Why misaligned equity kills deals — and how to fix it before you raise
Most pre-seed problems are fixable. A rough product, an evolving business model, an early go-to-market strategy — these are expected at this stage. But an equity split that doesn’t reflect who is actually driving the business forward is a different kind of problem. It’s often painful and sometimes impossible to fix and it causes deals to fall through more often than founders realise.
This piece covers the most common equity problems seen at pre-seed, why they matter so much to investors, and the questions every founder should be able to answer before approaching investors.
A deal that almost was
Recently a promising quantum pre-seed deal came across my desk. The tech was solid, the founder was excellent, and there was early traction. But the equity split with the co-founder didn’t make sense given who was actually building the company. That was enough to walk away.
It’s a hard decision to make when everything else looks good. But a misaligned cap table doesn’t just create problems now — it creates compounding problems at every subsequent round.
The most common equity problems at pre-seed:
A junior or departed co-founder holding significant equity
Someone who was involved at the very beginning, took a meaningful stake, and has since left or become peripheral is one of the most common cap table issues. It’s understandable how it happens, but from an investor’s perspective it means equity is sitting with someone who isn’t contributing to the outcome they’re backing.
A university holding a large stake from a spinout
University spinouts can be compelling opportunities, but when the institution has retained an outsized equity stake — sometimes 20–40% — the incentive structure for founders becomes difficult. Future investors will be asking whether there’s enough equity left to motivate the team through the hard years ahead.
Advisors or academics with more equity than the CEO
Early advisory relationships are valuable, but equity granted to advisors without clear deliverables and vesting schedules can create a situation where the person taking the most risk and doing the most work holds the least reward. Investors notice this immediately.
Questions every investor will ask about your cap table
Before approaching investors, be able to answer all of these clearly:
• Who is contributing what? Be specific about roles, time commitment and value-add for each shareholder.
• Are they full-time or part-time? Part-time founders or advisors holding significant equity is a yellow flag.
• Who has taken real risk? Who quit a job, put in personal capital, or worked without pay to get here?
• Who brings the domain expertise or leverage? Equity should reflect irreplaceable contribution, not just early involvement.
• What happens if someone leaves in six months? Is vesting in place? If not, this is the first question to fix.
The vesting imperative
Vesting is not just investor protection — it’s founder protection. A standard four-year vesting schedule with a one-year cliff means that if a co-founder leaves in month ten, they leave with nothing. If they leave in year three, they leave with 75%. This is fair, and it’s what good investors expect to see.
Without vesting, a co-founder departure leaves you trying to renegotiate equity from a position of weakness, often at exactly the moment you need to be focused on the business.
The underlying principle
Equity is not a reward for the past. It’s an incentive for the future. The question investors are asking isn’t “who helped get this company started?” — it’s “who is going to drive this company to an outcome?” If the answer to those two questions points to different people, the cap table needs to change before you raise.
Sort these issues before approaching investors, not afterwards. Once someone has invested, your leverage to restructure the cap table is much lower. Most investors won’t ask you to fix it — they’ll just pass.
Originally posted on LinkedIn.