Cap Table Red Flags: AI Rewriting Startup Investing, SaaS, Solopreneurs, Founder Splits & Vesting

And I think most people now are pretty familiar with this because most lawyers will encourage us and do it. But every once in a while, we see deals. No, I would say even every cohort, when we teach it, someone says, "Oh, I didn't do this." Yeah, there is. Well, our cohorts can be 30 people. So yeah, five or six of them. Five out of the 30 companies have no founder-vesting. No founder-vesting. That's horrible because if you assign that to your co-founder or to three co-founders, one of them takes off and they're sat there holding 25% a third or a half of your company without doing any daily operations. I'll say it to the operation. What's up, founders? We are back. Welcome back to the Startup Ignition podcast. I'm your host, Tyler Richards. This is John Richards over here. It's just me and my dad today. We have no guest, no fluff. We just want to give to some startup truths and talk about a couple of topics that we've been seeing as kind of things we've talked to other teams about, seen come up in our daily conversations, whether that be pitching or mentoring or advising or whatever we're doing in our weekly and daily conversations. We're seeing some trends and we have a couple of cool topics that we want to talk about today. But first, before we do it, just to give you a maybe a little bit of a timestamp and let John speak for a second, we just, it was the day after Master Sunday. Did you watch the rest of the Masters? Yes. Did you watch Rory basically implode and then come back and then win everything again and then do back-to-back wins at the Masters, which is super rare. So that was a cool moment to see the fourth-person history to do it. Yeah, and we were huge golfers. We love, we're not great golfers, but we like to golf. I'm a pretty high-handicap, my dad's a high-handicap, but we like to golf and we like to really enjoy watching the Masters, which is a cool time. So Rory won his second jacket, congrats to Rory. That was fun. I like to see Scotty Schuffer come back up the ranks. He was down and the beginning had a horrible first round and then worked his way back to, I think he got second. I can't remember, but I think he was even second. Scotty is one of my favorite golfers. But also in other recent news, just again, to timestamp this episode, it might reveal how much we actually delay that, the episodes. There's so many new things happening in AI, and I kind of wanted to kick off the episode with what my dad and I are seeing with all the recent updates in AI. We have been seeing so much progress being built, and maybe we save this for a little bit later in our discussion in the podcast. But I just feel like AI is changing everything with startups. I was at the gym last week with a friend and we were having a conversation about how it's impacting what SaaS is, and I know that you are under the belief that SaaS is still not dead, but I still think it's making its way. It's really creeping into even what we do internally at startup ignition and the products that we're building and what we're seeing teams that are what they're able to accomplish, and I don't know. I don't know if you have any thoughts on it, but every single pitch that I'm seeing, my instant reaction is, oh my gosh, that could be built in a weekend with the tools that everybody's disposal. I don't know if you're still feeling that way. Yeah, but that's not all that a SaaS company is. SaaS company is expertise and service and product that if you're a golf course, you're not going to have somebody at your golf course building a software for the whole golf course to run, the point of sale and inventory and all that. You've got to have the devil's advocate. We are going to start seeing tech companies building internal tools that are analytical or data driven that are just whipped up in a day or two. How is the counterperson in the pro shop going to look up a member and how much credit they have from winning tournaments and what they can spend at it and what they can do in terms of sign-up for four sums and buying stuff and then food and beverage and how much credit they have left on there. I mean, there's so many things about companies and what runs. You have to have a piece of software built by an expert company that focuses and makes a piece of software that thousands of golf courses can run on. You can't have 25,000 golf courses each with an AI expert person making their own custom software and that's not efficient for that market. And think of the security breach on all that, too. Yeah, of course, coders and software companies are going to be building product cheaper and faster than ever. But that doesn't mean golf courses are not in the business of creating software. They're in the business of running a golf course. Yeah, I guess I was just saying that it really does diminish the value of a product a little bit, though. Like, you know, five years ago, three years ago, when a team came to us with a full-fledged built product that was working in a lot of bugs and kinks were worked out, like that was pretty valuable. I just don't know how valuable. But there's still a lot of bugs that have to be worked out by a good team when you whip up something in vibe coding. I'm just saying that putting out a software product and having a complete company that can take care of 2,000 concurrent golf course customers, that's a company that needs much more than just being able to whip out features. And does the market matter? Does the customer matter? Like the user. So, for example, in your example of golf course management software, yeah, sure. A golf course pro or manager is not going to whip up something on itself with himself. But will a tech company, you know, instead of buying a sass, say, I can build that. I can do that and internalize that myself. I can take my dev teams 10% of my dev teams time and dedicate it to that rather than spending to $5,000 a month. And who, you know, I don't know what dev team. So I'm saying the customer. So you're seeing the customer in your examples of golf course. Yeah. So my customer, what if it's a sass company selling to other sass or tech companies that are already very tech oriented that have developers