GTM Navigator: Cap Table Clarity - Getting Real on Valuations

GTM Navigator is our ongoing series where we break down the essential components of nailing the right go-to-market strategy.

In this episode, Daria Davydenko, Chief of Staff at Fin Capital, sits down with Pauline Chan, Principal at Pilot, to unpack the often-overlooked but crucial topics of valuation, cap table management, and investor strategy.

Drawing from her experience in investment banking, venture capital, and as a fractional CFO, Pauline breaks down how tech companies are valued, what drives revenue multiples, and the nuances between strategic and financial investors.

Key Questions Discussed:

• How are companies valued in tech from both a venture and M&A perspective
• Which valuation methods are most relevant for high-growth, early-stage companies?
• What drives revenue multiples, and how do business models and gross margins influence them?
• What are the common mistakes founders make when fundraising and managing their cap tables?
• How should founders approach cap table construction, investor mix, and equity allocation?
• When should founders prioritize strategic investors over optimizing for valuation?
• What advice can help first-time founders navigate valuation negotiations effectively?

Transcription (edited for clarity):

Daria (00:00): Welcome to the Go-to Market Navigation by Fin Capital, our ongoing series where we break down the essential components of nailing the right go-to market strategy. I'm Daria Davydenko, Chief of Staff at Fin Capital, where I work across our portfolio to support strategic initiatives, operational scale, and capital planning. Today, I am thrilled to be joined by Pauline Chan from Pilot to talk through one of the most critical, and often misunderstood parts of building a high growth company, how to manage your cap table and negotiate your valuation. This is such a foundational topic for early stage founders and one that can shape everything from the team incentives to a long-term fundraising success. I've been really looking forward to this conversation. Welcome, Pauline.

Pauline (00:52): Hi everyone. Pauline here. I'm a Principal at Pilot. Pilot is a growth stage fintech company backed by Sequoia and Index. We help founders from closing the books to finding taxes on a more strategic level on a fractional CFO side, which is where I sit. I've had financial experience for more than a decade, spent quite a number of years in investment banking Goldman's and Morgan Stanley's M&A a team. I have a lot of experience with valuation, helping founders think about M&A and IPOs. Before Pilot I was also a VC investor, investing from seed to series B - seeing thousands of founder pitches & their financials. So, would really love to share my experience with everyone today.

Daria (01:39):That's awesome. Thank you so much. Well, let's dive into some of the questions that we have today for you. Let's start with the most basic question, how companies are valued, especially in tech. If you don't mind just maybe walking us through both from the venture perspective and M&A lens as well.

Pauline (01:58): Let's start with a public company perspective and how we think about valuation. So this is to demystify a lot of questions that founders have. When you actually go to the M&A stage, investment bankers would use a method, what we call the football field, that would comprise of basically four types of valuation methods. Number one is discounted cashflow, known as DCF. Second is public comparables, public companies that trade similar to you. The third is what we call the private M&A deal comms that we use. Then the last one is leveraged buyout model. In the tech industry, the most relevant metrics is actually public comparables and also private deal comps - I would say because a lot of them might not be profitable yet or high growth. Generally, when we were in investment banking, that's the weak analysis that we used to do for all of our clients. This is also very relevant when we come to venture where how a lot of VCs think about your multiples or how they think about your valuation would directly be relevant to multiple revenue multiples, and happy to talk about what drives revenue multiples, but I'm going to pause here and see Daria of any questions.

Daria (03:18): No, that's awesome. Do you have a favorite method to value a company? One that you always rely on or does it really depend on the company?

Pauline (03:28): Yeah, to me there's a quick backup way to think about valuations. When a founder tells me what their business is. I think the three things to think about would be, how a company monetizes their gross margin, revenue growth rate, and how they monetize. Actually the key metric of that really determines the revenue multiples. More recurring nature of revenue versus a more transactional tick rate usage base can trade very differently. I'll give you an example, like Uber, DoorDash, everybody knows it's a tick rate. Marketplace model is usually traded between 1-3X, 1-4X net revenue in the public sense. For more of an Adobe, more like 90% gross margin relies on recurring revenue, they could be traded in the teens range. So, the magnitude could be 3-4X depending on how you monetize cash is the same. But this is something for founders to think about when you do your pricing model and strategy. And I think the second is on gross margin where what I mentioned like Adobe as an example. OpenAI that’s what we call the SaaS type of margin in the 70 to 90% rate

That leaves you with a lot of room for your fixed cost to operate versus a more of a service type of model in the 50% range. So that could actually affect valuation, as you know. I would say lastly, on revenue growth rate, a lot of VCs really want to see great revenue growth rate, so that is the model that we're looking at. Some investors even look at a 3X type of explosive growt, so that is also one of the levers. In public company sense, once you're a billion dollars of revenue, very healthy metrics is still growing at 30%. But when you're earlier stage, I think the room for growth is actually just more massive.

Daria (05:29): Yeah, that makes a lot of sense. I know you touched on OpenAI. Would you mind quickly maybe walking the listeners through the OpenAI evaluation example?

