Angel investing is difficult and inherently dangerous. Not like enterprise capital corporations, angels don’t typically have the sources to carry out deep due diligence and typically make investments intuitively, however one leveller is the startup’s cap desk.

A cap desk is the only supply of reality for who owns shares in a startup, below what phrases, and the way proceeds shall be distributed in future financings or exits. It’s typically the ultimate due diligence step that an investor takes earlier than wiring cash. 

As an angel, you typically don’t personal sufficient fairness to dictate the construction, however you need to learn the cap tables earlier than wiring cash, revisit it with each proposed spherical, and mannequin what it seems to be like after your cheque converts, to guard your funding. 

Whereas most angels should not have board seats, they’ll negotiate for info rights, pro-rata follow-on rights, or, in some excessive circumstances, even vetoes on key selections. These phrases offer you visibility and leverage, two issues that may make all of the distinction in a future negotiation or liquidity occasion. 

For this week’s Ask an Investor, I spoke to Temidayo Oniosun, the CEO of Area in Africa and an angel investor in forty startups, about how angel traders ought to take into consideration cap tables. His funding portfolio consists of energetic startups like MoneyHash, WeMove, Contact and Pay, and Eden Life, and shuttered startups like Sprint and Zazuu. 

Like most Nigerian angel traders, the successes of Paystack and Flutterwave drew him to investing in African startups. “Startup investing turned a sizzling subject. I had some extra capital, so I believed, ‘Why not?’ Oniosun mentioned. 

Since he began investing in 2021, he has largely used two approaches. “First, there are startups I come throughout straight. Both I attain out to the founder after seeing what they’re constructing, or they pitch me. If now we have a superb dialog and I imagine in what they’re doing, I write a cheque,” he mentioned. 

That method introduced startups like WeMove and Zedvance Africa to his portfolio. The opposite method is thru an angel syndicate, a bunch of angel traders that pool capital into startups. Via this syndicate, he has invested in over 20 startups. 

His expertise as a founder and investor has allowed him to develop some sturdy opinions on cap tables. Our dialog serves as a information to angel traders and founders on learn how to construction cap tables on the earliest levels of the startup course of. 

This interview has been edited for size and readability.

How do you outline a wholesome cap desk on the seed stage? What ought to it usually appear to be?

What constitutes a wholesome cap desk has modified over the previous 5 years, given the completely different waves we’ve seen in startup fundraising. To be trustworthy, I haven’t written any new cheques but this 12 months so I can’t say for positive if the dynamics have modified once more. However typically, on the seed stage, I anticipate to see some degree of construction in place. It’s completely different from the pre-seed stage the place there’s typically little to no construction.

At seed, the corporate ought to have matured a bit. I anticipate the founders to nonetheless personal a major majority of the enterprise. It’s too early to be gifting away giant chunks of fairness. There must also be indicators that the founders are nonetheless totally dedicated to what they’re constructing.

What precisely do you imply by construction and, percentage-wise, what qualifies as a founder nonetheless proudly owning a superb share of the corporate?

Once I speak about construction, I imply issues like having a transparent worker inventory choice plan, if the corporate intends to have one, and ensuring that whoever is on the cap desk truly has a direct function in or connection to the enterprise.

Let me offer you an instance. I’ve seen circumstances the place a co-founder is now not concerned within the firm however nonetheless holds a major chunk of fairness. That’s not wholesome; or conditions the place plenty of fairness has already been bought in secondary offers although the corporate remains to be early-stage.

So ideally, at seed, I need to see the core founding crew nonetheless holding about 65% of the corporate after the spherical is closed. If it’s a solo founder, I’d anticipate them to nonetheless maintain a majority stake. If it’s a number of founders, that 65% is cut up amongst them, nevertheless it indicators they’re closely invested within the long-term success of the corporate.

What’s the very first thing you search for on cap tables? And what instantly raises a pink flag for you?

One of many first issues I search for is who’s truly on cap tables and what roles they play. A significant pink flag is seeing names of people that haven’t any direct involvement within the enterprise—no operational or strategic contribution.

