Five common cap table mistakes

A cap table shows who owns how much of a company. It looks simple, yet the issues that slow a round down the most during due diligence often come from it. Here are five mistakes that are common at the early stage.

1. An equal split without vesting

The founders split the shares equally and consider the matter closed. When one of them leaves early, a large part of the equity stays with someone who no longer contributes. However you split the shares, put vesting and leaver terms in writing.

2. Ignoring the option pool

If you plan to grant share options to employees, the pool set aside for them dilutes the existing shareholders. The pool usually comes up during a funding round, and its size is negotiated. A pool that is missing from the table makes your post-round percentage look higher than it is.

3. Not modeling convertible instruments

Instruments such as SAFEs and convertible notes are not shares today, but they will become shares later. Once several of them accumulate with different valuation caps and discounts, the table after conversion becomes hard to predict. Re-run the conversion scenario after each new instrument.

4. Verbal equity promises

“We’ll give you two percent” is often said to advisors and early employees, and often never written down. At the investment stage these promises turn into disputes or last-minute bargaining. Record any promise of shares or options, with its conditions, in a written document.

5. A table that does not match the official records

Your table should say the same thing as the company’s official records. Which record counts depends on the type of company. In a Turkish limited company, share transfers are registered with the trade registry (Turkish Commercial Code, Art. 598). In a joint stock company, only the person entered in the share ledger is treated as a shareholder in relations with the company (Art. 499). A share transfer that was not carried out or recorded properly can mean that a person shown on the table is not treated as a shareholder by the company. An investor’s due diligence will uncover these gaps.

A suggestion

Keep the cap table in one current file, update it after every transaction, and store the supporting documents (agreements, shareholder resolutions, share ledger entries) alongside it. Checking the table against the official records before investor talks begin costs far less than a surprise in the middle of a round.