on staff that have been like, you're talking about a big company like Divi or Podi and Aaron Utah, that they would just whip up all their, so like, let's say they need something to calculate commissions. Yeah. Would the company spiff, which sold for $400 million to Salesforce? Yeah. Would, would they build their own customer spiff? Yeah. Yeah. And they might. But so I do, they're going to be able to take care of all the systems and make sure it's right and accurate. That's that one might be, but I think it's, again, horizontal maybe will be threatened. Yeah. But highly verticalized. No, I don't think so much. Yeah. But I do think it's, it's market dependent, too. I think it's because that what you're saying is the more horizontal and needed, then maybe that is, but I like, I use the golf course, or just a plumber, or, you know, is a, the, you know, whatever software I'm using to run my plumbing contracting business, maybe I use six different pieces of software. Yeah. Am I going to build all those and not buy those software? Is that really going to happen? I don't think so. Not for a long, long time. And why would a plumber want to do that? A plumber makes tons of money by going into people's homes and businesses and fixing their plumbing. Yeah. So, so a lot of these, I'm just saying, I guess my whole point and bring this up before we even get into the hot gas was just about AI is, it's a reason that we're acting a lot. And even there, I don't know if you saw this video online either, but open AI just created a new voice AI as well that can mimic a voice within 15 seconds of video. So like people are taking people's voices, mimicking it just from any kind of clip. And it's just, you know, people could, I guess founders utilize that to call venture funds or call prospects themselves and task them to do that all day around the clock all day. So I'm just saying, there is a lot of AI technology that's coming out that is impacting startup life. I'm just wondering at what point are we going to teeter over to? Oh my gosh, the SaaS world, the tech SaaS startup world is really going to be replaced. I think this is all in its infancy though, because I also just saw over the weekend that, you know, Sora, which was opening AI's video, they just shut it, the whole thing down. Oh, they did. I saw that actually, the whole thing shut down. So literally, you go on, what the heck? Because when it came out, it was revolutionized everything, right? And they just literally shut the whole thing down. And they found out, here's the problem. They were spending $15 million a day for people making goofy videos. Yeah, negative cash flow. Yeah. So I mean, 15 a million a day. And so they just shut the whole thing down. And so that's what happens when you raise, have our mini billions, they've raised a lot of AI companies, mark my words here a little bit are sustaining themselves from venture and investor money, not through profitable offerings. Right. So right now, the question I'm wondering is are these LLMs and these core AI products artificially low cost right now for their use of tokens? And they're going to go. Oh, sure. Mad capture users. Yeah. It would the minute they have to be profitable on a P and L statement versus just spending investor money. Oh my gosh. I mean, and we are all going to be so hooked that are we going to pay orders of magnitude more for that? We are. Yeah. We just last week, we upgraded all of our accounts on every single thing. Yeah. We're like, even to us internally, it started a ignition. Would we rather hire someone who is a video editor or someone who is doing calculations or doing analysis, or are we going to pay 200 bucks for quad code? Yeah. So in other words, it was this. We were loving it at $20 a month. But now that they're saying you don't get this much features or you don't get that much capacity or tokens. And we're saying, man, with our usage dependency, even at 200 a month, [BLANK_AUDIO] which is a huge 10x increase to them in revenue. We're sitting here saying, well, that's a few thousand dollars a year compared to an employee that costs 80 to 120, right? - Exactly, exactly, exactly. - So this is a, it's an amazing time and what we've seen Tyler, you and I run an adventure fund and running our bootcamp and everything, it's fascinating. Since December of 2025, and it's now April of 2026, it's the impact of AI, I believe has gone up 10x. - Yeah, it has. - Yeah, just the year of 2026. - Yeah, yeah. - But that does not mean that SaaS and software companies are not going to be valuable. A lot of people, the smartest investments in the world have recently put out incredible white papers and articles that they think SaaS isn't going to be better and bigger than ever. But is it going to morph and change? - Yes. - Okay, but gun to your head, and then we can close this conversation. Gun to your head, how far away do you think we are? Because I think you can even see it. Even though you're saying SaaS is not dead, I think you can see the point at which SaaS will be dead. Where have you not seen it? All the YC companies right now, what YC's mandate is for is for custom personalized software. So what happens is you're building out your platform, but code is so easy to build that they build to one-on-one users. So they say, after time, the analytics say, you're using this feature more, you need this to be built out for more for your workflows and they're automatically building out one-on-one versions off of the code base for individual users. - Okay, so they say that's the future. - So gun to my head. When is it ignoring the, I don't know if there's a tipping point, it's ignoring the reality of the physical world. In other words, I'm going to use, since we start off with the masters today, I'm going to go on golf courses again. A golf course, it does not exist in a virtual world. You cannot make that business run any faster or change that business in the physical world. It is what it is. - Yeah. - Okay, so also it's not efficient if all 25,000 golf courses in the world had their own piece of custom software written just for their specific needs. - Yeah. - Because the industry will be hindered and hurt by that. You want people that have been in the golf industry to be able to move from golf