Your Cap Table Is Your Strategy: Part I: The System
This is part one of a two-part series adapted from a conversation between Chris Fenster and Charlie O’Donnell at nextNYC. Part two covers the financial consequences and includes two case studies you won’t forget.
Most founders will tell you their biggest fear is running out of money: not having enough to hire, enough runway to get to the next milestone, enough cushion to survive the thing they haven’t thought of yet.
I get it; I’ve been there. I’ve had three (consecutive) companies fail before I started the one that worked. Running out of cash is an existential threat, and it makes sense that it would dominate a founder’s psychology.
But after 18 years of running Propeller Industries and working with more than 1,400 venture and growth-stage companies, I’ve had a front-row seat to how cap tables shape outcomes. I’ve personally worked with well over a hundred of these companies and sat in countless board meetings. I’ve watched the same patterns play out again and again, and I’ve come to believe that the most common failure mode isn’t running out of money.
The most common failure mode is this: raising the wrong money from the wrong people at the wrong terms, and then spending years discovering what that actually means.
Your cap table looks like a record: a spreadsheet, a list of names and numbers on Carta. In practice, it’s a contract. It encodes who gets paid first, what kind of company you’re obligated to build, and which options are available to you at every fork in the road. Every name on that cap table has a set of incentives, a time horizon, and a definition of success. If those definitions don’t align with yours, you’ll find out; the question is just when.
I want to lay out four concepts that I think every founder should understand before they raise a dollar of institutional capital. The first two are foundational: they describe the structure of the system you’re entering. The second two are dynamics that emerge when those foundations collide. All four trace back to the same root cause: the cap table was built by default, rather than by design.
The Faustian Bundle: Beware the Tradeoffs of Funding
When you accept money from an institutional investor, you’re not just getting capital; you’re getting a bundle: money, governance, and guidance, all wrapped together.
The money part is obvious: that’s why you’re at the table.
Governance is the board seat, the fiduciary rights, the reporting obligations, and the protective provisions that give your investors influence over decisions you might have assumed were yours to make. This is structural, and it shows up in the docs. Your lawyer can walk you through it. (Get a good one, and by that, I mean one who will tell you which of your three options to take, not just hand you a menu. They exist, especially in New York. The ones who charge more up front usually save you money later.)
Guidance is softer but just as consequential. It’s the advice, the introductions, and the strategic perspective your investors bring. At its best, this is genuinely incredible. A lead investor with deep domain expertise who picks up the phone when things go sideways and helps you think through the problem is worth more than the check they wrote. I’ve seen it.
At its worst, guidance becomes pressure disguised as helpfulness. “Have you thought about raising more?” “Maybe it’s time to bring in a more experienced operator.” “We think you should be spending more aggressively on customer acquisition.” The guidance comes from people who have their own incentive structure, a particular definition of what your company should become, and a timeline for getting there that may not match yours. That part usually isn’t explicit in the first few conversations.
You can’t take the money without the governance and guidance: that’s the bundle. I call it the Faustian Bundle because the trade-off is real, the benefits are real, and the consequences don’t reveal themselves until later. The deal always sounds great at signing, and ! Mephistopheles was charming, too.
A smart founder can navigate this well. You’ll find investors whose domain expertise genuinely helps and build a relationship where guidance is a conversation, not a directive. You’ll structure the governance so you retain meaningful control over the decisions that matter, and add an independent board member early (more startups should do this, by the way, even if it’s a rotating seat for a couple of years). I’ve seen founders handle the bundle beautifully… and I’ve also seen it go very wrong, usually because the second foundation was never understood in the first place.
The Systemic Misalignment: Consequences of the Power Law
The Faustian Bundle describes the deal; here are the interests behind it.
It helps to understand the basics of how a venture fund actually works. Investors raise capital from limited partners. A small percentage of the fund comes from the GPs themselves, maybe 2% to 5%. The rest is other people’s money. The fund charges a management fee, typically 2% annually, and takes 20% of the profits (the carry). This is the two-and-twenty model, and there’s nothing wrong with it. It’s just how the system is designed.
As a function of that design, the fund needs to put capital to work. It has a deployment schedule and it has a fund life. It has LPs who expect a return that justifies the illiquidity and the risk. And here’s where it matters for you as a founder: the GP’s customer is the LP, not you.
I think founders are naturally inclined to think of themselves as the customer: we’re the ones getting the money, after all. We’re the ones being courted, pitched to, and taken out for coffee. But the capital relationship runs in the other direction. The GP’s fiduciary obligation is to generate a return for the LPs, and the founder is the vehicle through which that return is generated.
If you want to think about it structurally, founders are inventory. Capital is raised from LPs and deployed into founders, and the goal is to buy low and sell high. When a portfolio company isn’t going to generate venture-scale returns, the rational move is to write it down and redeploy attention toward the companies that might return the fund. That’s not cruelty; that’s fund management.
Marc Andreessen described the structural version of this problem in a recent interview on the 20VC podcast. He explained that a16z built its growth-stage fund specifically so founders could, in his words, “preserve the firm’s mentality on their cap table for longer.” The implication is worth sitting with: if the wrong capital comes in at the growth stage, you get a different set of pressures: different risk tolerance, different timelines, and different opinions about whether the founder should still be running the company. Andreessen built a multi-billion-dollar product to solve a problem most founders don’t realize they have…until they’re already living inside it.
I want to be careful here because I’m not making a moral argument. Many of my close friends who are investors are also smart, thoughtful people who genuinely want their founders to succeed. But good intentions don’t override systemic incentives. The system is built around the power law: roughly 10% of investments generate somewhere between 60% and 80% of a fund’s total returns. That math creates a structural requirement to chase outsized outcomes. It’s why we talk about TAM in every pitch, and it’s why the question is always, “can this return the fund?”
