Shannon: Hey Bob, how's it going?
Bob: I'm good Shannon, how are you?
Shannon: I'm doing great. Fun fact — Bob also lives in Costa Rica, he's somewhat my neighbor and we just chat cap tables and tax things all the time. Bob, would you introduce yourself to everybody listening?
Bob: My name's Bob Gillespie. I've been an entrepreneur and financial guy for about the last 25 years. I started and ran startups as CEO, CFO, and COO, based out of Chicago — ran three companies for about 15 years. After that I moved over to the venture capital side and now I'm the managing partner at Second Century Ventures, a prop tech and fintech venture capital firm out of Chicago. We invested very early in DocuSign and have had a couple of other high-profile unicorn-type exits. I've invested in about 73 companies.
My passion is a bit of a weird one — I'm a math guy. I love term sheets, safe notes, cap tables, option pools, warrants, strike prices, and 409A valuations. My real passion is helping people with their cap stack and their governance. Sometimes I get brought in by law firms where the situation is a complete mess, and they need someone to unwind things and create a reasonable go-forward cap stack — usually to prepare for a new round or an exit.
Shannon: And I think it's something that a lot of people are overwhelmed by. A lot of small business owners aren't even thinking about their future capitalization strategy when they're starting. They're just trying to keep the lights on, and they end up setting themselves up for failure without realizing it. So let's start with: how does this actually affect small business owners fundamentally?
Bob: Let's frame it around where things go wrong. Let's say Bob and Shannon start a company together — we call it Shanno Industries. We make Tibetan monk statues. We say we might take outside investors eventually, so we create a C corporation, because that's generally a better structure for outside investment than an LLC. A lot of times people create an LLC because it's easier, and then later when they start to take outside money they realize they need to convert to a C corp.
So the very first common mistake: Shannon and I get together, Shannon is 51% and I'm 49%, we throw in $5,000 each, sign the document, and we're done. Then a year later I decide I don't want to do this anymore. I say, "Thanks Shannon, good luck — I own 49% of this company, so please go make us some money." And Shannon says, "Wait — you don't own 49%, because I'm doing all the work and you left." And I say, "No, here's my document."
So the first thing people fail to do is vest with partners. Vesting means Shannon and I sign our C corp documents, we have a million shares, Shannon takes 510,000 and I take 490,000. What we should do is say: you have claim to those shares, but you need to stick around for three to four years and actually vest into them. A structure I like: we test drive each other for six months — if one of us leaves after six months, we get nothing. Then after that six-month cliff, I get one-sixth of my 490,000. And then for the remaining 30 months, I get one-thirtieth of what's left each month.
I prefer monthly vesting over quarterly. It stops people from coasting through 80 days just to grab the next quarterly chunk.
Shannon: And my advice to owners is: sit down and come up with every way you could possibly screw each other. What happens if you stop working? What happens if I stop working? The number one thing I hear is "but they stopped working" — and the answer is their equity isn't contingent on working. You just need a piece of paper. That's what Bob means by vesting — you earn equity through time.
Bob: Exactly. And when you go to raise money, the new investor sees the 49% held by someone who's gone, and either walks away or says we need to buy out that person first. That former partner is now sitting there owning 49% of a $9 million company, and you have to tell them: this deal doesn't get done unless you cut your equity back. Would you like to own 49% of zero, or 12% of $10 million? I can take any number and multiply it by zero — I'm very good at it. Billion times zero is zero.
So that's the number one stickiest issue for early-stage founders. It's like a relationship without a prenup.
Bob: Now a tax issue that gets missed all the time. When you vest equity — and you're granted all your equity on day one but vest it over four years — you need to tell the government using an 83B election. You tell the IRS: I just got 49% of this company. The company is worth nothing right now, so I'm buying all my stock at par value and I'm claiming my tax basis at purchase. You write a $4,900 check for 490,000 shares.
