During my recent conversations with multiple early stage fund managers, we exchanged some of the 'expensive surprises' we have run into working with founders that attempted to manage their cap table on spreadsheets. Several scenarios were discussed and I'll attempt to highlight some of the more common ones here.
The premise is that as startup founders, you want to be empowered with the ability to understand the impact to equity from investment terms, model & share cap table composition with investors & board, plan for future equity, understand exit waterfall, and more. Early stage fund managers tend to move quickly and trust the company structure presented by the founders at face value.
Spreadsheets are notorious for being delicate with formulas spread across cells and tabs. A deadly mistake may silently creep in to surface much later to everyone's surprise.
Scenario 1: You brave it and spend 30+ hours merging various crowd-sourced cap tables and formulae. You have Notes and/or SAFEs with different terms and you want to share some models with your investors. What is your confidence level going in front of investors with a house of cards?
Scenario 2: Your CFO or lawyer has been doing an amazing job of maintaining your spreadsheet based cap table. Do you as founder feel confident about making changes to that spreadsheet? Or rather, would your CFO or lawyer feel confident about handing over their spreadsheet to you?
Scenario 3: You think you have 5% of options remaining in your pool. You have been issuing options to employees and advisors without realizing that you exhausted your option pool inventory several months back. Spreadsheet didn't provide the sanity check and you now have to explain to your investors and shareholders why their shares are going to get diluted. Worst case (or is that typical?) - investors will want the founders to absorb the dilution hit.
Scenario 4: So you're in the midst of a capital raise and running against a deadline to ready your cap table. Your lawyer wants to know your plans for greening founders or other common shareholders and you *think* you want to issue bunch of shares prior to investment. Problem is, those shares were never issued, but the lawyer papered up the investment round assuming incorrect fully diluted share count. You didn't catch this and you ended up raising 2 more rounds with incorrect share price. So, how would you want to go about trying to explain why you are restating your cap table?
Scenario 5: A former co-founder, the current CFO, your first lawyer, your second lawyer, your lead investor, your board member - each maintain a snapshot of your cap table from different times that are totally inconsistent. Which is the source of truth? How far back do you have to go to reconcile the cap table? Did you say you have an acquisition offer on the horizon? Good luck with that!
Scenario 6: Did you have your trusted spreadsheet ninja update your cap table post your recent priced round? Did she use Post-Money valuation to arrive at the new ownership breakdown? Were the investments from the Notes and SAFEs you previously raised considered into the post-money calculation? If not, you just got screwed.
Scenario 7: Did you make sure that your updated spreadsheet formula got copied to all cells in that column? Are you sure? Are you 100% sure?
Scenario 8: If your investor wants 10% pre-money options pool, are you running your math correctly to include all converted securities and new investor money? Did you end up raising less money than anticipated? Were the option pool count updated to reflect this change? Heard of option pool shuffle?
Examples are endless. Small mistakes will come back to bite you. Ditch spreadsheets. The right time to get on a cap table solution is now. Not when you are planning to raise capital. Not when you're about to raise capital. Not after you've raised capital. Now!
Let TWO12 help you with your cap table needs. We encourage startup founders to add TWO12 to their corporate hygiene checklist - signing up to GSuite, setting up bank account, subscribing to the TWO12 Startup Suite, and similar.
Sign up at https://sigma.two12.co/sign-up.