Fundraising Pitfalls: Capitalization Table & Founder Salaries

1. A Poorly Structured Capitalization Table: A Barrier to Investment

The capitalization table (cap table) represents the equity distribution within the company. A poorly structured allocation can be a major obstacle to fundraising.

Why is this a problem?

An article by Sifted, "The Equity Trap: How Academic Founders Can Hinder Startup Growth", highlights a common issue: academic founders holding too much equity and refusing to dilute their stake. This situation can prevent investors or key talent from joining the company, ultimately stalling its development.

Similarly, Les Échos warns that mismanaging the cap table can lead to internal conflicts and limit flexibility for future funding rounds. Their article, "Capitalization Table: The Costly Mistakes Startups Make", stresses the importance of a balanced and evolving equity distribution.

Another frequently underestimated factor is the presence of a co-founder who remains a salaried employee elsewhere or is too involved in another project. This can send a negative signal to investors, who seek fully committed teams. Investors need assurance that founders are dedicating their full time and energy to their startup, without outside distractions. If a co-founder is not fully invested in the project, it can cast doubt on the team’s strength and long-term vision.

Case Study: BioTech Innovations (Switzerland)

• Mistake: Academic founders held 70% of the equity and refused to dilute their stake to attract an experienced CEO.
• Outcome: Investors deemed the startup too risky and declined to fund it.
• Lesson Learned: "We had to restructure our cap table, but it was too late." – Dr. Hans Müller, Co-founder of BioTech Innovations.

Expert Advice:

"The capitalization table should reflect the real value contributed. If early founders are unwilling to share the pie, they may end up eating only the crumbs." – Julien Moreau, Business Strategy Consultant.

2. Founder Salaries: A Key Indicator for Investors

Founder compensation is another major friction point in fundraising. A delicate balance must be struck between ensuring financial stability and demonstrating commitment to the project.

Why is this a problem?

According to Sifted in "Founder Salaries: How Much is Too Much?", founders who pay themselves high salaries too early send a negative signal to investors. Investors prefer to see entrepreneurs make personal financial commitments before they take the risk of investing themselves.

Maddyness, in its article "Founders: Can You Combine a High Salary with Equity?", highlights this dilemma and warns against salaries disconnected from a startup’s actual performance.

Founder profiles also play a crucial role. Investors look beyond technical or strategic skills; they invest in ambitious, resilient leaders determined to seize every opportunity. They want founders who can convince and overcome the challenges of entrepreneurship. In the harsh reality of the market, only fully committed founders with a winner’s mindset can truly maximize their chances of success. A co-founder who lacks initiative or hesitates to take risks may be seen as a growth obstacle.

Case Study: GreenEnergy Solutions (France)

• Mistake: Founders were paying themselves €10,000 per month from the start, despite having no revenue.
• Outcome: Investors declined to invest, questioning the founders’ commitment.
• Lesson Learned: "We had to lower our salaries to demonstrate our commitment." – Thomas Dubois, Co-founder of GreenEnergy Solutions.

Investor Perspective:

"A founder who takes a high salary from the start shows they are not ready to take risks. That makes us question their commitment." – Élodie Martin, Partner at GreenTech Ventures.

Conclusion

In summary, a well-structured capitalization table and appropriately adjusted founder salaries are critical elements for a successful fundraising round. By avoiding these common mistakes, startups significantly increase their chances of attracting investors and ensuring sustainable growth.

At TheScaleGroup, we guide startups through these challenges, offering strategic expertise and personalized support to help them meet investor expectations. By anticipating these issues and optimizing financial structuring, startups will be better positioned to turn their ambitions into success.

Together, let’s make your fundraising a real launchpad for your company’s future.

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References:

Startup.ch: "Les salaires des fondateurs en Suisse : Entre réalité et excès".

Maddyness: "Fondateurs : Peut-on cumuler salaire élevé et participation au capital ?"

Sifted: "Founder salaries: How much is too much?"