So You Want To Remove A VC From Your Cap Table?

There are many reasons why you may want an investor off from your cap table. The post below will cover the major cases and how best to handle them:

Case 1: They were early investors and you are trying to clean up the cap table.

This happens quite frequently, probably the most common case. Investors come in many flavors and the ones that were with you in the early trenches are rarely the ones who will be with you once you are fighting a global war. Often times the investor was an angel investor and looks for liquidity once the company has reached a certain level of maturity, typically series B. The motivation may also be very much coming from the entrepreneur who wants to clean the cap table — reducing who to keep apprised on the business.

Sometimes an existing or new investor will buy the shares of the investor leaving the cap table A.K.A do a secondary. Do note this solution has a downside since ideally all parties (management, employees, board, major and minor investors etc) should want all money being raised to benefit the company, rather than just getting exchanged between investors. Also not all companies will publicize how much of a round was actually secondary i.e. if a company announces raising $16M it doesn’t mean always that all $16M are going into their coffers.

Case 2: The investor is unable to contribute duly.

People are people and could have a personal situation come up. It’s also possible that an angel investor who is an operator is forced on a professional conflict from his day job and wants to recuse himself / herself. Even if this is not written explicitly into the legal docs the common process, at least in the US, is for the company to have the right of first offer i.e. they can purchase the shares. If the company wants to preserve its cash, with the approval of the board, founders or management can also buy back these shares.

Case 3: The investor and the entrepreneur are not agreeing.

This is the hardest case. Hiring and firing an employee is hard, hiring and firing an investor is even harder — they are essentially co-owners of the business. Obviously no one wants this situation but one way to ameliorate the damage proactively is to distinguish between minor and major investors, typically based on ownership threshold, and give them different rights.

These days we have also been seeing more founder shares, which should be an item of negotiation when the company is being created. Founder shares separate out ownership and voting rights ie even if an investor owns 20% of the company it doesn’t mean they have a commensurate say in the board.

Case 4: Changing the board (com)position.

This is not about removing an investor from the cap table but we will discuss here since it’s such a related topic. Downgrading and upgrading people from a board seat to board observer to nothing is most often a conversation rather than noted explicitly on legal docs. And it can also include a non-investor in the case of an independent board member.

Keeping a small board is key to efficiency and the ideal choice is keeping to a odd number so you don’t have hung decisions. Except when the company is very small 3 people is too little, 7 is usually too large, 5 is ideal (2 from management, 2 from investors, 1 from independent). What to do if you find yourself with too large of a board, maybe because you are a CEO inheriting a previous situation? Consider putting ownership thresholds around the board composition in your next financing i.e. if an investor doesn’t meet the bar they will automatically fall off the board.

These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). I would be stoked if they get people interested enough in a topic to explore in further depth. I work for Samsung’s innovation unit called NEXT, focused on early-stage venture investments in software and services in deep tech, and all opinions expressed here are my own.