect your business with sufficient vesting structures in place!

3. Giving too much away

When a founder’s ownership stake becomes too small, it raises concerns to investors about their long-term motivation and commitment to the business.

If a founder holds too little equity - possibly due to giving too much away in early funding rounds - it could also complicate decision-making at key points in future. 

Good investors want founders to have sufficient skin in the game to justify the work still to come with growing the business. Ultimately, it is a balancing act. 

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.

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. Finding the right balance is key to managing your business going forward.

4. Zoo of micro-investors

Having a large number of micro-investors, each with a small stake in your company, might seem harmless. However, managing lots of individual investors can be challenging, time-consuming, and lead to unnecessary complexity and confusion. 

This is where SPVs come in handy. Considering a nominee structure to consolidate a collection of micro-investors into a single investment vehicle is a great way to simplify your proceedings, and ultimately make your business more attractive to larger investors.

Vestd’s SPV structure streamlines communications, reduces administrative burden, and ensures your cap table remains manageable. 

5. No employee option pool

Without enough shares set aside for the right people, you risk losing out on top talent who might go elsewhere.

Setting aside shares for key team members shows investors that you're serious about rewarding and retaining high-performing employees - an essential factor for long-term growth. 

A typical pool size is between 10-15%, and so reserving this to acquire top talent ahead of a funding round is a sure-fire way to boost your business in the eyes of investors.

Having an option pool in place before a funding round reassures investors that their stake is protected from future dilution, avoiding the pitfalls of creating one later.

Establishing it early on also reduces administrative hassle, as it requires formal approval from the Board and present shareholders. Sign up to our free plan to set up your option pool early with Vestd, simply book a call to get started.

6. Picking the wrong people

Choosing the wrong people to have on your cap table can have a detrimental effect on your image as a founder.

Remember: when you offer equity to early employees, investors, or advisors, you’re not just handing out shares. You are inviting them into the decision-making process, which ultimately shapes the future of your business. 

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 the right precedent going forward in your development.

7. Inadequate agreements

If you’re going to share equity, make sure you do it right! Verbal agreements or unsigned deals simply aren’t legally binding, and they won’t hold up when it comes to making decisions later. To avoid disputes and legal headaches, it’s crucial to document everything properly. 

Anytime shares are issued or ownership changes, update your cap table and ensure all agreements are signed. We provide comprehensive document templates to help you stay on top of things and keep your equity structure watertight.

Don’t leave room for misunderstandings - keep everything clear and documented from the start.

8. Human and rounding errors

Managing your cap table in a spreadsheet may seem fine at first, but all too often this leads to small errors that can have detrimental consequences for your business.

Small rounding errors can add up over time, resulting in incorrect share allocations, potentially conflicting with what shareholders were originally promised.

Equity is complex, and capturing all the necessary details manually in a spreadsheet is tricky. As your company expands and your list of shareholders grows, so does the risk of mistakes.

Relying on manual updates or sharing multiple versions of a cap table with lawyers and accountants can lead to confusion and inconsistencies.

Digitising your cap table is a perfect way to decrease the risk of human errors, and ensure that the information held is up-to-date, accurate, and digestible. 

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.