Funding rounds are already stressful enough for founders, but adding the necessary cap table checks to the mix introduces new obstacles and frustrations.
Critically, every investor expects founders to maintain clean, healthy cap tables before starting funding conversations. Below, we aggregated our internal cap table tip sheet. Let’s dive in!
Founder’s Corner: 3 Common Frustrations
Here are some common areas where founders have trouble with initial cap tables:
First, building on Excel can be tedious, mainly when founders write their own formulas for the round model and calculations.
Second, founders are amazed by how diluted the rounds can get from their option pool. (LTSE's tools accommodate this within their modeling.)
Third, founders sometimes don't realize they have to allocate a certain number of shares to their pool, which must be refreshed from time to time, especially going into a new round. Investors expect this, so they don't get diluted. (LTSE built in these calculations as well.)
How to Proactively Address Dilution
There are two main paths for founders to ensure they have dilution in hand:
Have a handle on your cap table.
Know your allocation from day one. LTSE has models and suggestions for structuring dilution, but it ultimately comes down to the founder's comfort. Practice improves your understanding, so play around with your scenario.
Ensure you're rewarding employees accurately.
They should be compensated correctly for their time with you. Everything given to employees should be through a long-term lens, rewarding them as they mature with you.
Green Flags: What Your Investors Will Prioritize
Here are three steps founders can take to ensure investors will like what they see:
- Make sure everything on your to-do list is good to go – This is huge from an admin perspective. LTSE has a built-in to-do list that asks about aspects of this, like the issuance method.
- The 409A valuation – make sure you've done one so you can base your new valuation on it and for compliance with the IRS. A fast, easy solution is to get an audit-defensible 409a valuation from LTSE Equity.
- Transparency – an essential and underrated part of the game. Ensure that anyone with a financial interest in the company can access your cap table and your employees' holdings. Make sure they can communicate with you about all of it.
From a compliance standpoint, checking the above boxes is super important. Other forms deal with compliance as well, like 83b elections.
At LTSE, we’re committed to helping anyone in need with surviving and optimizing their cap table health check, and beyond that, we have a suite of services and partners available to clients. Get started today.