Q: I have been advised to restructure our cap table by a VC. How do I structure an attractive cap table for future VC investment?
Usually “restructure your cap table” means you’ve either (x) sold far too much of the company already in the early days, e.g. >50%-60% and/or (y) you have departed cofounders that own too much of the company (10%-50%).
The problem is that these scenarios can scare away new investors. And it’s not always an easy fix!
- If you have departed co-founders, the best way to “fix” the issue is to try to work it out amongst yourselves and rebalance your equity. This is sometimes hard or even impossible, but it’s worth trying. If the departed co-founders own <9.9%, VCs will be OK with it.
- If you have sold way too much of the company, the best way to “fix” the issue is to get them all to agree a restructuring is coming, and that the existing investors likely will have just 1 board seat (if they have more than 1 now) or no future board seats potentially. That way, the next round term sheet can just use a simple pre or post money valuation.
Note that you need to try to be fair. Founders that have left, even if their contributions were limited, often see it differently. Early investors took a big risk on you. A big one. It’s not their fault their investment may turn out to be much more challenging than planned.
These are tough conversations. They can take too long, longer than you have patience for. You’ve got to keep your cool and make them understand the consequences of now being unfundable.
Most eventually come around if they truly see it as a critical path forward. But it takes a lot of tough conversations in most cases.