Our friends at Cake Equity have sorted out a Top 10 list of what NOT to do, we’ve recapped it here 👇, and check out their full article here.

Not creating a cap table early on

Without a clear picture of your company’s ownership from day one, you’re setting yourself up for headaches down the road.

To avoid this:

start your cap table as soon as you incorporate, include all founders, allocate shares, and document any early investments or promises of equity.

Not keeping it clean

When it comes time for a funding round or an exit, an inaccurate cap table can lead to disputes, delays, and even derailed deals.

To avoid this:

make updating your cap table a regular habit, every time there’s a change in ownership (new hires with stock options, an investor buying in, or a co-founder leaving) update that table.

Not having proper vesting schedules

Without proper vesting schedules, you risk having a co-founder or early employee leave the company with a significant equity stake after only a short period, this can dilute the value for remaining shareholders and potentially discourage future investors.

To avoid this:

implement vesting schedules for all equity grants and make sure it’s clearly documented in your cap table and all relevant agreements.

Not managing equity dilution

Unexpected or excessive dilution can demoralise your team, erode trust with your investors, and make it difficult to attract and retain top talent, it can also lead to founders losing control of their company faster than anticipated.

To avoid this:

plan for dilution from the start, model out different scenarios for future funding rounds, be transparent with your team about potential dilution, and consider anti-dilution provisions for key stakeholders.

Not using a cap table software

Manual cap table management in spreadsheets is time-consuming and error-prone, it’s also difficult to model future scenarios or generate the detailed reports investors often require.

To avoid this:

invest in specialised cap table management software, these tools can automate updates, model future rounds, and generate detailed reports at the click of a button.

Not documenting transactions

Poor documentation can lead to disputes over ownership, complicate due diligence for future funding rounds, and even attract unwanted attention from regulators, it can also make it difficult to accurately value the company or individual stakes.

To avoid this:

ensure every equity transaction is backed up by proper legal documentation, including board approvals, shareholder agreements, and stock option grants – keep these documents organised and easily accessible.

Not understanding different types of shares

Different classes of shares come with different rights and privileges, and mixing them up can lead to conflicts between shareholders, complicate decision-making processes, and potentially violate agreements with investors.

To avoid this:

educate yourself on the different types of shares – common, preferred, etc and make sure your cap table clearly distinguishes between them – as always, consult with a legal professional before creating new classes of shares.

Not communicating with shareholders

Lack of communication can lead to misunderstandings, erode trust, and potentially result in disputes, it can also make future fundraising more challenging if existing investors feel out of the loop.

To avoid this:

maintain regular, clear communication with stakeholders about the state of your cap table and equity, proactively send updates and provide access to parts of the cap table that matter to them (you don’t have to show everyone everything!).

Not calculating option pools

An option pool that’s too small can leave you unable to hire key talent, and if its too large you’re unnecessarily diluting existing shareholders. 

To avoid this:

don’t stop at setting up your option pools, regularly review it and adjust accordingly, investors will likely want to see a healthy option pool before they invest.

Not planning for future funding rounds

Failing to plan for future rounds can lead to awkward conversations with potential investors and complicated restructuring down the line.

To avoid this:

use your cap table to model out future funding rounds and consider different valuation scenarios and their impact on ownership.

Remember to keep these helpful tips front and centre when building your cap table, and as always we’re here to help, even if it’s to mop up the mistakes (lets say a ‘clean up service’ of sorts), and help you avoid more in the future.