Managing Partner & Co-founder @Transition VC- India’s 1st Energy Transition VC Fund, funding early-stage startups focused on decarbonisation
Cap Table Red flags in early-stage start-ups Over the past two years, we at Transition VC have evaluated close to 1,000 deep technology or Engineering start-ups in the energy transition domain in India. More than two dozen are actively working on innovative ideas and developing technologies or products with significant potential. Still, we had to reject a few start-ups due to Cap Table issues. Disproportionate allocation of shareholding percentage among the founders: Disproportionate allocation among the founders has resulted in potential conflicts leading to founder issues and the collapse of the start-ups. These human issues are complicated to solve in the later stages, and it also means one of the founders with a majority stake is perceived to have a significant influence & role, and the other founder whose role is perceived to be a supporting one. For us, at Transition VC, the maximum difference between dual founders shall not be more than 20%, i.e., the maximum disproportionate split can be 60% versus 40%. Allocation of a significant percentage of passive participants: We have observed that few start-ups gave up significant stakes to non-active participants such as advisors, universities, accelerators, or incubators, This substantial allocation of shares to passive participants hinders the start-up’s capital-raising ability in the further rounds, as the co-founders’ stake might come down significantly below the minimum stake, as every investor at each stage expects the founders to have more significant skin in the game. A single investor holding more than >30% with special powers related to exit, monetary and strategic rights is perceived negatively by the new investors, who would want to avoid existing investors having too much control over the start-up. Bringing in a strategic investor early in the game: Having strategic investors, suppliers, and customers on the cap table can be detrimental to attracting new investors, customers, and strategic partners. It is better to avoid them until they have a very minimum stake and don’t have a direct overlap. Single founders: Entrepreneurship is very tough mentally and, many times, exhausting. It can drain all your energy, resulting in burnout within a short time. Things could be smoother and more linear when building or scaling start-ups. There are a lot of ups and downs during the entrepreneurial journey; you need someone who can share your vision and passion and support each other during tough times. There is a high chance of solo founders burning out if things go south and potentially giving up. Having multiple founders in a start-up is not mandatory, but we prefer multiple founder start-ups as the key personal risk comes down significantly with multiple founders. Transition VC #start-ups #Venturecapital
Mohammed Shoeb Ali great insights - often most funds do not openly talk of some of these aspects and young uninformed founders esp the ones that are in deep tech space end up making such mistakes early on!!
Sridhara Mishra
4mo
All the best Shoeb
Mo Fakhro
4mo
Interesting analysis
75 CR+ Raised for Founders with World-class Pitch Decks and Unique Fundraising Processes | Ex Co-founder at Jamuun, expezy | Pitch deck creator for seed, series-A/B/C | LP Decks | Investment Banker |
4moGreat insights, Mohammed Shoeb Ali sir. I am working on a deal right now in fintech space in which an only issue of not getting funding is mismanaged cap-table. The founder is raising series-A round of $3M and has already diluted 46% of the equity (ideally the founder should have diluted < 25% at this stage), despite the startup ticking all the boxes of VC's evaluation, this one area is causing them problem. I have advised them on several ways to restructure cap-table by talking to their existing investors. Thank you for sharing your insights.