10 Common Startup Equity Mistakes That Kill Fundraising Rounds (+ Expert Fixes)

So, you have founded a startup, developed a great product, and built a great team (however small).  Now, it’s time to source funds.

The way a founder approaches equity financing can sabotage fundraising. Most startups are capital-intensive, especially with the increasing need to digitize processes and build digital products, which require a lot of funds and a large workforce. So fundraising is a necessary evil. 

Sourcing for funds may require issuing equity, especially if you are sourcing funds from business investors, venture capitalists, or angel investors and not just friends and family. Issuing equity in your startup is a simple yet tricky way to get a startup business loan with no money. 

Whether you are an early-stage startup founder or a serial startup founder with all the startup wiz, you need to be aware of common startup equity mistakes that can derail your fundraising efforts. Let’s delve into them.

Common Startup Equity Mistakes That Kill Fundraising Rounds

Here are some startup equity mistakes many experts have made and how they fixed them: 

Accepting Money From The Wrong Investors – The “Desperate for a Check” Trap

Floating a business is capital-intensive, and the pressure to secure funding can cause even the most level-headed founders to make costly mistakes. 

It’s easy to fall into the trap of accepting money from any investor willing to write a check at the early stage. But here’s the hard truth: not all money is good money. Having funds to float a business is great, but as a startup founder, you can not receive money from all investors. 

Khushi Agrawal, founder of an e-commerce platform for a vegan lifestyle, Earth Based, thinks that founders should conduct thorough due diligence before receiving investment and signing equity contracts. Accepting money from the wrong person just because the runway is short can lead to signing away excessive control, painful liquidation preferences, or unfavourable board seats. 

Her little bit of advice that can be a lifesaver? Read the fine print! If an investor’s term sheet looks too good to be true, then you should check thoroughly. Maybe it is just too good to be true.

Overvaluing The Company – Unrealistic Valuations Are Costly 

Every founder wants their startup to be worth millions and billions. However, setting unrealistic valuations can backfire. While it might feel like a short-term win, it can lead to major fundraising blocks down the line. 

Gregory Shein, CEO at Nomadic Soft, warns that overvaluing the company may deter potential investors. Investors are sharp and well acquainted with numbers and businesses. They know when numbers don’t add up and won’t hesitate to abandon a deal that feels inflated. 

Adam Garcia, financial advisor and founder of The Stock Dork, has witnessed firsthand how startup equity blunders can derail fundraising. He advises founders to benchmark their valuation against similar companies and assess what the market currently offers. His advice? 

“Look into the market to find a value that makes sense, check it against comparable companies, and think about what the market offers presently.”

Fei Chen, founder and CEO of Intellectia.AI, adds that both undervaluing and overvaluing shares can scare off potential investors. Fei advises founders to work with financial advisors to get an accurate valuation that aligns with market standards.

Aside from the dangers of overvaluation, overvaluing shares can result in pressure to deliver huge growth rates. Investors will expect unrealistic growth targets if your valuation does not align with your traction. Also, raising funds at an inflated valuation can result in painful dilution or the need to accept investor-friendly terms in future rounds.

Here’s what you should do to avoid overvaluation mistakes:

• Conduct thorough market research and compare valuations of similar startups at your stage. 
• Be realistic about revenue and growth projections. Optimism isn’t the only factor that sells to investors. They care about data-backed projections. Show them an accurate, well-thought-out plan.
• Consult experts or advisors who can help you set an attractive valuation to investors without undervaluing your business. 
• Consider future fundraising needs when setting valuations; an inflated valuation can make future rounds harder. Aim for a fair and strategic valuation.

Underestimating The Need For Documentation – Avoid “Handshake Deals”

Documentation is important for clarity and protection. Startups move fast and rush to bring on co-founders and make key hires based on verbal agreements and handshake deals in a bid to secure funding. 

While trust is important in business, failing to properly document agreements can lead to confusion, disputes, unrealistic expectations, and even legal battles. 

