The Most Expensive Cap Table Mistakes I've Seen — And How to Avoid Them
Real-world examples of cap table errors that have cost companies millions, and the practical steps you can take to avoid them.
Introduction
Startups are hard. But nothing feels worse than building something real and realizing you accidentally gave too much of it away — or that your cap table is scaring away investors.
As a cap table expert, I've seen the same mistakes over and over again — sometimes costing founders millions, sometimes killing deals altogether.
Here are some of the most expensive cap table mistakes I've seen, how they happen, and what you can do to avoid them.
The Most Expensive Cap Table Mistakes
Dead Equity: When 50% of the Company Left the Team in Year One
One of the first startups I ever worked with had two co-founders who split equity 50/50 — but didn't sign a vesting agreement.
Six months in, one of them quit. No bad blood, but they walked away with half the company, fully owned.
Now the remaining founder was trying to raise money and hire a team — with only 50% of the cap table left. Investors passed, and new hires didn't like the math.
How to avoid it:
- Set founder vesting: 4 years with a 1-year cliff is standard
- Don't skip it just because you're friends or "it's early"
- Better to renegotiate than watch the business die
Verbal Equity Promises That Turn Into Legal Nightmares
"I told an advisor I'd give them 1%... I never got around to the paperwork."
Fast forward two years: the startup raises a Series A, and the advisor resurfaces with emails promising 1% equity.
Now the founder is in legal discussions over something they thought was informal. It delayed closing the round and almost killed the deal.
How to avoid it:
- Don't promise equity until you're ready to document it
- Use written, signed agreements (with vesting if applicable)
- Make sure everything is reflected in your official cap table ledger — not just your inbox
The Forgotten 83(b) That Cost a Founder $600K in Taxes
One founder was granted 4 million restricted shares early on, worth practically nothing. But they didn't file an 83(b) election with the IRS within 30 days.
By the time their shares vested and the company raised a Series A, their equity was worth ~$5M — and the IRS taxed it as ordinary income.
They owed hundreds of thousands in tax — and couldn't sell shares to cover it.
How to avoid it:
- File an 83(b) within 30 days of getting restricted stock
- Keep copies of the confirmation from the IRS
- If you're unsure, ask your lawyer and your accountant
SAFE Overload That Destroyed Founder Ownership
One startup raised $2M through SAFEs over two years — each with different valuation caps and discounts.
They never modeled how it would convert. At the Series A, they realized the converted SAFEs took nearly 40% of the company.
The founder went from 70% to barely over 20%, before the new investors came in.
How to avoid it:
- Track all outstanding SAFEs and notes
- Model conversions before you raise more
- Don't treat SAFEs as free money — they're future equity
Giving Away Too Much Too Early
It's tempting to hand out equity like candy in the early days: to contractors, mentors, early hires, or random "advisors."
One founder I worked with had given out 20% of their company by the time they raised a seed round — and couldn't explain who most of the equity holders even were.
The lead VC asked: "If you needed to clean up this cap table tomorrow, could you?"
They couldn't. The round fell apart.
How to avoid it:
- Be deliberate about grants — no more than 0.25–0.5% for casual advisors
- Put everyone on vesting schedules. Make advisors deliver for their grants. If they aren't, cut them loose before they vest
- Keep a single source of truth for your cap table — a living, breathing, accurate ledger and future state model to understand different scenarios
Not Understanding Dilution — Until It's Too Late
Many founders focus on how much money they're raising — not how much equity they're giving up.
One startup raised a large Series A at a great valuation. But the founders were surprised to see their ownership drop from 60% to less than 35%, once the pre-money option pool expansion and convertible notes were factored in.
They hadn't modeled it in advance. They thought the dilution would be ~20%, but it was nearly 40%.
How to avoid it:
- Always model pre- and post-money ownership
- Understand how option pools and convertibles affect you
- Don't rely on verbal assurances — get an expert involved to work with you creating a proforma model that will make you the master of your cap stack
Conclusions
Your cap table is one of the most valuable — and fragile — assets in your startup.
Most of these problems aren't caused by greed or incompetence. They happen because founders are moving fast, and equity feels abstract — until it's very real.
Take it seriously. Clean it up early. Ask for help if you need it. The founders who understand their cap tables usually raise faster, hire better, and win bigger.
If you'd like to talk with Bob about cap tables, you can connect with him here – because every point matters.