# Cap table nightmares
- URL: https://www.petrikajander.com/cap-table-nightmares/
- Author: Petri Kajander
- Date: 2020-06-12
- Language: en
- Audio: https://anchor.fm/s/1018a6478/podcast/play/98857313/https%3A%2F%2Fd3ctxlq1ktw2nl.cloudfront.net%2Fstaging%2F2025-1-22%2F395326740-22050-1-ee0d3fce58a46407.mp3
- Video: https://www.youtube.com/watch?v=UpXHbJDVqXo

Crowdfunding is a welcoming addition to the equity round options with startups. It adds some complexities that may come to haunt you later on.

The default but not preferred (in my books) option is to just add all crowdequity investors like any investors to your company.

This sounds the natural way to do it but it may become counterproductive for everyone. Some years back, I was involved with a company that had raised some angel rounds, a bit of institutional money (VC) and then made a large crowdequity round.

The company was an early-stage private growth company but it had +700 shareholders. In some way, it resembled more a publicly listed company than a startup from the governance perspective.

When you have tons of small investors that are not involved with the company this adds complexity, admin, and ties up resources. In this particular case, the company had also an active secondary market listing resulting that the cap table was dynamic and live all the time.

If you only have a shareholder’s agreement that applies to everyone you are calling for trouble. It’s impossible to agree upon anything and getting signatures to company decisions.

A solution to mitigate this is to use special purpose vehicles (SPVs) where all the crowdequity investors are pooled together and they are represented by a single entity in the cap table, the SVP.

This way you only need to get the approval of the SVP, the SVP investors can do secondary trades with their shares without any material changes to your cap table or operations.

You don’t necessarily need a SVP structure to avoid impasses. A simpler version of your shareholder’s agreement could be applied to the crowdfunding investors that include tag-along and drag-along clauses among others.

Startup funding is a bit like chess where you need to plan ahead many steps and with some matters all the way till the desired end game.

Seldom things are irreversible but every moment spent on admin and governance is time and resources away from building your product and growing the company.

Complexity escalates from individual decisions that pile and multiply over time. The antidote is experience and keeping it simple.

[Video](https://www.youtube.com/watch?v=dXTykov_2Ws)

## Transcript (https://www.youtube.com/watch?v=UpXHbJDVqXo, YouTube's automatic captions)

[0:02] Nightmares crowdfunding is a welcoming addition to the equity round options with startups it adds some complexities that may come to haunt you later on the default but not preferred in my books option is to just at all crowd Equity investors like any investors to your company this sounds the natural way to do it but it may become counterproductive for everyone some years back I was involved with a company that had raised some Angel rounds a bit of institutional money VC and then made a large crowd Equity round the company was an early stage private Growth Company but it had plus 700 shareholders in some way it resembled more a publicly listed company than a startup from the governance perspective when you have tons of small investors that are not involved with the company this adds complexity admin and ties up resources in this particular case the company had also an active secondary.

[1:05] Market listing resulting that the cap table was Dynamic and live all the time if you only have a shareholders agreement that applies to everyone you are calling for trouble it's impossible to agree upon anything in getting signatures to company decisions a solution to mitigate this is to use special purpose Vehicles spvs where all the crowd Equity investors are pulled together and they are represented by a single entity in the cap table the SVP this way you only need to get the approval of the SVP the SVP investors can do secondary trades with their shares without any material changes to your cap table or operations you don't necessarily need SCP structure to avoid amp passes a simpler version of your shareholders agreement could be applied to the crowdfunding investors that include tagalong and drag along clauses among others startup funding is a bit like chess where you need to plan ahead many steps and with some matters all the way.

[2:07] Till the desired end game seldom things are irreversible but every moment spent on admin and governance is time and resources away from building your product and growing the company complexity escalates from Individual decisions that pile and multiply over time the antidote is experience and keeping it simple.

## Transcript (https://www.youtube.com/watch?v=dXTykov_2Ws)

[0:01] Capitalisation tables, gap tables, as they're usually called. You can have nightmares over them. You don't want to have that thing. So let's talk about them. When you have shareholders in your capitalisation table. Usually, when you're dealing with startups, you need to have a shareholders' agreement. And often, that goes along with the investment agreement as well. So, the shareholders need to voluntarily sign that document. And it's not a company law in your respective country, which is stipulating these things. It's the voluntary agreement, the contract you put together for the shareholders so that there are certain situations, certain things when you need to make decisions in a certain way.

