Cap table red flags that make investors hesitate

Your cap table is a list of who owns what in your company. It looks like an administrative detail, but investors read it closely. Cap table red flags tell them about past decisions, future arguments and how much of the company will be left to motivate the team. A messy one can slow a raise or end it.

Here are seven that make investors hesitate, and what to do about each.

1. Large stakes held by people who have left

What the investor thinks: “A big slice of this company belongs to someone who is no longer building it.”

The fix: Talk to departed founders or early staff about buying back or restructuring their shares. For the future, put vesting and leaver terms in place so shares are earned over time.

2. Founders already heavily diluted

What the investor thinks: “After our round and the next, will the founders still care enough?”

The fix: Show the cap table after this round and a projected next round. If founder ownership looks thin, consider a smaller raise, a different instrument, or a refreshed incentive scheme for the team.

3. Promises that are not on paper

What the investor thinks: “Who else thinks they own part of this business?”

The fix: List every verbal or email promise of shares or options to advisers, staff or early backers. Either formalise each one properly or agree in writing that it no longer stands.

4. Convertibles nobody has modelled

What the investor thinks: “My stake could be smaller than it looks.”

The fix: Convertible loan notes and advance subscription agreements turn into shares later, often at a discount. Show a fully diluted cap table that models how and when each one converts.

5. A long tail of tiny shareholders

What the investor thinks: “Getting signatures for any decision will be slow.”

The fix: Consider a nominee structure for small holders, where one party holds shares on their behalf, and check that your articles allow decisions without chasing every individual.

6. Unclear share classes and rights

What the investor thinks: “I need to know who gets paid first and who can block what.”

The fix: Set out each share class, its voting rights, any preferences on a sale and any veto rights, in a short summary that matches your articles of association.

7. Records that do not match

What the investor thinks: “If the basics are wrong, what else is?”

The fix: Reconcile your spreadsheet, your statutory register of members and the filings at Companies House. Every share issue should have the right filings behind it. This is a common source of delay in due diligence.

A clean cap table will not win a round on its own. A messy one can easily lose it.

A one-afternoon cap table check

Before you speak to any investor, sit down with your register and work through this list:

• Does every shareholder on the spreadsheet appear in the register and at Companies House, with the same number of shares?
• Are all options, warrants and convertibles listed, with their terms?
• Have you shown the fully diluted position, after everything converts?
• Do any former team members hold significant stakes?
• Is every promise of equity either documented or withdrawn?
• Can you summarise every share class and its rights on one page?

Put the results, with the supporting documents, into your data room. Investors will ask for them early, and having them ready signals a well-run company.

Most cap table problems are cheaper and easier to fix before a raise than during one. If you find several, take legal advice and allow time to sort them out before outreach starts. It is far better to delay a month than to have a deal stall at the final stage.

This article is general information, not financial, legal or tax advice. If you are planning a raise, talk to BDM Capital.

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