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Funding Guides Published:  May 20, 2022 6 min read

What is a clean cap table? And why it’s probably not what you think it is.

Sometimes customers message us saying they want a ‘clean cap table’, and to do that they want to set up a Special Purpose Vehicle (SPV) or nominee structure to reduce the number of shareholders on their cap table.

In fact, a ‘clean cap table’ isn’t that you have few shareholders, it’s that the founders have the majority of the shares and that you don’t have toxic convertible notes or investments.

Here’s how to achieve a clean cap table that keeps your company looking investment-ready, and avoids investors blocking your ability to run your business.

In this article:

In the past, a ‘clean’ cap table meant fewer investors

In the old days before SeedLegals, people wanted fewer shareholders because documents had to be signed in person. You and your investors had to schlepp to a lawyer’s office to sign, and share certificates were issued as signed pieces of paper.

What a faff. If you had more than a dozen or so shareholders, it was a major headache. So companies often preferred a ‘clean’ cap table with fewer shareholders.

Nowadays, services like SeedLegals and e-signing have changed everything. On SeedLegals, your cap table is digital – you can create, sign and send share certificates to one or 100 shareholders in one click. No-one meets at a law firm’s office or signs bits of paper anymore, those days are over.

Beyond 100 investors, you might consider doing a crowdfunding round. The crowd platform will usually set up their own nominee structure – but that’s as much for their strategic purposes as for your convenience.

So, here’s what a ‘clean cap table’ means, and how to achieve that for your company:

A clean cap table is one with no toxic debt or founder over-dilution

It’s fine to have lots of investors on your cap table. A clean cap table actually means a company has:

  • No toxic debt
    Sometimes businesses need to borrow money, and that’s fine. But a loan becomes a toxic debt if your company isn’t going to be able to pay it back when it becomes due, or if potential investors see that their investment will be going to pay back the loan rather than grow the business.
  • No toxic convertible notes
    Convertible loan notes can be toxic if, for example, they give an investor 30 to 50% or more of the company and if, for example, the company doesn’t raise sufficient investment before the maturity date of the convertible note.
  • No investors owning a huge chunk of the business
    New investors want to see that the founders are still in control.
  • No investors with a big liquidation preference on an exit
    Liquidation preference shares allow the investor to recover the amount they invested, or a multiple of the amount (2x, 3x) with priority over the rest of the shareholders. If you have investors who will get back a multiple of their investment on a sale of the company, before anyone else gets paid anything, for new investors, this is toxic.
  • No super voting rights
    Mark Zuckerberg might have them, and when you build a $100bn company and IPO you can have them too. But for an early-stage startup, if investors see that the founders have given themselves super voting shares, it’s a big turnoff and almost always needs to be undone before they’ll invest.
  • No ex-founder who still owns a big chunk of shares
    Investors don’t like departed founders still holding big chunks of equity in the company. Make sure all founders sign a Founder Agreement.
What does a healthy cap table look like?
When potential new investors look at your cap table, they want to see:
  • they’ll get straightforward shares (ordinary or preference)
  • they’ll be able to have their say in the company proportional to their investment
  • there will be no nasty surprises at the next round

 

An SPV or nominee company groups investors – but can be a bad idea for founders

You could use a Special Purpose Vehicle (SPV) or nominee to bundle shareholders. Instead of appearing as separate investors on your cap table, they appear as just one investor: the nominee company.

It looks nice and tidy on the cap table as just one line entry. But actually we think it’s a bad idea, here’s why:

  • It’s expensive to set up
    It can cost around £5,000 or more to set up an SPV or nominee company.
  • It’s expensive to run
    On top of the set-up cost, you’ll have to pay running costs, often several thousand pounds per year. Over five years, that could add up to be most of the investment you raised from those investors. Wouldn’t you rather spend that money paying your software developers?
  • It’s harder to get shareholder consent
    An SPV or nominee centralises voting power which makes it harder to get approvals to run your business going forward.
    Let me explain with an example:
    If you have 50 angels all separately investing £10,000 to £50,000, it’s likely they won’t want a board seat and they might even get non-voting shares. When it comes to getting investor consent or a shareholder vote, you’d usually only need 50% to get your majority so this is easier when those investors are separate on your cap table.
    But if you’ve parked the 50 angels in an SPV or nominee, then you’ve only got the one vote from the lead investor. The lead investor might insist on an investor-director position on your board, with veto rights. And because they’re representing more people, they’ll do more due diligence. That leaves you at the whim of one person, with a veto over some of your company decisions. Why would you want to put yourself in that position, when there’s an alternative?