course to golf course from golf company to golf company and have some familiarity with a common language. We talk all the time about the beautiful thing that Leon startup has brought to the entrepreneurial world is a common language that we can all understand the same thing and what a word or a piece of data means. This is really important. And if everybody was running on all 25,000 golf courses in the world were running on their own custom piece of software, just for them by them, the industry is not going to be able to have people move about in the industry and they won't have a common language. The whole industry will inefficient. What do we call this? Oh, at my golf course, where I just came from, we called it this. Why do you call it that? That doesn't make sense, you know? I mean, and we stored our data this way and this is how we did in process things. The ability to have one or two big leaders for vertical SaaS software that creates kind of a standard for the way companies operate so that the industry can be efficient. I just have questions on how inefficient 25,000 different custom pieces of software to run the golf industry will really be. Well, that's my, that's a big question. And maybe I'm not smart enough to understand it, but I just, I know what it's like to, and you've heard me say this to so many people over the years, Tyler, is that your software to run a verticalized business has to be easy enough and common enough for the lowest paid worker at that business to run. So for instance, think of the person who makes $12 an hour working at a golf course or $15 an hour, that is a very low level worker at that golf course, but they've got to interface with a mobile and iPad or a PC or laptop somewhere on a piece of software. And it's totally custom and they've got to learn it. And then when they go to the next place they work at, it's totally new and different again. And they're going to go, this is crap, my last one was better and they're going to complain about their new company because their software sucks. And that's not good for an industry. That's all I'm saying. So imagine that happening already in the SaaS world, right? Where a company employs moving from, you know, HubSpot to Salesforce as they switch jobs, right? Now imagine that 100x, right? That happening all the time, that many different pieces of software. So it's not just HubSpot or Salesforce, it's HubSpot Salesforce and 200 other custom-built things that new employee who is a onboarding specialist or Salesforce pro or whatever has to go and relearn every, yeah, that's just-- - Yeah, so there's issues there that have to do with-- - That's going to happen, I think. It has to do with the practical real world. I mean, that's just an interesting thing. We'll see where it comes down to. But I'm-- - Did you ask my question though, what's the time? - I don't see a time right now. I lean towards the fact that elements of SaaS software will change, but the core offering and purpose of having software as a service, I don't know if it will change. - Yeah, so maybe that I can boil this down to, and it comes through a conversation we had, and you were actually out last week and I had this conversation with one of our top prospects that we want to invest in in the venture fund. And I had a phone call with them and I just said, you know what, we're close to investing in you. We really like your opportunity. We really like your market. We like your product. But I think it's just unfortunate timing for you to be in this era of AI and product building and SaaS where product is so easy, it's not a moat anymore. It's not something you can show on a silver platter to a VC and say, look what I built. That's not, that's nothing. That's one out of a home. - It's one out of a home. - How many customers do you have using it? - Yeah, and so that's what I had. I broke him the news and I said, look, really what it's about is we love your product and we see the problem that is behind me. - And the solution you're bringing to that problem. But the issue is you need more customers. Your pipeline, show me your full pipeline. Show me who's paying. Show me how many customers are paying. What the revenues you're making from them on a monthly scale, you need to 10X what you have right now and then that becomes investable. So the product is not the investable thing anymore. It's now who's the customer of the market and what's the demand you're getting and showing it in dollars. So all right, that was a long conversation for just talking about the recent news in AI. But we get passionate about it because this is our job. This is our career. We're in the trenches of this every single day. We talked to software company tech companies. Every single day we're tech investors, software investors. We read it six a day every day. And we're just to the thick of it. So we're very opinionated on it. Okay, I was gonna do an icebreaker and just with me and you and I thought it was gonna be a good one. But maybe we can skip it or give it a little bit of time and attention. - Give it a little time. - Okay, they like icebreakers. - Okay, so what I'm doing is overhyped or underhyped. I do feel like 20, piggybacking off of this AI conversation. I do feel like 2026 has been like the overhyping and underhyping like era. Like everything is so overhyped and everything is so underhyped and it's just like everybody doesn't know what to pay time and attention to. - Okay, go for it. - And so I got a couple of things here that I'm gonna read off to you. And I want you to tell me with as much words as you want. This is not a quick action or reaction thing. It's just what do you feel is this overhyped or underhyped? Okay. - Okay. - All right, AI co-founders. Is the AICTO a real thing? Or is it just like people jumping on social media and trying to overhype this AI building process and vibe coding? - Overhyped. - 100% agree. People are going on to social media and saying, I have an AI co-founder. And I think that is complete bogus and completely overhyped. - AI is a tool just like all of the tools have come before it that humans use to do cool things. - Okay, now I agree with you. Overhyped or underhyped? Now the flip side of this. Solopreneurs that are scaling to seven figures or