Cap table nightmares

June 12, 2020
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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.