A cap table written for a financing round can nearly kill an exit years later. M&A lawyer Peter Möllmann of PXR sees misaligned liquidation preferences, clauses that only apply to a 100 percent sale, and employees surprised by worthless options. His advice: have exit-experienced lawyers draft financing contracts and model the waterfall early.
You spent serious money on lawyers to get your Series A done. The terms looked fine. Everyone signed. You moved on.
Three years later, you’re in an exit process. The buyer is real, the price is right – and then your own cap table nearly kills the deal.
This is not a hypothetical. It’s one of the most common failure modes Peter Möllmann sees in his work as a tech M&A lawyer and partner at PXR, one of DACH’s leading tech M&A law firms. Almost always, the damage was done years before the exit ever began.
How a cap table becomes a liability
One of the most common culprits is the Liquidation Preference – a clause that determines who gets paid first when a company is sold. In a standard structure, the most recent investor sits at the top of the waterfall. Founders and employees with common shares sit at the bottom.
This creates a dynamic that most founders understand abstractly but rarely think through concretely. Consider this scenario: your last investor came in at a high valuation with a 2x Liquidation Preference. An earlier investor came in much lower, and is sitting on a 50x return at the current offer price. Those two investors are not aligned. One wants to sell now. The other wants to wait for a higher price – because 2x on a late-stage entry still means they barely made money.
Thirty shareholders. Thirty different incentive structures. One exit process.
The clause nobody reads carefully
Peter describes a specific failure he sees repeatedly: a Liquidation Preference clause that only activates in the case of a 100% sale. The founders never questioned it at signing. Why would they? Who imagines selling anything other than 100%?
Then comes a buyer who wants 80%. Suddenly the clause doesn’t apply. The entire waterfall breaks down. You can’t pull Drag-Along rights. And now you’re trying to fix all of this under deal pressure – which is the worst possible time.
These contracts, as Peter puts it, were drafted by people who had never actually done an exit. You can’t repair them once you’re in the process. The damage is already done.
The ESOP problem nobody talks about
There’s a third landmine that surfaces late: employees with stock options who suddenly realize their shares are worth less than they expected – or nothing at all, depending on how the waterfall plays out. This creates internal friction at exactly the moment when you need your team aligned and performing. Some founders discover this for the first time when they’re weeks from closing.
What you can do today
The fix isn’t complicated, but it requires doing it early – ideally before your next funding round, not after you’ve signed a term sheet with a buyer.
Here are three particular things Peter recommends to do:
1. Make sure your fundraising contracts are drafted by someone who has actually closed an exit – not just a financing round.
2. Define in your shareholder agreement what majority is needed to decide who sits on the deal team when the time comes.
3. Model out what your cap table actually looks like at different exit prices and structures – not just the headline number, but who gets what, under what scenarios.
Your cap table is a document that was written for a financing event. Your exit is a different transaction. The gap between those two realities is where deals go to die.
Peter Möllmann discussed this and much more in my DEALMACHER Podcast – a two-part M&A masterclass for tech founders. Listen here.
Frequently asked questions
How can a cap table kill an exit?
Investors who entered at different valuations have different incentives. A late investor with a 2x liquidation preference may want to wait while an early investor sitting on a 50x return wants to sell now.
What is the risk of a liquidation preference that only applies to a 100% sale?
If a buyer wants 80 percent, the clause does not apply, the waterfall breaks down and drag-along rights cannot be used. Fixing that under deal pressure is the worst possible time.
Why can employee stock options cause problems in an exit?
Depending on how the waterfall plays out, employees may find their options are worth less than expected or nothing at all. That creates internal friction when the team needs to be aligned.
What should founders do to prepare their cap table for an exit?
Have fundraising contracts drafted by someone who has closed an exit, define in the shareholder agreement what majority decides the deal team, and model who gets what at different exit prices and structures.