It’s completely different if it’s a revered institutional investor or a widely known angel. But when I’m seeing random people, individuals who aren’t including worth, holding important quantities of fairness, that’s an issue.

One other pink flag is when an angel investor holds a disproportionately giant stake. If an angel owns, say, 15–20% of the corporate on the seed stage, that’s worrying. That form of focus too early suggests the founders could have given away an excessive amount of fairness prematurely, which might complicate future rounds.

Have you ever ever handed on a deal as a result of the founders had already given away an excessive amount of fairness?

Indirectly due to that. Not less than not as the only real purpose. I’ve by no means checked out cap tables and mentioned, “I’m out” purely as a result of the founders gave up an excessive amount of fairness. However it will probably undoubtedly be a contributing issue.

Often, by the point I get to evaluating cap tables, I’ve already shaped an opinion primarily based on different standards—market alternative, crew energy, product high quality. The cap desk is extra of a last due diligence verify, so whereas I haven’t handed on a deal solely due to an over-diluted cap desk, it might undoubtedly assist tip the choice towards a no if different considerations exist already.

What’s a typical mistake founders make when establishing or managing their cap tables early on? 

One huge mistake founders make is gifting away an excessive amount of fairness too early, particularly on the pre-seed stage. This normally occurs when founders are determined; possibly they want simply sufficient capital to get the corporate off the bottom or construct an MVP (minimal viable product) so that they tackle dangerous offers.

I as soon as noticed a pre-seed spherical the place the investor was given undilutable fairness. That’s a horrible thought. It primarily locks in a set share for that investor irrespective of how a lot cash the startup raises sooner or later. It complicates issues for later-stage traders and could be a dealbreaker.

These varieties of choices, made out of desperation, nearly all the time backfire. By the point you’re elevating a seed or Collection A, you realise you’ve boxed your self in and no high quality investor desires to stroll into that form of mess.

My recommendation to founders is: if you happen to’re ready the place the one method ahead is to take a very dangerous deal, possibly it’s higher to pause. Let the thought breathe. Return to the drafting board moderately than signing away your organization to remain afloat.

One thing that occurs typically on the early stage, particularly with first-time founders, is that they offer fairness to buddies, supporters, or builders. Principally anybody who helps them within the early days. What recommendation would you give to founders about issuing fairness to those varieties of individuals?

That’s a state of affairs I nonetheless see fairly a bit, surprisingly. Let me reply this in two elements. First, from a common startup-building perspective, and second, from the perspective of an investor.

I perceive why founders do that. Early on, you’re broke. Possibly you’re squatting with somebody. Possibly a good friend helps you construct your MVP without cost. You’re feeling such as you owe them, and the one foreign money you may have is fairness. So that you begin dishing it out to everybody who lifts a finger. That’s the intuition. However right here’s the factor: more often than not, that intuition is incorrect.

I like to recommend that founders take a extra structured method. If somebody actually believes in your imaginative and prescient and desires to contribute meaningfully, there are methods to contain them that don’t jeopardise your cap desk. For instance, you’ll be able to create clear, restricted agreements, possibly a vesting plan or milestone-based rewards. Importantly, these might be off-cap-table. You don’t have to mirror every thing in your official cap desk, particularly on the very early levels.

As a result of right here’s what occurs: you give your developer good friend 5% fairness early on. Then you definately exit to lift from a VC, and that investor seems to be at your cap desk and says, “Wait—you gave this particular person 5%, and now you’re asking me for $500,000 for a similar 5%?” It creates severe credibility and valuation points.

So ideally, don’t do it. In the event you actually should, construction it properly and maintain it off the principle cap desk till there’s a extra formal spherical. And most significantly, solely give fairness to people who find themselves genuinely shifting the needle on your firm, not simply because they had been round at first.

How do you suppose angels and syndicates needs to be mirrored on cap tables? Ought to they be listed individually or through a particular goal automobile (SPV)? What’s one of the best apply?