Does an SPV or nominee company still sound appealing? We hope not – we think they’re a superficial way of cleaning up a cap table and they thwart your aims for straightforward company admin.

For investors, an SPV or nominee can be a good solution

There’s nothing wrong with SPVs or nominee companies, they’re a great solution for specific problems. For example, if your goal is ‘As an investor, I’d like to set up a vehicle so I can create and manage a group of co-investors and we go hunting together’, then an SPV or nominee company is a good solution.

But if your goal is ‘As a founder, I want a clean cap table’, an SPV or nominee company adds overhead that in our view is unnecessary, and might actually make it harder to run your company.

So, how about using a syndicate to group investors?

A ‘syndicate’ rewards a lead investor – but there’s an easier way

A syndicate is an arrangement where a lead investor brings other investors with them. The lead investor might simply be a well-connected angel investor who loves investing but doesn’t have the funds (or doesn’t want to take the risk) to fund an entire round themselves. So they introduce the investment to some friends, and then they hunt as a pack.

The lead investor sometimes wants a fee for finding and bringing the other investors – that fee could be in the form of cash, or share options, or a ‘carry’. A carry is where the lead investor gets an enhanced pay-out if/when you sell the company – they’re effectively deferring their payment till later.

Sometimes the lead investor isn’t looking for any fee for themselves, they just want to invest in great companies, and bring their friends with them. It’s a mix of business and lifestyle.

Either way, the lead investor might simply introduce their co-investors to you and you add them as direct investors in your round as normal.

Or, the syndicate might set up their own SPV or nominee, giving them more control of who they have in their investment group – this way, they can freely add and remove people themselves. In this model, the syndicate itself typically bears the costs of setting up and running their nominee entity.

If you have an investor who’s asking about setting up a syndicate for this purpose, explain to them that, sure, they can if they want – but you can save them all a lot of time and money by just having them invest directly. With SeedLegals, you can easily set the syndicate lead as the Lead Investor in your round, give them share options as their reward, and maybe a board seat if needed.

SeedLegals makes it easy to handle large numbers of investors

On SeedLegals, you can choose terms to make your company admin much easier, for example:

  • Give smaller shareholders non-voting shares
    This makes running your company easier because you don’t need their approval on company decisions. Generally, you won’t need to speak to them or wait for them to sign things, so there’s almost zero admin overhead for even hundreds of small investors on your cap table.
  • Choose ‘You snooze, you lose’
    What if an investor goes missing? Maybe they’re trekking in the Himalayas? Or in a coma? Usually you’ll only need a majority vote, not 100%, so if one investor is mysteriously absent then it might be fine. But with SeedLegals, you can add the ‘You snooze, you lose’ clause. If your shareholder doesn’t respond within 15 days, their lack of response is taken as acceptance. So you can move forward without spending ages chasing up an AWOL investor.

We have 50 shareholders on our cap table

At SeedLegals we have a lot of investors. Some are angels, some are funds. In total, we have around 50 shareholders on our cap table (we use SeedLegals for our cap table, of course) – and that’s totally fine.

We designed our cap table management tool to automatically create clean, easy to read cap tables which automatically update when you issue more shares. There’s a reason SeedLegals is the UK’s number online one cap table tool.

Need a hand with your cap table? Hit the chat button to ask our experts. We’re here to help seven days a week.

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Watch video: What is a clean cap table?

Anthony Rose explains what a ‘clean cap table’ is and how to make sure your company’s cap table is as attractive as possible to potential investors.

Anthony Rose

Anthony Rose

Serial entrepreneur and startup champion, Anthony is our CEO and Co-Founder.
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