Six Common Cap Table Pitfalls to Avoid — Before They Cost You
Essential insights to help you avoid the most common cap table mistakes that can create lasting damage to your startup's ownership structure and fundraising potential.
Introduction
Your cap table is more than a spreadsheet — it's your ownership, your leverage, your control. But many startups make costly mistakes early on that can create lasting damage, from fundraising pain to lost equity and even co-founder conflict.
Here are six of the most common cap table problems, and how to avoid them.
Cap Table Pitfalls
Dead Equity: Giving Too Much Away Too Early
Dead equity happens when someone owns a large chunk of your company but is no longer adding value — like a co-founder who left in year one but kept their full stake. It's one of the most painful problems on a cap table.
How it happens:
- You split equity 50/50 on day one
- There's no vesting
- One co-founder leaves after 6 months — but keeps 50%
Why it's bad:
- That dead weight creates dilution for future hires and investors
- VCs will hesitate to fund a company with misaligned ownership
How to avoid it:
- Set founder vesting early (standard is 4-year vesting with a 1-year cliff) give or take
- Have hard conversations early, not after things go sideways
- Be generous with trust, but disciplined with equity
No Founder Vesting
This is directly related to dead equity, but it's so common it deserves its own section.
Why it matters:
- Investors expect vesting. They want to know founders are earning their equity over time.
- Without it, you may lose negotiating power or even blow up a deal.
What to do:
- Implement reverse vesting even if you're a solo founder
- Vesting can be reset or accelerated in special cases, but it should be the default
"I'll Send You Something Later" — Verbal Promises Without Paperwork
This is more common than it should be: someone is promised equity verbally or via email, but the grant is never formalized.
Why it's risky:
- These promises can become legal liabilities
- They create resentment or even lawsuits
- They can destroy trust if the relationship sours
How to fix it:
- Never promise equity unless you're ready to put it in writing
- Use formal grant agreements, board approval, and proper documentation
- Cap tables are legal records — not hopeful ideas
Forgetting to File an 83(b)
If you're granted restricted stock, and you don't file an 83(b) election within 30 days, you could face a nasty surprise: huge tax bills later.
What is an 83(b)?
It tells the IRS you want to be taxed now, when the shares are worth very little — not later when they could be worth millions.
Why it matters:
- Without it, your equity could be taxed as income when it vests
- You could owe taxes with no cash to pay them
What to do:
- File the 83(b) within 30 days of your grant — no exceptions
- Get help from a lawyer or tax advisor if needed
Convertible Debt Overhang
Raising with convertible notes or SAFEs can seem fast and easy — until you realize what you've signed up for.
What's the problem?
- You may have raised $1M in notes with valuation caps and discounts
- At the next priced round, those convert — often at aggressive terms
- Founders are surprised by how much equity was given away
This is called a debt overhang — a buildup of convertible securities that suddenly hits your cap table when they convert.
What to do:
- Model out the impact of all your SAFEs/notes as if they convert today
- Keep investors updated on the total outstanding
- Don't treat convertibles as "fake" equity — they're very real
Not Understanding Dilution
Founders often focus only on the money raised, not on what percentage they're giving up.
Common blind spots:
- The true impact of the option pool (especially because they are usually added pre-money)
- How convertible notes can compound dilution when they convert
- What happens after multiple rounds stack
Why it matters:
- You could wake up one day owning 15% of your own company after just a few rounds — and not know how it happened
- Dilution affects your incentives, decision-making, and future
What to do:
- Get with a Cap Table expert to build a living, breathing model to always understand your cap stack and be able to model out current and future scenarios
- Run "what if" scenarios before signing a term sheet
- Don't rely only on legal counsel — own the math yourself with your own expert
Final Thoughts
Every cap table tells a story. The best ones are clean, clear, and aligned with the company's goals. The messy ones? They're filled with silent promises, bad breakups, and unexpected dilution.
Founders who treat their cap table like a living document — and not a set-it-and-forget-it tool — are better positioned to raise capital, keep talent, and maintain control.
The earlier you clean it up, the better.
If you'd like to talk about your cap table with Bob, connect with him here – because every point counts.