An article we liked from Thought Leader Haje Jan Kamps:

When your cap table makes your startup uninvestable

This Norwegian hardware startup may be in for a nasty surprise when it starts raising funding

The CEO of a Norwegian hardware startup shared a pitch deck with me that had an unusual slide: It included the company’s capitalization table — the breakdown of who owns what part of the company. Typically, cap tables are shared in the diligence phase of investing.

Taking a closer look at the table, something is significantly amiss:

The problem here is that the company has given up more than two-thirds of its equity to raise $3.3 million. With the company starting a $5 million fundraising round, that represents a serious hurdle.

TechCrunch spoke to a number of Silicon Valley investors, posing the hypothetical of whether they would invest in a founder who presented a cap table with similar dynamics as the one shown above. What we learned is that the cap table as it stands today essentially makes the company uninvestable, but that there is still hope.

Why is this such a big problem?

In less sophisticated startup ecosystems, investors can be tempted to make short-sighted decisions, such as trying to take as much as 30% of a company’s equity in a relatively small funding round. If you’re not familiar with how startups work in the long run, that can seem like a sensible goal: Isn’t it an investor’s job to get as much as they can for the money they invested? Perhaps, yes, but hidden within that dynamic is a de facto poison pill that can limit how large a startup can possibly get. At some point, a company’s founders have so little equity left, that the cost/benefit analysis of the grueling death-march that is running a startup starts shifting against them continuing to give it their all.

“This cap table has one giant red flag: The investor base owns twice as much as the three founders combined do,” said Leslie Feinzaig, general partner at Graham & Walker. “I want founders to have a lot of skin in the game. The best founders have a very high earning potential — I want it to be unquestionably worth their time to keep going for many years after my investment in them … I want the incentives to be completely aligned from the get go.”

Feinzaig said that this company, as it stands, is “essentially uninvestable,” unless...

Read the rest of this article at techcrunch.com...

Thanks for this article excerpt and its graphics to Haje Jan Kamps.

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