Aidi — 5 Common Capitalization (CAP) Table Mistakes That Scare Away Investors

In our last article, we broke down the basics of a Capitalization (CAP) table for early-stage founders trying to understand startup ownership. We explained what it is, why it matters, and how to build one from scratch.

However, knowing what a CAP table is and how to build one isn’t enough. As you start raising capital or hiring top talent, the way you manage your CAP table can either build investor confidence or raise serious red flags that would make them walk away. From unclear equity agreements to too many unused employee stock options, many startups make costly mistakes that can affect their fundraising efforts before they even begin.

In this article, we will walk you through 5 of the most common CAP table mistakes that scare investors away and how you can avoid them.

1. Poor Record-Keeping/ Outdated CAP Tables: This is by far the most common reason why investors lose interest in some startups. Many early-stage founders forget to update their CAP tables as they bring on advisors, employees, or investors. By the time they’re ready to raise funds, the numbers become messy, the dates don’t match, and some critical information is missing. This is a big turn-off for investors because if you can’t track your own company’s ownership properly, how can they be sure that you will manage their investment responsibly? This is why it is important to always keep your CAP table updated in real-time, use CAP table management tools to manage your CAP table and track the number of shares, both diluted and undiluted.

2. Unclear Agreements with Co-Founders or Early Employees: Many startups are so quick to promise equity to their early employees before the startup raises funds.

"Don’t worry, we’ll give you 10% when we raise our first round." 

Without written agreements, this leads to misunderstandings, conflicts, and sometimes even lawsuits; all of which are red flags to investors. Investors don’t want to get involved in a startup where an ex-founder or employee might come back and claim ownership. If the legal details aren’t clear from the start, it could create unnecessary risk and end up messing up your CAP table. Always make sure to put all equity agreements in writing, create proper vesting schedules for assets, and sign founder agreements early to outline roles, responsibilities, and equity splits.

3. Unallocated or Overloaded Option Pools: Option pools (shares of stock reserved for employees) are essential as they allow you to reward and attract top talent for your company. However, problems can arise when you don’t set up an option pool early enough; if the option pool too large, unnecessarily diluting the founders; or if you fail to
allocate options to team members, leaving a huge chunk of the company floating unassigned. An unallocated option pool can be a sign that you haven’t built out your team or don’t have a hiring plan. What this means is that investors may have to negotiate additional dilution in future rounds. This can be a big turn off. What you can do instead is to size your option pool realistically based on hiring needs, allocate options with clear terms and vesting schedules, regularly update the CAP table to show who holds what, and what’s reserved.

4. Giving Too Much Equity Too Early: We get it; when you're just starting, it feels fair to give significant equity to early investors or advisors. But giving away 5% to someone who is just advising, or 10% to a friend/family as initial investors in your startup, can hurt you later. Over-dilution of your CAP table too early can prevent future hiring and investment. It shows a lack of foresight and understanding of long-term capitalization strategy. Instead, you can use standard equity benchmarks (e.g., 0.25%–1% for advisors, 1%–2% for senior hires, convertible loans/SAFEs for family and friends investors, etc). You can also include vesting and cliffs so that equity isn’t fully granted on day 1.

5. Not Modeling for Future Rounds and Dilution: Founders often look at their ownership percentage now and forget to forecast what it will look like after a Series A, B, or C round. When you don’t account for dilution, you can end up shocked at how little you own, or worse, scare off investors who see a messy future CAP structure. Investors want to know that there’s room on the CAP table for them and for future hires and fundraising. A poorly modeled CAP table means you will struggle to raise or even retain key talent. What you can do to avoid having a poorly modeled CAP table is to run scenario models for what your CAP table will look like after future rounds and leave room for an option pool top-up in the next funding round. Also consult a lawyer or financial advisor before raising to clean things up.

A well-maintained, transparent CAP table is a sign of a startup that’s ready for serious money. It shows that you understand the value of ownership, and that you’ve been thoughtful about how it’s distributed. Don't wait until you’re in the room with an investor to realize your CAP table is broken.