Investors in Australia often call a cap table messy when it has a long list of shareholders. Look at a public company. Thousands of shareholders, one class of share, one set of terms, and no management problem. A company I listed on the ASX had more than a thousand shareholders, all on ordinary shares, all on the same terms. The register was a list, and it was managed without issue.
Count the sets of terms instead.
The cap table that causes trouble has three convertible notes, each with a different discount and cap. It has a shareholders' agreement that binds the first group of investors, and a second group that came in later and never signed the deed of adherence. It has side letters that nobody remembers. Two shareholders can create more complexity than two hundred.
I understand why investors use headcount as a shortcut. A long list often does come with informal terms and missing paperwork. Headcount is the symptom. The terms are the cause.
A company can have as many shareholders as it likes, provided everyone sits on consistent terms and the register is managed properly, on a platform built for the job. Check the headcount thresholds in the Corporations Act with your lawyer, because they depend on the type of company you are.
Most messy cap tables start with the investment document. Founders who need money often sign what arrives. This is a warning, and it applies at exactly that moment.
Before you commit:
1. Issue your own documents where you can, with a lawyer's help, so every investor signs the same terms.
2. If you are handed an investor's document, read it carefully and get advice before you sign. Understand how the terms will look to your next investor.
3. Work out the future issues now: who holds which rights, what a later investor will have to accept, and what you would need to change to raise again.
4. Be prepared to walk away. If the terms will make it hard to raise again, weigh that seriously. Plan to start your raise with six months of runway, not six weeks, so that walking away is a real choice.
Count the terms, not the shareholders.
General information only. Not legal, financial, tax or investment advice.