more on their own. Is that overhyped? Is that a reality that a solo entrepreneur can really get to those revenues, build that kind of value on their own? - I don't know if it's overhyped or underhyped, but I think it's real, but it's also they're creating small businesses not scalable ventures. - Okay, so you can do small business is great. Have a one to two or three or four million dollar business and you pay yourself half a million dollars a year and you're doing fantastic. That's a great thing in life, but you're not going to create a scalable venture that is going to make investors a lot of money that's going to be sold. I mean, so your opinion is is that you can't really go the distance solo. - Well, no, you can be a small business and if you run for 20 years and make half a million dollars year, that's a great life. That's what you can do. - No, but I'm saying to an acquirable, exitable startup, you know. - Yeah, the goal of a scalable venture is for the founders to create a company where they work themselves out of a job and they have non-founders running the company so a bigger company can replace themselves and a bigger company can come by that company, keep those employees. The founders don't go along with the company when they sell, obviously they do sometimes, but that's not the purpose. The idea is to I'm going to make a company and I'm going to get non-founders coming in and running that company. I'm going to be wealthy because I own most of the stock and I'm going to sell it to a big company and it's got a complete team that knows how to run a business, take care of customers and is in it for the long haul. A solopreneur by definition is not very sellable because it's so dependent on the solepreneur. If he's made a product that's him and the AI have custom made a product, how is another human going to step in and use that and be that same thing? And how's it going to be of any value to a big company? I mean, yeah, so you're just, you're saying. That you can start a business and get to seven figures and all these influencers that are touting these one-person businesses sure Maybe they're doing it, but it's not a true real scalable. I can also be a plumber Yeah, I could start a plumbing contract in business and get to three million dollars in revenue having for apprentice plumbers under me and A team of people a receptionist and somebody work in my office and just have a great lifestyle That's called a small business lifestyle business It's not something though that you're going to sell for ten times its revenue right if you're a solo entrepreneur and you're building up to those revenues You are responsible for those revenues. Yeah, and it's just impossible again This is purchasable. This is back to the fundamentals of business. There are different types of businesses There are small businesses lifestyle businesses social ventures scalable ventures right different types One to four million dollar business that you build as yourself because you're using a is a great life though Having a two million dollar business that nets 800,000 before paying its owner and the owner takes out 600,000 It's 200,000 profit left after paying that's a great life, but it's not something that you're going to sell You know for 50 or a hundred million dollars right okay Uh I okay. Yeah, I agree with that. I'm on that same side of the fence. Okay another one under hyped or over hyped The remote only startup culture so despite the early trends in 2020 right A lot of people went remote work the 2026 data is coming back and it's showing that a lot of startups are shifting back to like a hybrid or in-person model again So now I'm not asking if the remoteness of 2020 was under over hyped I'm asking right now in 2026 is it the free shift backwards into in-person over hyped or under hyped Do you think that's the trend or do you think it's not actually happening under hyped it's under hyped So you think that the in-person trend in 2026 is actually going to be bigger than it's even hyped right now It should you've seen it yourself And you've had to kind of learn this yourself coming over the last six years of us being really intently working together Is that you've seen every one of our portfolio companies that hits about a 500,000 revenue or more says Oh, this remote stuff sucks, you know, I'm getting rid of remote workers We're not going to have any remote workers the one of ours. That's about one and a half million dollars in revenue now He's preaching this all over the place and he came and told us he had a great worker that was moving out of state And that that worker wanted to stay remote working for the company and he said nope We don't do that. Yep, and he had a lot of going. Yeah, yeah, and so and he and 99 plus percent of every CO I know when they We're remote and then go to saying we're not going to do remote anymore. They say they get more done in 30 days in the previous year That's how why that's how the it comes. It's just the way it is so Um, I agree. I think there's going to be a huge shift at towards the end of 2026 and throughout the whole year back into humans need to work together and be together and it's just it's The the nuances and the subtleties of the problems that creep in for a moteness are are they pile up and there's a big tax on the company from that. Yep Okay, another one overhyped or underhyped more venture firms and are running incubator incubator type styled programs like come build a company with us Um, but results are mixed so studio born startups Um, are they glorified? Do they have an unfair advantage? Do they work or do they not work? So startup studios and like founder and residence programs that these VC and Venture studios are popping up overhyped or underhyped I'd say slightly overhyped I agree And here here's what's important any accelerator incubator whatever we do a bootcamp knowledge and education and mentorship super important. It's a way to Um, save time Don't need to repeat all the mistakes that you know, I'd say 80 plus percent of the mistakes you'd make as an entrepreneur can be avoided by having a good mentor and having good knowledge and education But at the same time Um, it is highly dependent on who's teaching and what's going on here one of the disappointing