You have 30 days after receiving your stock issuance agreement to file the 83B. It's one page. You mail it to the IRS with a return receipt — you want proof they got it — and you keep a copy.
If you don't do that, three years later your company has gone up in value and when you vest that next tranche, you pay taxes on the fair market value at that future date. Say your company is worth $10 million and you own 49% — you just got granted $4.9 million in equity that's going to get taxed as income. The 83B wipes all of that out.
So the playbook: set up your company, get your shares, vest — that's how you protect each other — and then you have 30 days to file your 83B.
Shannon: One question: if somebody has an LLC now and converts to a C corp, does the 30-day window for the 83B start at LLC formation or at conversion?
Bob: At the stock issuance. Stock is issued in a C corp, so the clock starts at conversion.
Now, if you think you're going to be venture-backable, you also want your QSBS — Qualified Small Business Stock — going. This is only eligible for C corps. If you hold qualifying stock for five years, you pay zero in capital gains tax on the sale. It's stepped: three years gets you 50% off, four years 75%, five years 100%.
The trap is this: you're running an LLC for six or seven years, then institutional money comes in and you convert to a C corp. Two years later you sell for a big number. Because you were only a C corp for two of the required five years, you pay full capital gains on the whole exit. On a big exit that can be millions of dollars.
Rule of thumb: if you're a lifestyle business — funding your lifestyle and not aiming for a PE exit — an LLC is a fantastic structure. If you're hunting your value down the road and trying to scale, a C corp is probably the right call.
Shannon: And about the double taxation argument against C corps — that comes up a lot.
Bob: Here's what a study at Chicago Booth found. Your C corp does its own tax return and pays taxes on profit. If you make distributions to shareholders, they also pay taxes — so the same dollars get taxed twice. However, when you chew through everything, the difference between an LLC and a C corp is roughly 2% more in taxes. And the venture capital industry has broadly decided we are more than willing to pay the extra 2% to avoid getting K1s.
If I invest in a C corp, I don't have to do anything unless they paid me a distribution, which they never do in a growth company. If they're an LLC, I get a K1 every year. I have 353 companies in my portfolio — you think I want to wait for 353 K1s before I can even do my taxes?
Shannon: Guys, a K1 is a piece of paper you get from a partnership, multi-owner LLC, or S corporation. It says: your company made $100,000, you own 51%, here's $51,000 of theoretical profit — and you're taxed on it whether or not you actually got that money in your bank account. The C corp taxes at a flat 21% federally. You're not taking out 100% of profits every year, so it nets out to about 2% more — which is why Bob says it's not as bad as it sounds.
Bob: And accelerators like TechStars or Y Combinator won't put money into an LLC. They'll make you convert because they don't want the K1 burden, and they don't want to tell investors: "We made two million bucks and your portion is a million dollars — go pay taxes on it. No, we didn't actually give you any money, but you've got to pay like you have it."
Shannon: So when we talk about taking outside money — what are the options and what does that mean in the long run?
Bob: For early-stage venture money, 90% of the structure is a safe note — Simple Agreement for Future Equity. It's a contract. There's a pre-money safe (the older version, common from 2010 to 2018) and a post-money safe (now the standard). They work similarly, but post-money is the default today.
A safe note says: you give me $500,000, I give you a document acknowledging that. We don't know what the company's worth yet, so we'll convert that $500,000 into equity at a future valuation when we do know. What percentage do you own right now? We'll figure that out later.
If instead I say "give me $500,000 for 5% of the company" — I just implicitly valued the company at $10 million. That's Shark Tank: "What? You just valued your company at $10 million and all you have is an idea and a whiteboard?"
Now, a savvy investor thinks: I'm putting money in now, the company grows, and future investors set the valuation. Why would I pay that future valuation? I took more risk. So the safe note gives you two protections.
