Mastering Your Cap Table with Joshua Lee of Ardius

"You need a great lawyer and you need a great accountant. Those two things are inevitable. But they look at me and I go, 'Oh, you've never looked at your cap table."

Joshua Lee, CEO and Founder of Ardius explores the vital importance of cap tables in managing startups and guiding investment decisions, in this episode of Founders In LA. With his deep background in accounting and building ventures, Joshua sheds light on the typical challenges and the strategic value of keeping cap tables clean and detailed. He outlines potential issues entrepreneurs may encounter, such as dilution, valuation discrepancies, and investor expectations, offering insightful advice on how to tackle these hurdles. Through practical examples and personal stories, Joshua highlights the need for transparency and meticulous planning in venture relationships and the growth of startups. This episode is a valuable resource for both founders and investors, providing practical tips on how to understand and use cap tables to drive successful business outcomes.

Key Takeaways:

1. Understanding Cap Tables: Joshua Lee highlighted the intricacies of cap table management, noting issues like convertible notes and safe notes. He emphasized the importance of meticulous attention to detail in tracking each entry, as these have significant implications on future strategic decisions, especially concerning funding and exits.

2. The First $10 Million In an Exit Can Be Tax Free: Joshua underscored the crucial need for skilled accountants and lawyers to guide founders through the complexities of startup management. These advisors ensure legal and financial robustness -like uncovering thousands of dollars in taxes or understanding that the first $10 million in an exit might be tax free under the right conditions.

3. The Difference Between Joining a New Fund vs. One that is Almost Closed: Joshua detailed the challenges of navigating funding cycles and managing investor expectations. For instance, a company joining at the beginning of the fund may have different timelines and expectations than one at the end of the fund.

4. Long-term Vision and Strategic Exits:Joshua shared his approach to strategic exit planning, stressing the need for alignment between a startup's operational activities and its exit strategy. He noted how a well-maintained and clear cap table is essential for facilitating smooth transitions and maximizing stakeholder benefits during exits.

5. Founder Diligence: Joshua advocated for proactive founder engagement with their cap tables, emphasizing the critical nature of understanding the implications of each entry. He highlighted the risks of dilution and the necessity for founders to remain vigilant about how transactions affect their control and align with their long-term goals.

   
   

   Top Quotes:

1. "We started opening up the cap table. Start seeing the convertible notes, the safe notes, the priced rounds even venture debt and the warrants that have been issued. It's all over the place." 

2. "What is QSBS? It sounds like BS. No, it's called Qualified Small Business Stock. Just look that up. That will pay for itself." 

3. "You need a great lawyer and you need a great accountant. Those two things are inevitable. But they look at me and I go, 'Oh, you've never looked at your cap table.'" 

4. "So when you take money, there come expectations of different sorts. One is the return, depending on how their fund's doing."

5. "This is why our last company was sold in 18 months, and, very interestingly enough, it was done in a way where I thought everyone's numbers were achieved."