It is easy to underestimate documentation and avoid tough conversations and legal agreements in the early days with people who invest in your business and cofounders when everything feels exciting and new and everyone’s vision is on the same page.

Amra Beganovich, founder of Colorful Socks,  calls this phase the “honeymoon period” and warns founders against verbally promising ownership without documenting anything. Let’s find out the dangers of handshake deals:

• Hidden Risks 

According to Tapos Kumar, a finance professional & founder of financeideas.org, “Startup founders often promise equity to early team members with vague emails. For example, the startup may pay 3% or 2% later. These casual promises could become a legal burden if startups grow.”

He advises executives and founders: 

“Never discuss equity without signed paperwork. You should use a simple one-pager outlining vesting terms even before formal agreements exist. You should use a simple one-pager outlining vesting terms even before formal agreements exist.”

• Document Everything – Even With Friends And Family

Kumar advises that proper documentation should be done even with friends and family; startups and family/friends should be treated separately. Family & friends often take investments from personal contacts, and it can be easy to overlook documenting this. Later, these investors may come back to demand unreasonable involvement.

Kumar emphasizes: “Use standard notes and make it clear this is a financial investment, not a relationship chat”

• The Co-Founder Equity Trap 

Do not let excitement blindside you. Khushi Agrawal knows this all too well, “Two (or three, or four) excited co-founders shake hands and split the equity equally, without a vesting schedule. Then, one burns out or bails, and suddenly, a huge chunk of the company is in the hands of someone who’s no longer contributing.”

It can be especially harmful to a business when a huge chunk of the company belongs to someone who doesn’t align with your vision. Do not figure it out later; fix a four-year vesting with a one-year cliff. It will protect your startup from future resentment. 

• Protect Your Startup From The Start

“Handshake agreements do not hold up when the going gets tough.”, Jay Barton, CEO of ASRV, advises. For him, founders should establish unambiguous agreements early and seek the advice of an attorney if necessary. It’s worth the investment.

Sheldon Sutherland, founder of Epoxy Werx, suggests practical alternatives to “handshake equity.” 

“Whether a convertible note, SAFE, or stock option grant, a startup lawyer—or an equity management platform like Carta or Pulley—should track and document everything from day one, always.”

No matter how much trust exists between co-founders, investors, or employees, proper documentation is non-negotiable. Excitement fades, but agreements last. Protect your startup so you don’t have to pay for it later.

Giving Away Too Much Equity Too Early – Another Downside of the “Honeymoon Phase” 

Excitement is always high in the early days of a startup and founders often feel generous when bringing on co-founders, early employees, advisors, and investors. This is known as the “honeymoon phase”, where everything feels aligned, and founders believe rewarding key contributors with large startup equity is a smart move.

However, giving away too much equity too early can be a costly mistake that haunts the startup in later fundraising rounds.

Why is giving away too much equity too early is a grave mistake?

• It Can Hurt Future Rounds 

Deepak Shukla, CEO of Pearl Lemon Accountants, guides businesses through fundraising processes and has experienced just how equity blunders can make or break a deal. “Founders frequently dilute their stake too soon in their haste to close deals, which can turn off future investors who question the founder’s motivation,” says Deepak.

He advises founders to maintain a tight grip on their company’s valuation and dilute only when necessary. Having well-documented processes is critical to ensure everyone’s expectations are fulfilled. Establishing clarity early on is vital. 

“When co-founders don’t clearly define their roles and equity distribution upfront, it can lead to conflicts and inefficiencies down the road”, Deepak adds.

• Overdiluting Equity Too Early Reduces The Founders’ Share Disproportionately 

For Connor McDougall, CFO at Mapleworthy.com, a common mistake startups make is over-diluting equity early in their lifecycle, which not only reduces the founders’ share disproportionately but also makes the venture less appealing to future investors who may perceive limited growth potential. 

To avoid this, startups must carefully strategize their funding approach to balance immediate needs with maintaining enough equity for future growth and investment rounds. 

