Cap Tables For Early Startups

It’s all about the ‘who’ and the ‘how’…

That’s how I started off my talk on cap tables last week. I was teaching a lesson for 45 hungry startup founders at Draper University who are set to pitch for their initial angel round of funding in 3 weeks.

My goal was to help them understand that being intentional upfront as to who they allow to fund their startup and what financial instruments and clauses they decide to use in their funding rounds, could decide whether they will be successful 12-24 months in the future.

I urged them to be intentional about keeping things simple, because complexity means additional legal fees, using sophisticated finance experts, and having to answers questions from investors they’d rather avoid.

For example, in most cases it is better to accept a lower company valuation from a venture capital firm who doesn’t want any add-ons such as dividends, participating preferred, a liquidation multiple, etc. than one who’ll accept the founder’s lofty valuation…with a catch…

This was the case for Chegg Inc. who tried to maximize its valuation and ended up accepting the dreaded “ratchet clause”. After it’s IPO in 2013 it’s never come close to regaining its IPO price again.

Read the story of Chegg here.

It’s 10x more valuable to decide to do things correctly upfront than after the fact. It’s what I tell founders and it’s how I live my life.