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When your cap table makes your startup uninvestable
The problem here is that the company has given up more than two-thirds of its equity to raise $3.3 million.
“Situations like these which deserve ‘clean up’ certainly aren’t automatic ‘passes’ but they require the company and cap table to be comfortable with some restructuring in order to fix the incentive structure alongside the financing,” Walk said. “We would request that the founders receive additional option grants to bring their ownership up to the combined 50-75% prior to us leading or investing in the new round,” Grove says, but she points out the challenge in this: “This does mean existing investors on the cap table would also share in the overall dilution to make this reset happen, so if everyone is onboard with the plan, we’d hope to be all aligned on the path forward to support the founders and ensure they have ownership to execute their big vision and to take the company through to a big exit.” In the case of this company, however, it made an external investment at what the founder now describes as “below-market terms.” The CEO also mentioned that existing investors on its board suggested raising money at low valuations.
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