things I've seen from Many of the accelerators incubators, etc. Where we meet with these companies coming out of them is that they're really poorly trained and educated on even the fundamental principles of business fundamental principles of lean startup and how to do validation work Um, they're just you ask them basic questions and I go who is teaching you you're not understanding the basics of basics and that's the problem It's not enough just to run an accelerator and have people come into a common office and have a centralized support system They have are they really learning what they need to learn and being mentored in the way they should be mentored and I think there's a wide variance And this is all give my tip. I love to give people if you're being accepted into an accelerator or a similar type program You need to go talk to the CEOs of the last cohort and ask them if they would take that code do it all over again And you'll be surprised how many times they say no I gave up equity or I spent three months or whatever and we didn't get anything out of it right right Okay, thanks for playing my overhyped and underhyped game and I know we're really far into this episode already But hopefully there was a lot of value there for the viewers viewers and listeners um We're very opinionated and we have a lot of methodologies and strategies that we've developed over the years obviously my dad's a little bit older than me We love to hear from people that disagree with us. Yeah, we do write comments if you disagree We will change our minds. I've I haven't been an educator for 25 years in entrepreneurship I loved it when I was at the university and About I can remember probably about four times in particular where I was dead wrong on something and a student corrected me And he was right and I admitted to the class and it was awesome. Yeah, but I the my point in saying that is just because A lot of this just comes from a lot of experience and pattern recognition that we've just seen over the years because we deal in such high volumes of founders and startups and investments We can assume you know boil that information and data down into these strategies and opinions right um But again, yeah, if you feel differently, let us know shout it out And we would love to have a conversation if we're seeing something wrong um We're just trying to provide as much insight as some of my favorite ones of all time or remote like remote has been a huge conversation for years Hasn't it is remote in yeah, remember NFTs. Yeah, okay. I used to Lambast NFTs when they were the hottest thing in the world and uh We had I had strong opinions that uh sometimes even made you cringe because that was making young guys really upset with my opinions on NFTs But that's how I felt at the time. Yeah, there we go So Today we wanted to talk about a topic that um is super crucial in the early stages and throughout the whole career of your startup The whole life cycle of a startup, but we're seeing a lot of people mistreat or un Uh, I don't know not the word on uh, I want to say they are not taking care of and Building it and structuring it properly, which is the idea and the whole concept around capitalization tables or cap tables as they're known And which is the underlying structure of who owns what in your startup we see so many messed up cap tables That we come across and that's the word There's clean cap tables and messed up cap tables if you're going to go raise money from a precede to seed or a series a fund You have to have a clean cap table if you don't have one and needs to be cleaned up and We spent a lot of our time cleaning up messy cap tables. Yeah, so Okay, maybe we just start the conversation because that's what I wanted to have the conversation about today was about How to build a cap table how to structure a cap table what are the do's and don'ts and where maybe just what Makes for a messy cap table. Yeah. What is a good cap table and what is a messy? Let's go for the messy Yeah, because we have we teach these concepts within our curriculum and our content and our bootcamp We do a whole day almost on capitalization tables teaching how to structure it properly Going through all the different rounds of financing and how it works and what What that looks like after you jump into it. So let's let's number one. Well number one. What is your number one number one 50 50 or even capital splits Between founders. Okay. The worst 50 50 25 25 25 25 25 Just to let you know we say this all the time face it all time and it's a huge mistake We went through a long period where unfortunately why commentary which is an incredibly excellent organization in so many ways Was preaching that founders at a startup should have even splits and I very much disagree with that At least on a lot of problems there's ways to fix it. We don't have time to go in on this podcast and ways you can be creative and figure out how what percentage Everybody should have but the bottom line is don't go raise money with a 50 50 or a 25 25 25 25 25 cap table you need to have It set up to where there's a distinct leader in the company For instance like if I see two founders and they come to 50 50 That's an absolute automatic no for investment. If I see them come in and say it's 70 30 I go this is awesome Just on that one topic. Yeah, okay, and I think that just stems from you know misalignment and resentment and you know The actual effort that's being put in on day one versus what you're you know splitting the pie on day one over time that's gonna change contribution levels will be discovered over time. But the main founder, the CEO, whose ever idea is wherever the makeup is, we can situationally talk about lots of different things. But the bottom line is, is even equity splits are not the way to go. And another thing that we see a lot in not only just pitches to our venture fund and to startups that we're talking to for potential investment, but also within our boot camp. You know, we hold a startup boot camp when we see a lot of ventures go through that program. And a lot of them have another problem that relates to this 50 50, which is fixed equity issues or fixed equity given on day one without any kind of vesting schedule. So if you are giving out equity and