Deal Terms
Last updated
Quick Answer
Equity held by individuals who are no longer contributing to the company, creating a drag on the cap table and reducing available equity for active contributors.
Dead equity refers to ownership stakes held by people who are no longer actively involved in building the company — departed co-founders, early advisors whose engagement ended, former employees who exercised options, or early investors with small, passive positions. While these shareholders have legitimate ownership rights, their equity reduces the pool available to recruit, retain, and motivate the people actually doing the work.
In Practice
The startup's cap table showed 20% dead equity split among three departed co-founders and two inactive advisors. This made it harder to recruit a new CTO, as the available option pool was too small to offer competitive equity packages.
Why It Matters
Excessive dead equity is a red flag for VCs because it signals potential governance issues, reduces founder motivation, and limits the company's ability to attract talent. Addressing dead equity proactively strengthens the cap table for future fundraising.
VC Beast Take
Vesting schedules are the primary defense against dead equity, but they don't help when fully vested co-founders leave. Some investors now require cap table cleanup as a condition of investment, negotiating buybacks or restructurings to minimize dead equity.
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Dead equity refers to ownership stakes held by people who are no longer actively involved in building the company — departed co-founders, early advisors whose engagement ended, former employees who exercised options, or early investors with small, passive positions.
Understanding Dead Equity is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
Dead Equity falls under the deal-terms category in venture capital. This area covers concepts related to the financial and legal terms that define investment agreements.
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