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A cap table can worry investors for several reasons, particularly if it indicates potential problems with the company’s equity structure or raises red flags about future returns on investment. Here are some specific issues that may concern investors when they examine a cap table:

  1. Over-Dilution: If the cap table shows that the founders have very little ownership left due to over-dilution from previous rounds, this can be a red flag. It may indicate that the founders have less skin in the game, which could potentially reduce their motivation to see the company succeed.
  2. Complex Capital Structure: A cap table with a complex or unusual structure, with multiple classes of shares and securities (such as warrants, convertibles, and various preferences), can be concerning because it suggests future rounds of financing could be complicated and existing shareholders might be substantially diluted.
  3. Too Many Small Shareholders: A large number of small, inactive, or unknown shareholders can be seen as a nuisance or potential liability, especially if the company needs to make quick decisions or gather shareholder consents.
  4. Large Option Pools: If a significant percentage of the company is allocated to an employee option pool, especially if it’s disproportionately large relative to the industry standard, it might suggest to investors that future dilution could be more than they are comfortable with.
  5. Excessive Debt: Convertible notes or other forms of debt that can convert into a significant amount of equity can be concerning, as the potential for conversion may lead to considerable dilution when a conversion event occurs.
  6. Previous Down Rounds: Evidence of down rounds (rounds where the valuation is lower than the previous rounds) can indicate that the company is not performing well, which might deter investors.
  7. Anti-Dilution Provisions: If there are strong anti-dilution provisions in place for previous investors, new investors may be worried about the extent to which their investment could be diluted to protect earlier investors in the case of down rounds.
  8. Lack of Clarity: Any inconsistencies, lack of clarity, or errors in the cap table can be worrisome because they suggest the company may not have good control over its administrative affairs or governance.
  9. Legal Issues: Any signs of ongoing legal disputes related to equity ownership, such as unsettled claims from past employees or cofounders, can deter investors.
  10. Investor Rights and Preferences: Terms that heavily favor certain classes of shares over others can also be a concern, as they may indicate that new investors will be at a disadvantage.

Investors use the cap table to assess their risk, predict their potential return on investment, and understand their place in the hierarchy of stakeholders. A clean and well-structured cap table typically reflects a company that is well-managed, whereas a problematic cap table can be a symptom of deeper issues within the company.