allowing it between co founder and splitting that between co founders, it has to come with a vesting. Founder vesting. Uh-huh. And for those who don't know what founder vesting is basically over time is that that equity is not assigned and given it is earned over time. And usually it's a four year period where one quarter of that is vested each year. First year, you don't get anything on a monthly basis. You get it at the one year mark. And then after that, the remaining a three force of that. The same testing schedules we use on an option. No, I would say even every cohort when we teach it, someone says, oh, I didn't do this. Yeah, there is. Five out of the 30 companies have no founder vesting. And that's that's horrible because if you assign that to your co founder or two three co founders, one of them takes off and they're sat there holding 25% a third or half of your company without doing any operation. It's a bad mess. Never, ever, ever, never, ever, ever, ever, never be involved in the startup without founder vesting. Right. Exactly. All right. So protect yourself and the others. Okay, another thing about cap tables is to be careful on is when the investment world or, you know, whoever you're dealing with asked you to see your cap table. Don't just show them the outstanding or issued shares on the cap table. You need to show them what we call a fully diluted or as converted cap table. What that means? Why don't you explain that all? Okay. Outstanding. Okay. So first of all, let's take a C corporation in a C corporation to tell the state where you register what's the maximum number of shares you can have in the company that. And if you go over that number, you have to tell the state you're going to increase that number. That's called authorized shares. They have the author shares have nothing to do with actual ownership. When you have the ability to issue shares up to that authorized number, when you issue shares, those become what we call outstanding or issued shares. That's the true owners, people that hold those are co owners in the company. And those are called issued and outstanding. And so a lot of times when a bank or somebody asks you, I want to see your capitalization type of your list of owners. And you, if you only show the outstanding or issued ones. And don't show what we call contingent shares shares that don't exist or are not held by anybody yet. But our potential promise in the future, like options or warrants and we don't have time to date to talk about all of that. But they're called contingent shares. If you give a cap table to an investor, for instance, let's say Tyler and me and you say, here's my cap table. And we only see four people on it and we see there you have outstanding shares. We're going to assume that you're complete, fully deluded cap table. But if you sold have sold safe notes or issued convertible debt or issued options to people, we want to see all of that too. So in the venture and startup world, we deal in fully deluded cap tables where all types of stock actual held beneficially owned stock and contingent stock, which again, contingent stock is safe notes that could turn into stock in the future. Convertible debt, which could turn turn into actual stock and the held by somebody in the future options, warrants, those type of things. Stock appreciation rights, which actually don't even turn into stock, but they take a piece of the liquidity event in the future. So that's a contract where you given the amount of money as if they had own the stock, if the company sells that's called the stock appreciation rights. All of this needs to be disclosed to investors. You are very responsible for security laws and if you tell an investor this is my cap table and it doesn't have every contingent possible ownership or share of the pie on a liquidity event displayed in what you've represented, you're committing securities fraud and you need to really be careful with that. And so a lot of times we have people that don't understand this and they misrepresent and one of the things that sometimes they're not knowingly misrepresenting is even like the employee stock option pools. Yeah, a lot of times they'll show us a full cap table and we'll think that's the cap table and then they say, oh, yes, actually there's these shares that are safe for the employees of the employee pool or sometimes they don't even have one done, you know, so even if you haven't granted stock options of somebody, you've set aside 500,000 shares for the pool. Yeah, all that has to be represented on the cap table and so quick note about that we do like to see the employee stock option pool that set aside share pool amount made before an investment is made by us right that that needs to be done and squared away. Yeah, we don't like option pools being issued after we've had to dilute our investment will actually be quite upset with that yeah, by the way on the option pool let's talk about that 10 to 20% of what the founders received is a good startup option pool so for instance let's say that the founders receive 3.4 million i'm using that number because I like that number 3.4 million shares between them. And then I would think a perfect ideal option side pool size would be 15% or 600,000 that's kind of where I like to see it but I'd say yeah if they only did 340,000 or 10% of that as an obstacle that we find to if they did double that and did 680,000 then that's fine at 20% but 600,000. I was literally going to say I think 10 to 20% anywhere between that if you're lower than 10% it's going to get gobbled up or you know you're not you're going to have to reissue a pool at a later date so we want to see we would like to see the initial option pool something that could last well into the series a life right and last. Yeah, so all of those things in general any kind of deal any kind of agreement any kind of contract any kind of promise all needs to be documented and then reflected on your cap table when you're talking to investors and that's all the things we've. You just go Google every single thing okay if you don't know what it is go Google it up or leave us a question we'll comment or Gemini does yeah or Gemini it up hey another thing related to what you said though is undocumented promises this