A toxic cap table, also known as a toxic round, is a fundraising round that can pre-dispose a startup to struggle to find subsequent financing from other investors.
It happens when the founders of a startup cede more ownership or shareholding than they should have done to seed investors, leaving the founders with little control of the business.
While a company may be doing well, customers love your product and it’s growing like crazy, investors may shy away if the ownership structure or capitalization table is “broken.”
A broken ownership structure can disincentivize a founder from performing at his or her peak or make important strategic decisions extremely difficult to execute.
A toxic round could happen when “too much money” comes in too early at too low of a valuation, or when a company is too undervalued, or all three.
While this may not be the case in the day-to-day running of the company, it poses a risk to any other new investors looking to come in later.
There are several reasons why investors may stay away from a startup that experienced a toxic round in the past. These include:
For technology sector startups, there are already clusters of “ideal” cap tables that have been set with a plus or minus 10-percent wiggle room. The farther you get from this setup, the harder it becomes to attract investors for a tech startup.
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