Cap Table or Crap Table? You Be the Judge

The Pacific Crest 19th Annual Global Technology Leadership Forum reminded me of a promotional tour I once went on with my dad and some of his clients in the music business. In two days, I did 16 meetings with growth funds, about 50 minutes each, one right after another. I’d make the same pitch, give the same updates. I even wound up making the same jokes in the same places. Pull the string and let the puppet do its thing.

Did I just say that?
Toward the end of the second day, I was getting a little punchy. That’s when somebody asked me to walk them through our cap table. “Well, I understand what you’re thinking,” I said, eager to assure him that our funding, which included our recent $47 million Series B round, was very healthy and balanced. “A lot of ventures over raise and wind up with problems on their crap table.”

When I finished, the guy gave me a funny look. “You said crap table,” he said. 

I paused and realized he was right.

But you know what? So was I. Chalk it up to a Freudian slip.

How high is too high?
People who struggle to raise funds might find it hard to believe that there’s such a thing as over-raising funds. But if you over-raise money and create a company at too high a valuation, people will never want to further invest in or buy that company for that amount. That’s why you need to carefully manage your cap table. You need to keep your options open.

Problems start when the preference stack gets ahead of itself, which creates what’s called an overhang. It’s hard to get out from under that. It hits companies hard when they’re on an aggressive growth path and then stall. That triggers a terrible downward spiral. Employee stock options go underwater. Employees start leaving, and it creates a vicious cycle.

The plot thickens
The growth fund guy and I both ended up having a laugh. When I referred to over-raising as a “crap table” that was accurate: It amounts to a table full of crap. We joshed that I could also have called it a “craps table” because funding a company in that manner is like rolling the dice when you have no clue whether you’re going to win or lose.

Hey, that just gave me an idea for a movie. Bradley Cooper, Ed Helms, Zach Galifianakis and Justin Bartha star as four entrepreneurs who realize they’ve completely over-financed their startup. They’re cowering under a towering, teetering preference stack. In desperation, they take their company’s dwindling finances and fly to Vegas for a debauched weekend at the craps tables.

We’ll call it The Overhang. 

I think I’m getting punchy again.