What does a VC want to see in a cap table?

SidekickForHire

I'm looking for some objective insight into a cap table issue that's come up for our company as we look to raise a bridge seed round before our series A. We're a real estate fintech company in the investing space, our product is launched and in good shape (though always improving), we've started building some momentum but are still pre-proven traction. We're pivoting the direction of the business a bit and the bridge seed round should help us prove traction on that concept relatively quickly if all goes well.

Our company received initial funding from the key executives of a mid-sized real estate company (less than $1m) in the form of a convertible note at a $6m cap. In addition, the same group of investors received vesting common equity in the company (40% total) with the idea being that our business would be a true joint venture with them. We would use their large contact list (40,000) to find initial investments and, more importantly, initial investors and the sweat equity partners would work 1-2 days per week on our company and that amount would grow over time. In addition to their cash investment in the company, they also contributed some existing tech IP that they had started building before we came together. Since launching we have frequently used our partnership with this larger, more established company for PR purposes.

Fast forward about 9 months to present day. Despite best intentions the initial investors haven't been able to contribute to the day to day work of the company in a meaningful way. The initially contributed IP is largely irrelevant once we got into real, full time product development. The contact list provided us with an initial base of users (about half of the total we've acquired in our few months of business) but hasn't catapulted us to the significant headstart on the customer side that any of us anticipated. We continue to mention our partnership with this company on our site and PR materials but, as we broaden our marketing outreach for new customers, the affiliation becomes less powerful (they are pretty well known within the industry but not outside it).

We heard from one of our initial employees who has substantial venture experience that outside investors will see this situation and want to "fire" these initial investors so their common equity doesn't vest. We discussed restructuring the cap table so that these investors no longer have vesting common equity. To partially compensate them for this loss our idea was to lower the valuation cap on our note from $6m to $4m, increasing the value of their actual cash investment. The initial investors were reluctant to restructure without evidence that this would be a real issue for outside investors.

Recently we've been engaged in fruitful discussions with a very experienced angel investor (100+ companies). He loves our team and the new direction for our business but is ready to walk away from the opportunity because he thinks the current cap table situation won't work in the long term, either for raising additional money for the company or for healthy management and operations.

It would be really helpful to get feedback on how common his view is going to be and how much of a hindrance to raising outside investor capital our current structure will be. Our initial investors, fairly, want additional opinions before any kind of significant restructuring.

Gregory101

Generally they prefer to see:

• Founders, management, and employees (as a whole) retaining enough ownership to stay motivated, both before and after the current proposed round of funding. This varies with stage and with the particulars of how a company came to be, but something like 40% or greater after Series A, 25% or greater after Series B, etc is good. "Incubation"-style companies where the financiers start with almost all of the ownership in the beginning (e.g. Tinder/IAC) are generally bad signs because the founders have small stakes and tend to be mercenaries. Though if the company is performing well enough (again, e.g. Tinder) then this might be unimportant since the total size of the pie may be big enough to satisfy everybody (though then greed can come into play, and things can get complicated).
• The ownership on the cap table should reflect the narrative that we've heard from management (no surprises).
• No bizarre shell companies or other weirdness. Or if there is, an explanation of what's going on.
• Not too many early stage investor entities on the cap table. This is subjective, but companies that are crowdfunded or raised initial money from dozens and dozens of angels can have annoying complexities later on (and lots of people bugging the CEO at all hours of the day). This is unlikely to ever be a deal-killer but still something to take note of.
• For mid-stage venture investing, it's good to have a few good, solid, deep-pocketed investors on the cap table already, so if the company runs into later trouble and needs additional or emergency financing there are multiple parties with a stake in the business.

CurtisMLee

At its most basic level, a cap table is just a list of your company’s securities (i.e., stock, options, warrants, etc.) and who owns those securities. A cap table should tell you “who owns what.” More complex cap tables may also include formulas that model out various hypothetical transactions (e.g., new financings, sales of the Company (M&A) or public offerings). Cap tables can be summary in nature (e.g., grouping all holders into simplified buckets such as “founders” and “investors” and/or grouping multiple series of preferred stock into a single “preferred stock” bucket) or detailed in nature (e.g., providing granular detail on the holdings of each individual owner and each individual type of security). There is no one right or wrong format for a cap table. It all depends on how you will be using the cap table.

Matt_Shields

Sharks will always be sharks, I guess. VCs will always want to take a huge bite of your startup pie and that's like getting yourself a death sentence, rather, a painful, slow and agonizing death. As a private investor, I guess what separates people like myself vs the bigger capitalists out there is that we somehow share your vision, minus the greedy part of it. I've got more views about this though and you may read it here>>  How to Seed-Fund A Startup Without Completely Destroying It