Devin Ramos, founder of Simplifi Real Estate supports this notion, informed by experiences of navigating equity issues through over eighty property transactions and capital raises. 

For Ramos, desperate entrepreneurs dilute ownership by giving too much equity to early investors, which undermines future leverage and control. 

To avoid this, Devin Ramos gives practical advice:

“Use convertible notes or SAFEs to delay valuation negotiations until later rounds. Limit board seats or voting rights to maintain founder independence. Consult legal and financial experts that can help structure deals that maintain equity”

While giving equity away may seem like a great way to attract top talent or secure funding fast, it can create challenges down the road regarding ownership and control of the company.

Evan Tunis, president of Florida Healthcare Insurance, a licensed health broker for 20 years, advises founders to really think through how much equity they’re willing to part with at each stage of growth and only offer what’s truly necessary for the company’s success. Evan offers practical advice: equity distribution should align with growth. 

“As the business grows and evolves, it’s also a good idea to revisit and adjust equity plans to keep everything balanced and on track.”

• Giving Too Much Equity Too Early Without Clear Vesting Schedules is a Trap

While giving away too much equity too early isn’t a rational decision in itself, not using clear vesting schedules makes the situation even worse. 

“Startups mistakenly grant too much equity too early to advisors or early employees without clear vesting schedules.”, according to Moti Gamburd, CEO at CARE Homecare. He warns that startups that give away equity too freely early on may struggle to attract investors later due to an overly diluted cap table.

It’s easy to be generous when launching a startup, but equity is your most valuable asset. Being strategic about how and when you distribute ownership ensures long-term control, healthy growth, and smooth fundraising in the future.

Also Read: Artificial Intelligence in Fintech: How Machine Learning is Powering Fraud Detection and Risk Management

Rushing The Fundraising Process – Faster Doesn’t Always Mean Best 

It is easy to get carried away with the momentum and zeal to get your startup up and running. But faster isn’t always better. Prioritise partnering with the right investor, venture capitalist, or angel investor.

Johannes Hock, president of Artificial Grass Pros, reflects on their early days at Silvaner Capital:

“At first, the focus was on getting funding quickly, but we didn’t fully understand the business subtleties. Now, I take a more comprehensive approach to prevent missing red flags that should have been obvious.”

Devin Ramos, founder of Simplifi Real Estate, has seen the consequences of hasty fundraising firsthand:

“Founders either rush through pitches or drag out fundraising unnecessarily. Both approaches waste time and credibility.”

He offers three key strategies for a balanced fundraising process:

• Make a targeted list of investors: Identify companies relevant to your sector and stage of life.
• Practice repeatedly: Cut pitches to 10–15 minutes, with key differentiators and data-driven traction.
• Establish deadlines: Make the round urgent by restricting the round’s duration.

Overly Generous Advisor Equity Grants – The Perfect Formula For Dead Equities 

Avoid being overly generous to advisors with equity. The advisor stack problem occurs when a startup does not set milestones for advisor shares. 

The “advisor stack problem”, as Tapos calls it, can be critical. Tapos Kumar, a finance professional & founder of financeideas.org, paints a vivid scenario: “Imagine your startup gives away 0.5% here and 1% there to advisors. Suddenly, 4% of the company is tied up in people who aren’t actively helping.” 

How can this particular equity mistake be averted? Tapos offers a simple, uncomplicated solution: Milestones! 

“The advisor shares milestones, such as 0.25% now and 0.75% if you hit this milestone.” However, Tapos personally advises that advisors be paid cash for work when possible. 

Nathan Mathews, PropTech CEO and founder of Roofer.com, the first vertically-integrated AI-powered roofing startup, agrees, 

“It seems small when you are handing out 0.25% here or 0.5% there, but by the time you have got ten of those on the cap table, you have burned 3–5% of your company for people who might have shown up to two calls. 