First, the valuation cap — the maximum price at which you convert. In SaaS or tech, that might be $6 million for an idea-stage company or up to $15 million for something with real revenue. In food and bev, it might be $2–5 million. In my example, if you have a $6 million cap and the company later gets a $10 million valuation, the new guy pays $10 million but you convert at $6 million — so you're buying at a price that makes your holding worth 67% more. I would never do an uncapped safe note. That means I'm buying at the future valuation with no premium. No sense.
Second, the discount — typically 20%. If someone comes in at an $8 million valuation but your cap is $10 million, you didn't get the cap benefit. The 20% discount says you convert at $6.4 million instead of $8 million. Your holdings are now worth 25% more than what you put in. That's the reward for your early risk.
I have one investment where I got in at a $3 million cap — just two guys with an idea I believed in. They converted me on their first funding round at a $94 million valuation. 31 times my money on conversion. They're tracking to go public at about $4–5 billion. That's what venture capital is fishing for.
Shannon: And obviously you're not hitting that on every deal. You get zeros, you get some 1x. But one investment returning 200x can justify everything else going to zero.
Bob: Exactly. So: if you can value your company — you have revenue, a multiple, you know what you're worth — you can issue equity directly. If you can't value it well yet, use a safe note, straight out of the box. Don't customize it. Don't add weird clauses. The safe is a well-designed instrument. Use it as-is.
One warning: the safe can hurt you if you're not careful. Say your cap is $5 million and you raise $4 million on that note. You've effectively pre-sold 80% of your company. That's called debt overhang. If you keep stacking safe notes without modeling the impact, you can wake up owning 10% of your company when you thought you'd own 60%.
I've built a model where you put in your cap table, your safe notes, and future round scenarios, and it tells you exactly what your ownership looks like at each stage. That's a big part of what I do — getting to founders early and showing them where they actually stand. The nasty surprise is when you convert all those notes and realize you gave away too many pieces of the pie.
Shannon: And I think the key point is knowing that you have options — and understanding the mechanics well enough to participate in those conversations intelligently. A lot of people don't realize how many paths they have to turn their business into real wealth.
Bob: There's the founder's dilemma. There's a Harvard study and a whole book about this. Two options: take venture money, grow much faster, end up with a much larger exit — more dollars in your pocket, but you've given up control. Or: don't take money, grow more slowly, stay in complete control — but less money in your pocket at the end. Neither is right or wrong.
When you take venture, there's got to be liquidity for that outside money. If I write you a $5 million check, you don't get to run this as a lifestyle business and never sell. I need my return. Generally the time horizon is five to ten years to an exit.
And it's not a loan. Nobody is investing in a startup as a loan — the risk-reward doesn't work. We need a multiple on capital. At Second Century Ventures, we model every deal and it has to have the capability of a 10x return. If it can't get to 10x in the best case, it's not venture-backable.
Shannon: And even if you own 51%, you don't necessarily get to do whatever you want.
Bob: Exactly. Say you take two rounds — Series A and Series B. You own 51%, Series A owns 24%, Series B owns 25%. You think: I own 51%, so I control everything. That is naive. The documents will say: for ordinary votes, we vote on an as-converted basis — you vote 51-49, great. But for matters that matter — taking more money, making an acquisition, taking on debt — we're going to vote as a class. Common gets a vote. Series A gets a vote. Series B gets a vote. How many of those do you win when you're not aligned with your investors? Not a lot.
But mathematically, the person who gives up control and takes money grows faster and ends up with more money in their pocket at the end.
Shannon: So Bob, how can people learn more and get in touch with you?
Bob: If you have cap table questions, structural questions, fundraising questions — anything from "we want to give a new employee options" to "we're thinking about our first raise" to "this is a complete mess, help us unwind it" — my website is captableexpert.com. There are blog posts, insights, and a button to book a free half-hour consultation with me directly. I'll hop on, find out your situation, and I also try to come out of that meeting pointing you toward the right people. Anything cap tables, corporate structure, governance, early or late stage — captableexpert.com and click the button.