By Fernando Berrocal

Your time shifts from running a startup to meeting with investors after those once you start pitching. Then there's the issue of due diligence. Hopefully, investors will provide you with term sheets, and you will be able to choose whether to be included in your cap table or not. 

Here's what you can do to put yourself and your startup up for success before you do eventually visit the conference rooms.

Clean up your cap table:

When investors do their due diligence, they generally start with a look at your cap table right in the start. They'd want to see the following things:

• Who is on the Cap Table? Who are the current investors?

• What percentage of the startup does each employee own? What is the size of the employee option pool, how much money will be generated, and how much additional money will be required for the startup?

• How much of the startup does each of the founders own? Will they be rewarded accordingly for their contributions to the company's success?

• What is the ownership structure of the startup? What's the difference between common and preferred stock?

A checklist is available that goes into further technical depth on what investors demand from startups before investing. It's important to remember that your cap table should be current and verifiable at the time of due diligence.

With Cap Table software, you can get off to a good start: 

If you want to grow, you'll require good cap table software. The longer you delay issuing securities, manage your cap table, and get a 409A valuation, the more opportunities for errors will arise.

Pro-forma scenarios should be run: 

Dilution and potential rewards are affected by each new fundraising event. When you get a term sheet from an investor, you can use the software's modeling tools to evaluate how the terms will affect the founders' and employees' ownership.

The software's modeling has comprehensive reports and allows you to predict payments by share class and run waterfall models to see how your current actions will affect the startup in the future. You'll have to create or locate an appropriate scenario modeling spreadsheet and replicate a lot of data if you don't have this software.

Prepare for your 409A valuation: 

When you take on more capital, it is considered a "material event," and a new 409A valuation is needed. This means you'll have to select a third-party supplier, manage your finances, and acquire documentation. Keep in mind that you won't be able to make additional option grants until you update your 409A valuation.

Make grants to new hires:

Before you start fundraising, you may want to provide any pending options grants to new employees. If the new round raises your valuation, the exercise price for workers will rise as too. 

Issuing grants previous to a raise guarantees that the actual exercise price stated in an offer letter is the same as the actual exercise price communicated in the offer letter.

Remind employees that they have a choice:

You can remind your employees that they can exercise their options in the early stages of the fundraising process before the term sheet is received. Exercising before the terms arrive may give particular tax benefits for your workers if the startup’s valuation improves in the following new round.

Make it simple for others to contribute to (and edit) your Cap Table:

Unlike a spreadsheet, cap table's software is simple to manage and share. size in one location. You don't want to send investors paper certificates since they're difficult to track and easy to misplace. The software's certifications are digital and may be accessed at any time. You may also show investors your cap table. Before going out to fundraise from new investors, you may also share your cap table with them.

Before you start fundraising, experiment around with the program to make sure your cap table is correct and up to date. You'll work using tools that investors and shareholders are already familiar with. It's never too early to get started.

Ready to bring your startup to the next level? Apply to MassLight’s next batch. MassLight supplies capital and a dedicated tech team. We take equity in return. Have questions? Refer to our FAQ page.

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