That killed one of the fundraising rounds we were chasing before this one. Potential investors flagged it, asked tough questions, and then the deal stalled. That delay cost my company about three months on the runway and even slowed hiring by six weeks. Every fraction matters, especially when Venture Capitalists start checking the numbers.”

Mathews notes excitement and the need to build momentum by pulling in names as a factor that might blindside startup founders into giving away too much equity to advisors.

Mathews offers a fix similar to Kamur’s;

“One fix that worked for us? We moved all “advisory” or “friend” equity into a structured milestone model like no equity introduces hires, Y intros, or Z deliverables. That way, the paper reflects actual impact, and investors can trust what they buy into. Clean cap tables do not raise rounds by themselves, but messy ones kill them.”

It is a clear path to follow as equity given to most advisors may result in dead equities. Zarina Bahadur, founder of 123 Baby Box, narrates how she navigated a related situation, 

“In our pre-seed phase, someone asked for one percent in exchange for a few hours of mentorship each month. At the time, that felt like a fair trade. Two months later, they disappeared. We were left with dead equity. That one percent could have gone to a growth advisor or into an ESOP for future hires.”

Bahadur suggests that equity be earned: 

“These days, equity is earned. I offer advisor shares with strict performance gates and a 12-month cliff.”

Jason Rowe, founder of Hello Electrical, offers a similar suggestion but emphasizes documentation, 

“I suggest founders create a detailed Equity Distribution Plan which links milestones to its components for avoiding inequities. Equity vesting schedules enable employees to build equity wealth gradually, so they do not receive enormous amounts before their actual achievements.

Companies should delay giving substantial equity grants when they don’t have concrete evidence about the value their team has added through new customers or product developments or by key personnel hiring.” 

A clean cap table is essential for raising capital. Investors want to see that equity has been strategically allocated, not wasted on advisors who contributed little. By using vesting schedules, performance-based grants, and clear documentation, founders can avoid dead equity and keep their startup investor-friendly.

Not Having Clear Vesting Schedules 

According to  Evan Tunis, President of Florida Healthcare Insurance,  “Vesting schedules are a way to outline when someone will fully own their share of equity in a company. Usually, this happens over time, with equity vesting in chunks—often yearly. It’s a win-win for both the company and the individual, helping ensure everyone stays committed to the company’s success.”

However, founders overlook it despite it being a beneficial necessity. “Some startups overlook the importance of setting clear vesting schedules for employees. This can become a problem if someone leaves early and takes more equity than expected.”, states Evan Tunis. 

Founders need to establish fair and transparent vesting schedules with their team early on to avoid complications over time.

Fei Chen, CEO of Intellectia.AI and co-founder at Aurora Mobile, has a bit to say about this after his experience leading Aurora Mobile to a successful NASDAQ IPO. He believes not implementing proper vesting schedules with cliffs for co-founders and employees can lead to equity mismanagement.

His advice? “Use standard vesting schedules (such as 4-year with a 1-year cliff) to ensure long-term commitment.”

Oliver Morissey, founder of Empower Wills and Estate Lawyers in Sydney, Australia, emphasizes the dangers of not having clear vesting schedules: “Partners or early employees may leave and take equity with them if there is no clear vesting schedule for equity.” 

He talks about a particular scenario where improper vesting schedules became very costly for the startup. “One of our clients had to pay about $17,800 to restructure the agreement after an early hire left, and they had to buy back equity.” 

Not Structuring Equity to Accommodate Business Changes.

While founders may collaborate early on because they have similar visions and directions, it might not always remain the same. Mark Hirsch, co-founder of Templer and Hirsch, has worked closely with business owners and new companies as a lawyer and knows this firsthand.  

“Founders often split up, and suddenly, someone who isn’t helping has a big stake. That’s a terrible way to raise money.”

Hirsch offers a foolproof plan for this, 

“Make sure the terms of the grants are clear, the number of early grants is limited, and the plan includes room for new employees and investors in the future. Keeping your cap table clean and simple tells buyers a lot about making decisions.”

