Insights

Your cap table is killing your next raise: here’s how to avoid this.

In 2010, the luxury fashion world was rocked by a scandal: LVMH, the conglomerate behind Louis Vuitton, quietly acquired a 17% stake in their fiercest rival, Hermès, over the years.

They did it by exploiting the opacity of bearer shares — physical certificates that require no registered name, making the ownership percentage impossible to track. By skirting disclosure rules, LVMH moved in silence. By the time Hermès realized what was happening, its biggest competitor was sitting inside the boardroom.

In Web3 and tech, we like to think we are more sophisticated than a 19th-century family business, but we aren’t. In fact, the “bearer share” has returned.

For founders and CFOs, the capitalization table is supposed to be the single source of truth, but if you are not actively managing secondary liquidity, it is likely a lie.

Learn about “shadow” cap tables, hidden dilution, and toxic terms that might be silently killing your next funding round.

How the shadow cap table forms

When companies enforce strict “No Selling” policies without offering a sanctioned path to liquidity, employees and early investors turn to the grey market. They sign “Forward Agreements”, which are private contracts where the seller promises to deliver tokens or shares to a buyer the moment they unlock.

Forward agreements are essentially the modern bearer shares. You look at your registry and see “Loyal Employee Dave” holding 0.5%. You assume Dave is aligned with your long-term vision. In reality, Dave sold his economic rights six months ago to an aggressive hedge fund via a forward contract.

When you enforce “No Selling” policies, you don't stop the selling. You just stop seeing it.

This creates a “Shadow Cap Table.” You no longer know who your actual stakeholders are. Worse, when the unlock finally happens, you may face a sudden dump from entities you never vetted, crashing your token price.

The ultimate example of this would be the FTX case. When John Ray III took over FTX, he famously stated there was a “complete failure of corporate controls.” One of the biggest issues was that Alameda and FTX had undocumented side deals, token warrants, and handshake agreements with employees and insiders. They didn’t know who owned what.

What red flags kill the deal in due diligence?

When a Tier-1 venture capitalist enters due diligence, they are looking for structural risks. A messy cap table is often the reason a deal falls apart. In our experience dealing with issuers and investors, these are the three massive red flags:

The “Party Round”

The signal: A cap table cluttered with thousands of small retail investors (often via launchpads) rather than a few strategic partners.
The risk: This is a reputation risk. It suggests you couldn’t secure “smart money” and had to resort to crowdfunding. Operationally, it’s a nightmare. Retail investors often will dump at the first sign of liquidity, creating sell pressure that strategic partners wouldn’t.

The “Side Deal”

The signal: Hidden side letters granting special rights, like guaranteed refunds or higher liquidity preferences to specific investors.
The risk: There is a narrative right now about projects offering special refund conditions to big names (e.g., recent rumors surrounding Berachain). If Investor A gets a full refund when things go south, Investor B becomes the exit liquidity. No smart VC will accept being a “second-class citizen” on your registry.

Corporate Espionage

The signal: An investor on your cap table who also holds a significant stake in your direct competitor.
The risk: Investors typically get Information rights, such as access to monthly updates, financials, and product roadmaps. Without a controlled cap table, a competitor can buy their way in (via secondaries) and access your confidential strategy.

What are the ghost equity pitfalls?

Even without malicious actors, founders can unintentionally mislead investors through poor data hygiene. This can be very eroding to trust and therefore, for the deals.

The Convertible Notes
Startups often present cap tables that fail to account for the conversion of SAFEs (Simple Agreements for Future Equity) or convertible notes. An incoming Series A investor might believe they are purchasing 20% of the company based on the current share count. However, once the convertibles trigger, that ownership might shrink to 15%. If your data room doesn’t explicitly model the post-conversion fully diluted state, you are effectively handing the investor a ticking time bomb.

The Option Pool
Another common friction point is the employee option pool. Investors often demand the pool be expanded before they invest (forcing existing shareholders to take the dilution) rather than after (where the new investor shares the dilution). Presenting a cap table that hides the necessary pool expansion, or manipulating the timing to make the founders’ stake look larger than it effectively is, is a red flag.

The Founder Bluff
In the biotech and tech sectors, investors look heavily at “founder conviction.” If a founder holds 60% of the equity, they are incentivized to grind. However, unregulated secondary markets allow founders to fake this conviction. A founder might publicly hold a massive stake while secretly offloading 20-30% of their equity via secondary sales to de-risk their personal portfolio.

You cannot stop employees from wanting cash. You cannot stop early investors from needing to rebalance. But you can and must control how they do it.

How to control your cap table

You cannot stop employees from wanting cash. You cannot stop early investors from needing to rebalance. But you can and must control how they do it.

The grey market of Forward Agreements can be replaced with structured, issuer-approved direct transfers. If the issuer (you) approves the deal, the transfer is clean. You remove the counterparty risk, you remove the shadow ledger, and most importantly, you know exactly who is buying.

Centralizing your data is a big step to control. Instead of running your billion-dollar protocol on a static Excel sheet, use real-time ledger management that automatically calculates full dilution, tracks convertible triggers, and logs every secondary transfer.

Enforce the ROFR (Right of First Refusal) to maintain the right to buy back shares or vet incoming buyers. This allows you to block competitors or “bad actors” from entering your cap table.