I feel SPVs are a good way to maintain cap tables clear, particularly once you’re coping with a number of angels. However I additionally perceive why some founders select to listing people as a substitute.

There are circumstances the place having a widely known angel visibly in your cap desk is a large credibility increase. For instance, there’s an organization I invested in that had GB from Flutterwave (CEO, Oluwagbenga Agboola) on their cap desk. Now, he solely had a tiny stake, however the founders made positive individuals knew about it. Why? As a result of when different traders noticed GB was backing them, it gave them speedy legitimacy. It labored as a sign.

So I’d say in case your angels embrace huge names who can act as a sign to the market, it may be strategic to listing them individually. But when it’s a bunch of buddies, household, or unknowns and also you’ve raised from plenty of them, then completely use an SPV. That method, you retain your cap desk tidy and keep away from future fundraising problems.

In the end, it is determined by who your angels are and what technique helps your organization elevate the following spherical.

Because you’re an angel investor, how a lot fairness do you usually goal for on the seed or pre-seed stage? 

It is determined by how I’m investing whether or not straight or by means of a syndicate. If I’m investing by means of a syndicate, I don’t thoughts holding as little as 1%, and typically which may go as much as 5%, relying on the scale of the spherical and the way the syndicate is structured.

But when I’m investing straight, as in, I’m writing the cheque myself and presumably additionally contributing my time or community, I usually goal for between 10% and 20% fairness. That’s as a result of it’s not nearly placing in cash; I’m additionally investing effort. I need to assist the startup scale. I need to be concerned. So the fairness I ask for displays the truth that I’m bringing greater than capital. I’m additionally bringing expertise, assist, and introductions. That degree of possession makes the chance worthwhile for me at such an early stage.

Earlier within the name, you mentioned one pink flag for you is when startups give away an excessive amount of fairness early on. However now you’ve mentioned you usually goal for 10–20% fairness at pre-seed when investing straight. How do you reconcile these two positions?

I perceive why it feels like a contradiction, nevertheless it’s not. Let me clarify it with a sensible instance. Suppose I’m the one investor coming in on the pre-seed stage and I ask for 10% of the corporate. If the founder provides me that 10% and provides, say, one other 10% or so to different early angels; then all advised, they’ve solely diluted 20% of the enterprise. Meaning they nonetheless personal 80%. To me, that’s completely positive and never a pink flag.

It turns into a pink flag when the founder has given away 30% or extra at pre-seed and not using a clear justification (like important traction, a top-tier investor, or strategic worth). Or when the founder themselves now not personal a significant stake—say, lower than 50%—and it’s nonetheless just the start.

So, to reconcile each positions, if I take 10–20% and the remainder of the cap desk is clear, with no extreme dilution, and the founder nonetheless owns a big majority, then it’s nonetheless a wholesome cap desk.

The difficulty isn’t my ask—it’s whether or not too many different individuals have already been given outsized chunks early on, leaving the founder under-incentivised or limiting flexibility in future rounds. Backside line: I’m conscious of complete dilution, not simply my very own share.

Do you suppose convertible notes and SAFEs simplify early-stage fundraising or do they only create confusion?

I completely suppose they simplify issues. Convertible notes and SAFEs are nice instruments, particularly for founders.

One of many largest ache factors for founders when elevating cash is the negotiation round valuation. It’s all the time a tug of struggle; traders suppose your valuation is simply too excessive, and also you’re making an attempt to show it isn’t. It turns into this time-consuming debate that distracts from constructing the enterprise. What instruments like SAFEs and convertible notes do is eradicate that stress, no less than within the early levels. They help you elevate capital with out having to pin down a exact valuation. That’s big.

And truthfully, many founders don’t even know learn how to value themselves precisely till they begin fundraising and listen to suggestions from the market. So these devices purchase them time, they allow them to elevate cash, begin constructing, after which revisit valuation later when there’s traction and a clearer sense of the corporate’s value.

So sure, I’m a fan. I feel SAFEs and convertible notes have completed quite a bit to streamline early-stage investing for each founders and traders.

