A clean cap table is more than just an administrative detail; it’s a strategic asset that can significantly influence the future success of a startup. By ensuring that equity is distributed in a way that motivates the executive team and facilitates effective decision-making, you can position your startup for success. While cleaning up a messy cap table can be a challenging task, it is an investment in the future of the company that can pay dividends in the long run.

TL;DR - The biggest 5 pitfalls are:

1️⃣ Dead Equity: The most recurrent issue where passive shareholders, such as ex-founders, universities, accelerators, and business angels, once contributed but no longer add to future value.

2️⃣ Fragmentation: A zoo of investors, each holding a tiny portion of the company.

3️⃣ Concentration: Contrary to number 2, this entails a single investor possessing an excessive number of shares.

4️⃣ Super-voters: Tied to number 3, these are minor investors who, due to their voting rights, effectively wield control over the company (like having veto power).

5️⃣ Time zones: Managing investors spread across three or more time zones.

Fragmentation

If a company has taken lots of small checks from angels or small funds and hasn’t really settled on a lead investor with a significant share (say 15%) to represent the investor body, then it can be difficult to get the level of consensus needed to pass a resolution. To illustrate, imagine three VCs each owning about 10% of the company, with each one at a different stage in their fund’s lifecycle (and fundraising), trying to agree on whether to accept an exit offer or not. You really need to have someone in the lead.

Concentration

The opposite of fragmentation, if a company has sold a significant stake (say 20% or more) to a single investor and that investor is not deeply involved in the future success of the company (including future funding rounds) then new investors may be concerned about whether their voices will be heard over this one loud one. It gets even worse, if you sold over 30% to a seed investor, let alone cases where someone took over 50% of the company.

Super-voters

Even smaller stakes can hold significant power, particularly if those shareholders have been granted special rights, such as veto rights over major decisions. These rights can slow down or obstruct decision-making processes, and they can be a significant deterrent to new investors who don’t want to deal with the hassle of navigating around them.

Time-zones

Founders are often glad to have investors from various corners of the globe. The belief is that this diverse investor base can aid the company in entering new markets and securing additional capital. However, what founders frequently overlook is the impact this “global exposure” will have on their daily lives, not to mention the implications for the company itself.

Imagine needing to review a draft contract. By the time your investors on the West Coast wake up and examine the document, those in Japan are already heading to bed. A precious day is lost in the process.

Our overall advice for keeping the cap table clean for decision-making is:

• If you can, pool smaller investors' decision-making rights to make for easier voting processes. In cases of conflict of interest, they can still vote separately, but you would avoid herding cats.
• Avoid getting over-concentrated with a single investor too early in your journey, particularly if (like many angels) they can’t dedicate the long-term time or resources to make your company successful.
• Don’t grant veto rights or supernumerary voting powers (unless there is an exceptionally good reason to do so).