Cap tables

Fred Wilson had this interesting, albeit somewhat self-serving, piece about Cap Table in early January. Having handled many broken cap tables at Truffle Capital  – one took me 3 months to (almost) fix – I agree wholeheartedly with him that this is one of the more neglected yet critical parts of a startup's life. I strongly suggest that a first-time entrepreneur go through his article and that of eShare's CEO Henry Ward to understand the potential problems.

I don't think, however, that eShares's solution will be main-stream. It solves a real pain point for all VCs – more specifically, all the poor analysts or young associates charged with managing and tracking the cap tables of the 20 portfolio companies. However, as Henry said in his piece: the fact that most startups will die ironically renders the maintenance of their cap tables futile, broken or not.

For those startups that eventually make it, obviously this is a very serious issue. However, VCs probably would rather have broken spreadsheets than having the critical cash/valuation info out there on the cloud on somebody else's machine. Information asymmetry is both a liability and a powerful tool in this eco-system. I don't expect many VCs to give that up. Not to mention that such asymmetry also works well for some acute entrepreneurs.

Monetization-wise I don't think there are enough startups that will pay for eShare's services for long enough time. Most startups die within 1 or 2 years, which means the nature of eShare's business is high churn rates. VCs might be more willing to pay for the services but to get all the co-investors on the same page, to use the same service, would be a big challenge and probably not in the best interest of the VCs.

In any case, entrepreneurs still have to learn about the essence of cap tables, which concern deeply their own welfare and that of their employees. Without understanding cap tables, they would use eShare's services in a broken way anyway, however good that service is.

I hereby attach a sample Cap Table that shall apply to most startups:

Feel free to download it and use it freely. The CAP TABLE tab follows the VC investment logic of cash/post-money-percentage. For example, Series A investors want 25.0% fully-diluted for their $3M of cash and want the startups (and the Angel investors) to allocate 12.5% of options for future employees at their own cost. If you want to negotiate with them on the dilution, you can adjust the percentages (25.0% and 12.5%) in the table, you should see numbers flow nicely and everything is linked. You can also see the evolution of the absolute wealth of all parties in the SUMMARY tab. That should give you an idea what impact the dilution of a new round has on you and your colleagues.

Meeting Prof. Joseph E. Stiglitz

The myth about market size