Cumbersome Cap Tables

Ryan Nash , COO , Gust INC

23 Jan 2025

This write-up was originally sent to subscribers as a part of our Mission Control weekly insights, a series where we share wisdom and quick breakdowns on topics from our entrepreneur support network.

Your cap table records who has ownership in your company making it a critical asset for your startup from day one. You’ll often hear people stress the importance of a “clean” cap table without a lot of clarity on what that means. In this week’s Mission Control insights, we dive into the details of what differentiates a good cap table from a bad one.

Key Takeaway: The core of a good cap table lies in the clarity of its narrative and the efficiency of administrative processes. It’s less about the specifics of how many shareholders and their grant technicalities and more about why they are on the cap table and how that supports your startup’s story and its continued growth. The rest is keeping your company formalities—notices, signatures—sane. Adopting an option plan when the time is right and leveraging digital platforms can smooth out potential nuisances, allowing you to reward your team’s dedication without getting overwhelmed in chasing things down.

Detailed Breakdown:

1. Communication is Key: You’re going to have to tell your startup’s story a lot—especially if you’re fundraising. Every new potential stakeholder (investor, team member, advisor, etc.) is going to want to know who owns the company. Ensuring transparency about why early contributors are listed on your cap table is crucial. A well-articulated narrative justifies their inclusion and aligns with your company’s vision, facilitating smoother future engagements. If it is really onerous or cumbersome to explain someone’s stake, maybe that’s a sign it needs to be adjusted.Ensure your shareholders are clear that the ownership is only what has been officially executed with your company’s stock grant documentation. Handshakes, emails, or verbal promises are not sufficient to establish ownership. Whenever other documents—contractor/employment agreements, advisor agreements—reference a potential grant, ensure they defer the details to the grant documentation.
2. Streamlining Signature Gathering: Certain corporate actions require stockholder approval which means signatures. While approval is most often based on a simple majority and the founder(s) may have that for some time, non-unanimous approvals have notice requirements and other administrative burdens that could become time consuming with many small stakeholders.Transitioning to granting stock options instead of common stock (sometimes called restricted stock) minimizes the immediate necessity for shareholder formalities. Stock option holders are not shareholders and do not have voting rights until the option holder exercises their options which usually occurs far later once the company has significantly grown in value. Option plans do come with some additional yearly expenses so they are best considered once your team is growing. There’s no hard and fast rule, but worth a look after a couple dozen shareholders or so.
3. Adopting Digital Solutions: There are many software solutions to streamline cap table management—we have a few ourselves. By automating and simplifying signature collection and shareholder communication, these tools address common obstacles, making it easier to include contributors without chasing PDFs and signatures.

Check out our CEO’s response to a question from a recent office hours session, “is my cap table too cumbersome?”

By embracing these best practices, you can efficiently manage your cap table, ensuring it reflects your startup’s purpose and vision while fostering an environment of recognition and reward for those who have been instrumental in your journey.

Gust's Mission Control can guide early founders through all sorts of complex startup hurdles, like modeling churn.

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