Keep your cap table simple
Feld says that, drawing on the troubled financings he lived through between 2000 and 2005, he gives founders two simple rules: know where the capital to fully fund the business will come from, and keep the capital structure simple. He names too much liquidation preference, complex liquidation preference and carveouts as long-run problems, and suggests using a down round to clean them up. He also urges talking about it early, well before the next financing.
“Until you are consistently generating positive cash flow, you depend on someone else for financing.”— Brad Feld, Founders – Use Your Down Round To Clean Up Your Cap Table, Feb 2016
Do this
List every liquidation preference, carveout and note on your cap table this week and mark which ones would hurt you in a down round.