Have you ever seen any cap desk restructuring as an angel investor? And the way did you method it?

Probably not within the strictest sense of restructuring. What I’ve seen extra generally is when an organization consolidates its cap desk by shifting angels below one SPV (Particular Goal Car). This normally occurs throughout a follow-on spherical when the founders or new traders need to clear up the cap desk and make it extra organised.

So, as a substitute of getting 20 angels scattered throughout the cap desk with small allocations, they group everybody into one entity. It simplifies issues for authorized, simpler for decision-making, and simpler when new institutional traders are available in.

However no, I haven’t actually come throughout a state of affairs the place a startup did a full-blown restructuring like clawing again shares or renegotiating early offers. Most of what I’ve seen has simply been cleanup efforts utilizing SPVs.

As an investor, what are the issues you need to completely do when giving cash to a startup on the early stage? What are you able to do to safeguard your funding?

To safeguard your funding on the early stage, probably the most crucial factor is to do your homework. You must deeply perceive what the startup is constructing. Ask your self:

Does the thought make sense?

Is there an actual marketplace for this services or products?

What must occur for this startup to succeed in product-market match?

Can it scale?

That’s the place a lot of the investor’s work is available in – not on cap tables, however on assessing the market, product, and founder.

One other necessary level: there are too many startups constructing issues that both don’t scale or don’t have a big sufficient market. One among my present filters is straightforward. I need to see a transparent path to no less than $1 million in ARR (annual recurring income) inside two years. If I can’t see that, then it’s in all probability not value my time or capital.

As a result of let’s be actual, some issues simply aren’t value fixing at scale, or the enterprise mannequin can’t assist sturdy sufficient income, or the founders are constructing in a method that received’t assist an actual exit. These are the pink flags I deal with.

And lastly, as soon as I do make investments, I search for methods so as to add worth. That would imply serving to a startup put in operational construction or making introductions to potential clients. If I will help them make income quicker, I’ll do it. That’s one other method I defend my funding – by staying helpful.

How can founders defend their cap tables? 

Some founders are certainly making an attempt to guard their cap tables, however typically they’re doing it in ways in which don’t make sense. I’ve seen founders use ridiculously excessive valuations simply to keep away from giving up an excessive amount of fairness. And typically, it’s simply laughable. Possibly that’s their technique however truthfully, I don’t suppose it’s working.

There are primarily two methods to guard your cap desk. Elevate much less cash. That is the good method. Maintain your cap desk clear by limiting how a lot capital you soak up early on.

Elevate at a excessive valuation. This reduces the quantity of fairness you give away, however it will probably backfire. It typically results in a down spherical later or, worse, a complete shutdown as a result of nobody desires to speculate at an inflated valuation. You’re mainly taking pictures your self within the foot.

Founders are conscious that defending their fairness issues, however the ways they use like inflating valuations can find yourself hurting them.

Personally, I personal 100% of my very own firm. I haven’t given out any fairness but. Even with the brand new startups we’re spinning out of my lab, I haven’t raised cash. I’m funding them myself. That’s me placing my cash the place my mouth is. If defending your cap desk actually issues to you, that’s the cleanest method: construct with your individual cash or elevate solely what you actually want.

If a founder got here to you with a messy cap desk however a robust product and a robust crew, what’s your first transfer?

In the event you’re telling me the cap desk is messy, however the product and crew are strong, the very first thing I’d do is determine how messy it truly is. As a result of “messy” can imply various things.

Now, to be trustworthy, I usually wouldn’t put money into an organization with a fantastic product and nice crew if the cap desk is an entire mess. It’s simply too dangerous. However once more, it actually is determined by the specifics.

If it’s one thing that may be cleaned up, say, by means of a restructuring or an SPV that consolidates traders to make the desk look much less chaotic, then possibly I’d proceed. However I wouldn’t commit capital with out that being addressed. My funding must be protected.

Step one is to diagnose the state of affairs. If we will clear it up and put correct construction in place, I would think about it. If not, I’d possible stroll away.