Venture capital drought leads to cap table chaos

After more than two years of venture capital retrenchment, startups that survived the battle are emerging as real businesses. But their haphazard journeys — grabbing capital when and where they could — have, in many cases, made a mess of these companies' capitalization tables. 

It seems that guerilla fundraising, along with the normal chaos of crises and opportunities requiring immediate founder attention, frequently leads to a lack of accurate recordkeeping for the company's cap table. Companies will need to remedy that situation if they want to have any hope of raising new venture capital. 

2023 was the worst year for VC funding since 2017 and 2024 hasn't been looking much stronger. With venture investors still struggling to find a new normal, companies looking to grow will require all the usual proof points: good technology, a great market opportunity, a big problem and great underlying economics. 

But they also can't show up with a cap table that looks like a Jackson Pollock painting, all chaos and uncertainty. A bad cap table — or one that clearly signals financial laxity or mismanagement — can easily be the kiss of death in a still-challenging VC funding market. 

A dirty cap table is an understandable phenomenon that regularly occurs in fledgling companies where innovation, revenue growth and customer acquisition take precedence over keeping close tabs on funding rounds. It's a mistake entrepreneurs make time and time again. But that mistake can lead to future chaos and diminished confidence among critical investors, possibly resulting in debilitating lawsuits and a lack of interest from new investors to put more money into the administrative mess that's been created.  

So, founders who successfully wheedled needed capital from various sources in various forms and on divergent terms will now need to turn their attention to an urgent cap table cleanup. If they don't, they'll find their options for raising new capital on acceptable terms are severely limited. 

Preparing and executing a cap table cleanup is almost as much fun as surviving two years without additional capital. It's not a task that's particularly easy to fix in the rearview mirror, either. It's distracting and time-consuming, but it can and must be done. 

Here are the major steps:

1. Get all equity and capital-related documents in one place. Stock purchase agreements, option grants, SAFEs, convertible notes, term sheets — everything. Version control is important to ensure that the actual governing document is the one being compiled.
2. Make sure every equity issuance is reconciled with board minutes, resolutions and written consents.
3. Categorize all equity raises, taking care to separate common stock, preferred stock, options, warrants, SAFEs and convertible notes. Record all details for each type of equity: issue date, number of shares, price and any specific terms or conditions.
4. Check all ownership information and update records — shareholder names (including founders, employees, investors and advisors) — and be sure the share numbers are accurate. 
5. Lay out the variables in the equity structure by overlaying vesting schedules for founder, employee and affiliated party equity. Also, make sure all convertible instruments are tracked with their conversion terms and schedule.
6. This is the time to implement cap table software, like Carta, Pulley, Shareworks and others. Empower a qualified individual or cohesive team with the duties of overseeing a well-maintained cap stack with responsibility for creating and maintaining efficient workflows and controls that will deliver the results that keep you on track. Creating the foundation for future growth and complexity and are worth the investment for a growing company.
7. Get help where needed. No founder can spare key team members for an extended period to perform what is in essence a heavily clerical and analytical task. A company's accountants and outside counsel can usually make much shorter work of the task. 
8. Communicate with investors and evaluate any obvious challenges to a fundraising process. Are approvals awkward and time-consuming? Do you have too many small investors? At least come to the process armed with the knowledge of where the challenges will be. Also, examine any disproportionate voting rights that could become hurdles to new funding.

Nailing down the cap table in many ways is the documentation of a company's financial narrative, which in turn becomes an important element in the fundraising process. 

Having a clean cap table is a statement of operational competence and managerial transparency. It says that adults are in charge and future investors and their capital will be treated with the same level of respect and professionalism.  

It's been a long, hard road for startups these past few years, and that in some ways has led to permanent changes in venture capital investing. Companies that can demonstrate traditional capabilities like operating efficiency, financial control and tight business planning alongside their innovative technology development are being rewarded by investors. A squeaky clean cap table signals readiness to take investors' capital and earn them the returns they deserve.