[0:58] Usually, these are coming from the investors, but it's also a good idea to have those between founders if you haven't done that before. This is not a video about shareholder agreements. This is not a video about investment agreements. Those are for another time. Now, we're focusing on those nightmares and you don't want to have them. A few years back, I was involved with a company who had after crowdfunding pretty much like 700 shareholders. It was a private company. It had taken investor money. It had taken angel money. It had taken in institutional money, VC money, and nevertheless, it had 700 shareholders.

[1:47] And if that would not be all it was also having a secondary listing. At any given time, you could have new shareholders because the old ones might be selling the shares. And the cap table is a living, breathing thing. Any given moment that can change. That added complexity as well. And when VCs are saying that they are not really excited about situations where you have done crowdfunding before. What they mean is that if your cap table is not done in a way that it enables the company to function, that can be an issue.

[2:37] But it doesn't necessarily mean that it's bad to have crowdfunding because you can do it in different ways. The way we did it in that particular case was that we had the big existing shareholders' agreement between the main people, the founders and key people and shareholders and investors. And before we did the crowdfunding, we did another set of documents. One A4, a piece of paper where we said if you own these shares if you buy these shares you need to approve this document as well. And it had only a few things in there. It was not the full shareholders' agreement and but it had some of the most important aspects of that.

[3:31] And those were the tag-along and drag-along clauses. If there's a situation where the company needs to do an exit, and this is usually coming from the VCs, they need to be sure that you can do that. They can do that. If you have a shareholders agreement which requires everyone to agree on every term, by signing that might be an issue. There are cases where some of the shareholders could not be reached by some weird ways they could not be reached. And that holds back the whole process because you need their signatures.

[4:21] So if you have that type of situation where you have a lot of small investors, and they're not part of the day-to-day as actively as investors, institutional investors, and they are happy to just come for the ride. And enjoy from the benefits coming from the hopeful success in the future then if you've structured your company documents in a way that you have the tag-along, drag-along and something other important things in a document, which goes along with shareholding and that's the tiny and only thing needed just to have shares in the company.

[5:14] This was just one of the ways we structured the company and helping to tackle the issues coming with a lot of stakeholders. Because the company was actually more like a public company in the sense that now you have 700 people, you have to talk with them, you have to keep them informed. How do you do that? How do you run those annual general meetings and get the approval for the next rounds of funding and whatever the company needed to do in order to move on and progress. This was just a very small scratch on the surface on the topic, which is a huge: investor and shareholder agreements. My main message is to think further ahead.

[6:05] When you are starting and you don't have any external stakeholders, any investors. Think about how you're going to do it. Plan how you're going to do it. What is important for you? How are you going to do all those things? They are complex issues. They can be really complex issues. They can be boring as well, but please pay a bit of attention to them. Keep them in mind because they can become roadblocks. They can become big things if you don't pay attention enough, or if you don't have the right people to help you to do those documents. If you just find a lawyer to draft your documents, but that person is not a startup lawyer is not a person who has been specialised on doing startups and growth companies that might not actually be the best person to draft your documents.

[7:04] You may not see that immediately, but it will probably come a bit later in the journey. And you'll start to see that the documents are not in place. And if you have too many people that you have to agree on with when changing things. Usually, changing things later on is difficult because you already have something in place. And then you need people to agree upon those things and the changes and that may happen or may not happen as you desire. Keep that in mind. There are techniques and tactics, how to tackle a lot of owners in the cap table as well. You could use special purpose vehicles, SPVs. In some of these crowdfunding platforms, they are suggesting you do or they are actually using as their default option.

[8:00] That's something to keep in mind. But as you see, I'm not making much sense. So it's better to stop here. Stop the cap table nightmares by planning a bit ahead of time, planning before you take investors, standardising your documents, asking for help from people who have been doing that for a long time. Talk to your serial entrepreneur who's had done exits. Who's been through a lot. Who's been facing these issues so that you can avoid the biggest mistakes and pitfalls, which can give you nightmares. Nobody wants to have nightmares, have a good day. Till next time!