is regarding cap tables you if you promise somebody a co founder or a key person whatever that they're going to get 10% of the company and that was 9 months ago you made that promise and you think oh we just having. Got around to doing it that's actually a major problem undocumented promises for equity or something that you need to avoid and that really sends up red flags and there's a lot of issues that can come from that just a ton of stuff how about going into our favorite rule 83 B oh yeah okay so. If you are co founders together and you have issued stock at the founding of the company to one another at a very low price and purchase that at a very low price as founders. There is a fortunately a tax law that says and and excuse me I should say and you do what we've told you to do which is do founder vesting the founder vesting actually makes it a restricted stock and there's a rule called rule 83 B which says that restricted stock is taxed on the vesting date and not the liquidity date that's a disaster for startups this means like if you bought your stock for one one thousandth of a dollar per share which is a common number. One 10 thousandth of a dollar per share and you paid very you know $20 to get your equity in the company and then you put founder vesting on it to protect one another in amongst the co founders. A problem in the future when you hit that one year mark you said Tyler 12 months they get their first 25 percent vested and it could be by then worth a million dollars well. And on that vesting date they might owe taxes probably $350,000 plus dollars on that million dollars and the iris wants that payment now the government when they put in rule 83 B for other purposes they realize this cause a problem for startups so they made an exception. You can do a rule 83 B election and that means that you can elect to not be taxed on the vesting date but to be taxed on the liquidity date this is a very important thing that affects a lot of entrepreneurship. And so this means you within 30 days of creating that stock and putting that restriction on it need to file with irs a rule 83 B election asking to not be taxed on the vesting date but to be taxed on. the sale or liquidity date. Now that's a big description of what's going on here, but this is a completely potential catastrophic event for the company. It's not uncommon that founders that don't know what they're doing and have this happen and they have success, they could owe millions and millions of dollars in back taxes, penalties and interest, even though they haven't even achieved in liquidity. And similarly, in our bootcamp, for sure, without a doubt, every single cohort have 20 to 30 companies that we're running. There are multiple people that have forgotten to submit their 83B election. Again, it's about being taxed later, not taxed now. That's the underlying statement there. So you need to tell the IRS that's how you want to be. I'm looking square in the camera at our viewers and listeners here. So this is really important. If you missed the 30-day date, the only way to fix it is to shut that company down and start a new one. There may be some very high-paid attorneys that could help you get out of this problem in another way, but it's very serious and you should take it seriously. So please make sure when you found a company on day one that you ask your venture attorney, make sure you have a true venture attorney. Have we got a Rule 83B issue here and do we need to make our election? And how do we do that? Yeah. Okay. And that's done at the time of when you're setting up your first 30 days. First 30 days. Sorry. It's not equity. Your entity. That's done when you're setting up your entity, right, within 30 days of setting up that entity. Yeah. Yeah. So have we gone over a lot of the messy captains? One more. One more. When you price stock options and do pricing of grants of equity or grants of stock options, in other words, you've got a key employee. You've got somebody that you're trying to reward for joining your company and you set a strike price on that contingent ownership. You have to set it properly. It's now a criminal offense to under price your equity when granting it to someone. In other words, I want to give a really cool employee that I'm hiring 10,000 shares in an option grant to that person. And I have to choose the strike price of which that person can buy that stock over the next few years. If I put that strike price lower than the value of the company on the day that that grant was made, that's illegal. Yeah. It's a, and it's not just a civil penalty. That's a criminal offense now. And the CEO and the person in charge of finance, CFO, are the two that will be criminally held liable for doing that. So now and that law was put in about 25 years ago. It's called 409A. And we have to have what's called a 409A valuation to establish that share price. The rule of thumb most people use is if you haven't had an equity transaction within the last 12 months, you need to go get a 409A valuation if you're setting a price on your equity. And even though that pricing can be all over the map, right? High, low, whatever, it can be manipulated. At the same time, you need to show documented proof that you've got the 409A valuation. And there's 409A valuation companies that do this for a living and that then off of those valuations, you can actually set a stock or a price strike price for what the value is because if you're underpricing it, then the government's going to think, oh, you know, your companies were 10 million dollars and shares worth a dollar, but you just gave Mr. Joe Schmoe here who is an employee, a 10 cent strike price or a 10 cent stock and that's legal, right? If the market is saying it's worth a dollar, you have to give it to him at a dollar, right? He doesn't pay for that until he actually exercises those options right when he at the day that he goes and buys them. So it's not like it's a bill going to him. It's just that's what his strike price is that. Hopefully at the time when he actually goes and buys it, the value of the company under own even more. And then it's very worth it to buy those under price to be at that time, right? To be, yeah, to be technical. If you gave a dollar share, an option on a