What this means in practice is that you and your lead investor have fundamentally different interests: not opposing interests, necessarily, but different. Your investor has a fiduciary obligation to push toward outcomes that serve their LP base. You have a different set of obligations: to your employees, your customers, your co-founders, and yourself. Those interests overlap, in the best cases. In the worst cases, they diverge in ways that nobody anticipated when the term sheet was signed.
Understanding this doesn’t make you cynical; it makes you literate. You cannot can’t solve a problem you can’t articulate, and the systemic misalignment between founder incentives and fund incentives is the single most important structural reality in venture-backed startups.
The Confidence Vacuum
The first two concepts describe the system, and this one describes what happens when a founder isn’t equipped to navigate it. This took me a long time to see clearly, maybe fifteen years of sitting in board meetings, before I could have articulated it.
There’s nothing like a confidence vacuum in a decision-making structure to encourage the people around the table to fill it.
If a founder walks into a board meeting with a clear plan, a deep understanding of the levers in the business, and conviction about where the company is going, they’ll almost always maintain decision-making authority (even with strong-willed investors who have their own views about the right strategy). The governance provisions in the shareholder agreement matter, sure, but in practice, confidence and competence are the most powerful forms of control a founder has.
The opposite is also true. If a founder isn’t sure about the plan, can’t articulate the formula that gets the business from here to there, and is visibly uncertain about the next move, they’ll create a vacuum… and the investors will fill it: they have to. Given the systemic misalignment I just described, if the person running the company doesn’t have a confident, credible plan to generate a return on the capital that’s been deployed, the investors are obligated to engage. That’s not overreach, that’s their fiduciary responsibility. Understanding this dynamic is the first step toward designing around it.
Charlie O’Donnell and I were discussing this recently and he made a point that stuck with me. He’d just come out of a CFO roundtable where the discussion was about who owns the plan. His observation was that the founders who maintain real authority aren’t predicting the future, they just understand the inputs. They can walk the board through the formula: here’s our marketing lead, she’ll explain the lead generation engine. Here’s the CTO, he’ll talk about uptime and scaling. Here’s the revenue model, and here are the assumptions underneath it. They know the mechanics, even if the output is uncertain. This is what confidence looks like at a board level: not certainty about outcomes, but command of the machine.
When that confidence is missing, the investors don’t wait politely; they can’t afford to. And honestly, we shouldn’t expect them to!. The problem isn’t that investors step in when founders are uncertain; the problem is that most founders don’t recognize the dynamic until they’re already in it. They gave away the room without realizing they had it.
I’ve experienced this myself at Propeller, by the way, through my own journey as a founder, so I’m not describing something I’ve only observed from the outside. The confidence vacuum is real, it’s subtle, and it compounds over time. If you lose the room once, you have to work twice as hard to get it back.
Vision Creep: When the Money Tells You What to Build
This one is maybe the most insidious because it happens gradually, and it feels like good news at every step.
A founder I know went out to raise a seed round. She had a clear idea of what she wanted: enough capital to prove the concept and get to a Series A on her terms. She was thinking $500,000, maybe a million.
Nobody writes $500,000 checks. Or, more accurately, the people who write them are hard to find, and the process of finding them is exhausting. It turned out to be much easier to raise $2 million from an institutional seed fund: one meeting, one check, done. She closed the round, and it felt like progress.
Then the Series A came around. She’d planned for something like $5 million on $20 million pre-money, but the market pulled her upward. She came back with $10 million on $50 million pre. The investors were excited, and everybody celebrated.
Except now, she was building a different company. The business she had originally envisioned could have been extraordinary at $50 million in revenue: profitable, growing, and sustainable, the kind of machine that generates real wealth for founders and employees over a long period. But $50 million in revenue doesn’t return a $500 million fund. The company now needs to be worth $500 million, maybe a billion,or more for the cap table to work for everyone.
That’s vision creep. The company’s ambition got calibrated to the capital structure, rather than the other way around, and the founder went along with it because every step felt like validation: bigger round, higher valuation, more interest from better-known firms. The market was telling her she was onto something. What she didn’t fully appreciate was that the market was also telling her what kind of company she was now expected to build.
I want to be precise about this: there’s nothing wrong with building a billion-dollar company. Some founders should absolutely be raising big rounds and swinging for massive outcomes. The venture system exists because sometimes the right answer genuinely is to pour gas on the fire and run as fast as you can.
The problem is when it happens unconsciously, unintentionally. Why expect a founder who was confident building a $50 million business to build a $500 million one, when she’s not sure she has the plan, the team, or the stomach for it? The ambition shift isn’t something she chose, but something the capital structure chose for her. Now she’s in a board meeting, and the investors are asking about the path to a billion, and the confidence vacuum opens up, and the systemic misalignment kicks in, and suddenly the Faustian Bundle doesn’t feel like a fair tradeoff anymore.
This is the system: four dynamics, all connected, all feeding into each other. In Part two, I’ll lay out the financial mechanics of what happens next: the Risk Ratchet, the Pref Stack Paradox, and two stories that show what this looks like when it goes very wrong and when somebody gets it right. One of them involves a mattress company you’ve probably heard of; the other comes from an investor who figured out how to make the whole system work in the founder’s favor.
Chris Fenster is Founder and Executive Chairman of Propeller Industries, an 18-year-old embedded finance firm that has worked with more than 1,400 venture and growth-stage companies. This article is adapted from a conversation with Charlie O’Donnell at nextNYC. Charlie’s book Founder Unfriendly: What Investors Won’t Tell You About Getting Funded is out April 28, 2026 from Wiley.
Part II: The Consequences → [coming next week]