Your Cap Table is Sending Messages to the Outside World

Make sure it sends the ones you want

The design of your cap table sends messages both to future employees and to investors. It’s unavoidable.

There are obvious messages, like:

• Which founder wears the pants in the relationship?
• How generous were the founders in distributing equity?
• How disciplined have the founders been in fundraising?

Plus many more, interesting psycho-analysis questions you could derive from how the cap table is split.

A plethora of articles have been written on this topic, and I do not intend to add to them.

My intention with this article is to discuss the optics of the actual design of your cap table. I share three interesting questions that will play a tangible role in your company’s future (at least they have in mine) and took brain cycles to correct or resolve. This article outlines the results of those cycles.

How many shares do you want to authorize?

Quick primer — authorized shares are the total number of shares a company states in the articles of incorporation it will allow to be issued. An issued share is one that has been sold (or granted) to an individual or organization.

Just because shares are authorized does not mean they have to be issued. A company could authorize 100MM shares, and start off by issuing only 1MM of them.

You can authorize and issue as many shares as you like, but there are optics for you to consider.

Consider the following — Company A is valued at $325,659 per share, and Company B is valued at $293 per share. Which company do you think is more valuable based on share price alone?

Intrinsically, you would think Company A, even though your gut knows it may not be true. This is the optics of the share price.

In this case, Company A is Berkshire Hathaway ($518bn market cap), and Company B is Facebook ($835bn market cap) as of this writing.

Issuing 100,000,000 shares to a new employee might sound great, but if they’re smart and ask the value of those shares, telling them each share is worth $0.00001 sounds much less awesome — not to mention it’s a difficult number to wrap your head around.

You want your equity incentives to be incentivizing. Aim to create numbers that are both comprehensible and exciting for your recipients. There’s not a right answer to this one. Just points to consider as you think through growing your business, hiring, and fundraising, and the message you want to convey.

Are starting with an option pool?

An option pool is a class of stock you set aside to provide as incentives for future hires. If you’re planning to raise venture capital, your investors will likely have you add an option pool as part of the round. The question is just a matter of timing, and again, optics with your founding team.

Suppose you start a business 50/50 with a partner. If you start with an option pool, you’ll each dilute immediately. With a 20% pool, the business will split 40/40/20 for you, your partner, and the option pool.

A year later, you raise $3MM on a $9MM pre-money valuation. This equates to 25% dilution, or a 30/30/15/25 split between you, your partner, the pool, and your investors (respectively).

In the same scenario, if you wait to establish an option pool until fundraising, you’ll go from 50/50 to 30/30/15/25.

The difference is purely a mental game. In the first scenario, your position drops from 40% to 30% post-funding. While a good drop, it’s half of the mental shift in the second scenario, going from 50% to 30%.

This may be difficult to fathom right now, but this mental game will play a big part in your willingness to negotiate during fundraising — I assure you.

Human nature wants to minimize the amount of equity you’re “losing”, and as such, the most likely scenario is you end up raising less money.

The biggest hit to your ownership percentage will be the first funding rounds. Give yourself the leg up, and spread it out — it’ll be an easier mental pill to swallow when the time comes, and you’ll be better positioned to negotiate. Start with an option pool.

Who are you calling “co-founders”, and how much equity are you giving them?

Be deliberate in giving someone the title of “co-founder”. It may feel like a small thing, but it impacts how people think about themselves in the context of your business.

For instance, you start the business with your partner. Obviously you’re co-founders. But what about the next person — are they a co-founder? You likely don’t have a business yet, and they are putting themselves on the line in taking a risk with your venture. And even more — do you want that next person to act like an employee or a founder?

If you deliberately provide them with that title in their offer letter, they are much more likely to bring a “co-founder” mindset to the business. Doing so will erase ambiguity and make it easier to draw the line — at some point, people stop being co-founders. Don’t let your organization decide for you when that line is drawn — that’s the first chapter of many a lawsuit.

The next point to consider is how much equity are you willing to give your “co-founders”? This will be an important issue when you go to fundraise, and you talk about the “founding team”. What investors want to know is your founding team is invested in the success of the business and will be working hard to increase the value of their investment.

If they look at the cap table and see a handful of “co-founders” who only have 0.25% of the business, they will question their commitment to the success of the business. The more equity in the hands of the “co-founders”, the stronger message it sends about the commitment of the team.

Control your story

I’m sure there are many other messages your cap table sends, without you having to say a word. I’m a big believer in understanding the facts for the sole purpose of intentionally controlling your narrative. These three issues are the latest ones on my mind, would love to hear your thoughts in the comments on things I missed!

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