Rick Segal has today’s VC Post of the Day with his excellent post A Fatal Paper Cut. Rick tells the story of the death of a promising young startup as a result of a messy early capital structure that wasn’t managed correctly from the beginning. In due diligence, the VC chickened out and the company slammed into the wall. All of this could have been avoided – documenting the early equity grants correctly and taking the capital structure seriously from the beginning would have solved all the problems. Rick gives some great suggestions for this. The VC also might have been able to get comfort with a capitalization rep from the founders, although in this case that clearly wouldn’t have done it.
This is a must read post for any entrepreneur that is setting up a new business and giving out equity grants (options or shares) of any size in exchange for services.