We interviewed over 500 startup founders as part of TWO12’s cap table customer discovery. We found that most of the startups fall into 3 categories:
Stage 1: Recently founded companies that are ideating on problem/solution & building initial MVPs. Small founding teams that are often operating on a handshake. The cap table has either not been formed or has very few members and little activity.
Stage 2: Companies with a product and some traction. Perhaps a small raise, a few employees & advisors, but still maintaining their cap table on Excel or Google Sheets. Legal budgets are often limited so founders leverage Google Search, advisors, and draw from past experiences to try and establish a rough approximation MVP cap table.
Stage 3: Companies that raised large amounts of capital, established product to market fit, have growing teams, and have outsourced their cap table to a startup law firm that maintains their cap table in a spreadsheet or a third party product.
TLDR; if you are in Stage 2 you are in the danger zone and should consider ditching your spreadsheet and adopting a cap table management solution.
Generally, at Stage 1 there is so little activity happening, what matters most is that the small number of founders are in alignment on the how they are going to split up the pie. But there isn’t much to mess up. There is some advantage to getting on a cap table solution in preparation for scale and helping your company look professional.
At Stage 3 founders generally have the help of seasoned lawyers. While this is an expensive approach, the lawyers generally don’t let you make too many mistakes and often work hand in hand with cap table solutions. These solutions, while historically cost-prohibitive for early stage companies, reduce legal bills, and give founders precise real-time data about their cap table.
But Stage 2… that’s where spreadsheets, founder best efforts, and ‘shooting from the hip’ can get startups in trouble if they have not laid the proper foundation.
Many are under the misconception that their cap table is so simple that a spreadsheet is sufficient. However, mistakes once made with the cap table cannot be undone (or can be very expensive to correct). Spreadsheets are an archaic, general purpose tool that is not well suited for managing cap tables and leads to many mistakes.
Just think about how many mistakes you would make with your taxes if you tried to calculate using a spreadsheet instead of Turbo Tax.
Most importantly spreadsheets are stagnant and only reflect the current state of your cap table. What you want to be doing is telling a story about how your cap table got to where it is today and modeling how the decisions you make will impact the equity dilution of your cap table in the future.
We’ve talked to many founders that said ‘wow, I wish I had this tool when I was taking my first investment and hiring my first employees as it would have saved me from some huge mistakes’.
Imagine as a founder you created a 10% option pool, allocated about 6% of the options amongst 5 advisors & 3 employees, took in about $420K in a Pre-SAFE at a 75% discount rate at a $6M cap, and an additional $100K in Convertible Note at a $5M cap, 20% discount, and 8% interest.
Do you know how much equity the founders will have at a priced round of $10M pre-money valuation with a 15% post-money option pool? How much equity will each of your cap table participants have?
TWO12’s Dilution Modeling tool can help you answer these questions.
The other thing to consider is how to activate all of the people that just joined your cap table.
Many people these days have Robinhood accounts and are used to being able to log in and see what the current status of their portfolio.
With spreadsheets you must expose the entire cap table to each person or send them a snapshot of their ownership level at a point in time.
Cap table solutions allow you to provide your cap table members with a real-time view of their ownership in the company across capital raises, without exposing to them the entire cap table.
With TWO12 you can selectively share the models you create with your cap table members, sharing with them both the future risks… and future rewards.