dollar share for a 10 cent strike price, the day that that is given that recipient has received 90 cents of value. And that is what they're saying is immediately taxable. That's why we have to get a foreign evaluation to say that it's worth 10 cents, not a dollar. Yeah. Does that make sense? Okay. That's kind of a lot of messy. There's other stuff, but those are stuff we run into all the time. Yeah. Common cap table problems, common cap table misconceptions or a common cap table, you know, red flags that we're seeing all the time. Almost every single early stage entrepreneur. So if that's you don't feel what worried, just go and fix it, go and look it up, go and Gemini or go and ask AI or go Google these terms, get familiar with them and present a very, very clean cap table when you're raising, hiring, doing anything, keep the cap table clean, keep it managed, use some of these softwares that are out there like carda or others that are cap table management software. So it can document, take all of your documents and make that cap table, share that cap table, export the data, whatever you need. It's all in those softwares and a lot of them are free too. So should we segue now to what happens when there are major problems and how we have to clean them up sometimes. A lot of times our due diligence process discovers these these issues and these red flags and then we have to address them. We say it's more often than not. Yeah, no, it's every time. Anytime we go into due diligence. So some of there's other things. For instance, there's a concept called deadweight on the cap table and deadweight on the cap table is where the company started 18 months ago with four co-founders. Two of them are no longer there, but they still have the equity that they were given at the beginning and the company didn't buy it back or didn't clean it up. And that deadweight on the cap table is a major problem for investors and it should be a major problem for you, the continuing founders that are still working in the company. That's why founder vesting so important. Founder vesting is a structure so that if somebody leaves prematurely either because they were not doing well and they were terminated or they quit, the company needs a way to get back that stock from those co-founders and that's what founder vesting does. So if the relative percentages owned by co-founders at the time of seek an investment don't make sense to the investor. The investor is going to often say you need to fix your cap table and set these percentages right and fix what's going on. They want to who is this person? Why do they have the percentage they have? What's going on on this cap table? Who have you sold this to? And we often have to issue a term sheet and say okay here's our term sheet and here's 10 conditions to closing and five of the conditions are fixing cap table issues. And they have to fix them and it often takes weeks or a couple months to go through the legal machinations to actually fix those issues. But we will say this when we do this we're really helping the company and the main founder like the CEO, main founder who started the company to really damn it. Well it's issues that need to be cleaned up anyways but we're just pulling them to the surface and telling them hey you are uninvestable until you find that's why in Z. Here's what I meant by that statement. Before coming to us the CEO should have cleaned them up already because of awkwardness because of friendships because of this they didn't like a issue. Yeah and exited someone who left the company. There's no communications. They're brother law or it's their brother law. They don't want to take away equity. You know a lot of these are hard conversations. So we come and say hey here's a you know half a million a million dollars. We're going to invest it but only if you do this and this and this and this to clean it up then that CEO says okay they go back to her and say hey we need this money. So let's clean it up now and they get it done. It's obviously would be nice if they came to us with it cleaned up because we feel even that much more. So I don't even know why we're saying hey go clean this up because it no one's ever all the way cleaned up anyways but hey now you can be the smart founder in the room. You can be the one that's pitching us and you say hey yeah we have X, Y and Z already done. That's all buttoned up and taken care of and then we'll be super impressed and that'll give you a gold star. So exactly okay I think we've talked a lot about cap tables. We're running short on time but if you have any questions about this episode I know we spent a lot of time on AI but you know what podcast that's about startups isn't talking about AI anymore so can you fault us but cap tables what we wish we could dive in more but we're going to wrap up this episode. So this one's for you clean up your cap table go talk to your co-founders talk to the people that are supposed to be on the cap table or are on the cap table make sure everything's straight and figured out go down this messy cap table list that we just went through and and make sure you're fixing every single one of those issues and if this hits home to you and you have co-founders sitting there send this episode to your co-founder and say hey buddy maybe we should clean this up maybe we should go and tackle all these issues now so we don't have to do it later any parting words any parting comments on cap tables just you know take it seriously know that you have a responsibility to all the stakeholders in the company which is every single person that's working for you and that you've given equity to and future investors it's the leaders of the company need to do it right right and as I was just looking over at my dad when he was saying those parting words I just realized you have five startup ignition logos coming straight at your face for this whole episode on my hat his hat his shirt and behind us and on my shirt so we're over branded today So if you didn't know this is the startup ignition podcast, this has been an episode about podcasts. Share this with your buddies, share this with your friends, share this with your co-founder, share this with those in the startup ecosystem that you are in and we are out. [Music]