Skipping vesting schedules is risky, as you and your cofounder may not always remain on the same page. It is vital to foolproof your start for any changes in business direction. Raoul P.E Schweicher, Managing Partner at MSadvisory, offers some perspective:

“Founders who skip vesting schedules risk giving free equity to people who bail early. I’ve seen cases where a co-founder left after 6 months but kept 20%, killing morale and making investors question the team”

Aside from creating dead equity, when a team member exits with equity, it may lead to tension that stifles productivity and resentment, as well as deters potential investors who see it as a red flag. This is what James McClure serving as General Partner at Antler Australia says, 

“One of the most significant pitfalls is allowing a co-founder to retain a large equity stake after they’ve exited the company. This ‘dead equity’ can create tension among remaining team members and deter potential investors who may see it as a red flag.”

Always structure equity distribution in a foolproof way for future business direction changes. 

Not Setting Aside Enough Equity for Future Hires (Option Pool).

While it is not advisable to distribute equity early on to prepare for future fundraising rounds, keeping equity aside to attract top talents is a strategy you might want to consider.  Shaun Bettman,  Chief Mortgage Broker at Eden Emerald Mortgages, has been in the finance world for over 2 years, and he explains this strategy utterly, 

“First, giving away too much equity too early is a big mistake. Founders often think they need to offer large equity stakes to attract talent or investors quickly, but this can backfire. It’s better to set up an equity pool that focuses on future growth and keep some for later investors and hires.” 

Cody Carlson, finance expert and spokesperson at Car Finance Today, adds that founders forget to allocate enough equity for their future hires. He suggests, 

“If your option pool is 5% when it should be 15%, VCs will force a painful top-up right before closing—and that dilution comes from you. Build a long runway into your cap table. It’s a strategy, not an afterthought.” 

Underestimating the Tax Implications of Equity Grants – The Tax Trap!

Offering equity to key talents and hires can help motivate team members and employees and can help attract top talents. However, founders and executives often fail to account for the tax implications of equity grants. This can be easily overlooked but it does have serious consequences. 

Lisa Richards, CEO and Creator of the Candida Diet says that; 

“Equity without tax planning is like giving someone a financial grenade pin—it’s a mistake that could have been avoided from day one with a bit of capital structuring.”

It was a painful lesson she learned early on as she tried to build her startup business. During her startup’s first real funding round, her founding team provided attractive packages to attract top talents. However, they didn’t fully understand the tax burden that would fall on her when they exercised the options. The situation didn’t end quite well for Lisa Richards. 

“It could mean a few key team members hitting the wall when they were hit with unexpected tax bills they couldn’t afford — some with liabilities of 30-40% of their option value. This not only put a financial strain on the team but also was detrimental to morale and trust during a key growth phase.”

But Lisa Richards adopted a solution at her startup, 

“Now, we partner closely with tax specialists to set up employee-friendly equity arrangements such as early exercise provisions with 83(b) elections. We also educate all option recipients in mandatory financial planning sessions. 

For our previous funding round, we implemented a ‘Tax Impact Calculator’ which tells employees exactly what they’ll experience as they go  through different valuation scenarios — transparency that helped us achieve a 65% acceptance of options.”

Tapos Kumar, finance professional & founder of financeideas.org, suggests automating reminders for new hires to avoid the “tax trap”. He recommends HR software tools. 

“You can use HR tools like Pulley or Carta. Then, file 83(b) via certified mail within 30 days of the grant.” 

Bottom Line 

You may be wondering how to raise funds for a start-up or how to navigate equity financing. 

Always recognize that getting all the help you need is a brilliant start. Seek legal help and utilize structured, documented ways when issuing equity to investors. Fundraising software like Angellist, Fundable, or Foundersuite to improve structure and efficiency in fundraising and investor relations and attract credible investors. 

Market research, documentation, and well-structured vesting schedules are uncompromisable.