Pauline (05:40): OpenAI is a very interesting stage and interesting company. I think number one is there is a reason why OpenAI offers a subscription model where 90% of the users are paying a month to month instead of usage based. That's also why they're valuing a certain multiple. I would say one of the biggest levers for OpenAI valuation is their explosive revenue growth rate. So I think in the past, they started monetizing in 2021 and now they're in 2025 and 2021, they were only making around 20 to 30 millions and now they're projecting close to 13 billion this year.

Daria (06:24): Wow.

Pauline (06:24): And they're growing at seven or eight times every single year. If you think about what I just mentioned, for a healthy 1 billion public company growing at 30% and now last year they reported $3.7 billion revenue at that level and they're still growing at 7X, 3-4X. That is what we call explosive growth. Therefore there are multiples that you can imagine is more than the teams that we imagined it could more so be in the 30-50X range. It's mostly I would say one of the biggest drivers on revenue growth.

Daria (06:59): When you were a VC, what are some of the great examples where the founders came prepared and were able to position the company with a solid financial framework? Maybe if you could tell why you think it's important and what are some of the common mistakes that you see founders make?

Pauline (07:15): I think this is a great question. I always say that great founders, they don't just recite metrics, they really explain them. When I was in VC and very commonly very impressed with founders that came really experienced or with a finance background, they're usually really sharp on metrics. The most important thing is they can preempt what investors are likely to ask and already explain whether it is, for example, a one-off hiccup, whether it is a more structural trend, and what the action plans are that they already have to rectify those trends.

Those are usually the founders that are really pencil sharp, very thoughtful.That is, I think, one of the traits that I've seen that is very, very important. An example could be like, oh, if their gross margin drops by 5% consistently for three months, they should be able to explain whether this is a one-time pricing change or this is more of a structural change.

Daria (08:16): Yeah, absolutely agree. I feel like that the grounded bottom-up analysis is crucial and being able to explain to the investor why your spend is what it is and what are some of the levers you have to maybe improve your spend; it's going to be important. It instills confidence in the investors in your company and making sure that you understand what you're doing, what the metrics are showing you, and how to drive the company forward. Let's move on to some of the common pitfalls that founders should pay attention to when thinking about fundraising. I think it's one of the most important work responsibilities that founders have - is raising capital for their company. So what are some common pitfalls that you have seen the founders fall into? Especially early founders.

Pauline (09:08): There are probably a couple. I would say there are three things that I've seen. Number one is, especially for first time founders, every investor, they call themselves early stage investors, but it can mean pre-seed to seed investors, series A to B. They're all early stage, but they're all looking for very different types of metrics, different types of businesses. So, really understanding the different stages of VCs and what their theses are is very important. Number two is really a lot of them, some founders, they assume, “oh, you talk to an investor and they say no, and then it's a forever closed door.” But actually, ifyou're too early for a particular investor group, instead of being disappointed and really thinking the door is shut, it is always a great practice to include a potential investor update for everyone that you've spoken to.

A lot of times and on the street you hear about, “oh wow, who and who got preempted by some prominent VCs.” That's because the founders have this great practice of keeping everyone updated and when they hit certain metrics, VCs will extend their arm when this is really a fit for their investment thesis. I think number three is just chasing high valuation without really understanding the milestones or the metrics that you need to hit. A lot of times, I think founders really want to figure out whether this might be a short term when you get to that valuation, but if you don't grow into it with the amount that you raise and with the time that you have, this might actually be what I call a sword with two edges, where you might actually lose more ownership going down the road when you raise the down round potentially. So, really thinking about the right valuation, what market environment you're in is actually very important.This is firsthand learning from really real friends, founder friends.

Daria (11:07): Yeah, totally. How should the founders think about the cap table construction and investor mix? Are there any best practices or red flags that you could share?

Pauline (11:18): Cap table strategy is a really comprehensive topic that we can think about.It's not just about ownership. A lot of times it's the momentum and whether you can survive with the cap table that you have. So a few things that you want to know. I think number one is what we just mentioned, there’s different investors - more of the institution type, institutional type of strategic versus financial VC. So, you want to know whether you are getting someone that could be a potential acquirer on the strategic side, or you are getting money from a financial investor that are in it with you, and they want to make return. Number two is, especially for healthcare startups, we very constantly see angels investors on the cap table. They're usually really great for early checks and help you get the grant running, but sometimes they can be kept out and they don't usually follow on, especially if you need a lifeline.

So, there's a certain strategy that you want to really think about it. The third type is family offices, they can be very flexible but sometimes can be slower. A lot of times founders neglect the last type that I'm going to talk about, which is the debt of non-dilutive type of capital. Sometimes when you need a bridge cashflow, it can be very useful. A lot of actually big VCs, they have a separate, for example, SaaS revenue type of non-dilutive financing, but sometimes founders also need to be cautious with some of the confidence that it might have and some of the terms of these type of capital. For cap table construction, it's important to think about what time investors to take money from. What is the time spent that you have with that amount of money raised, whether the next stage milestones that you need to hit and ultimately think about the signaling risk that you might send to investors. Some investors talk about party rounds, some investors talk about, oh, they're angels that are really strategic. The cap table can signal different messaging to investors. So being thoughtful about it, it'svery important.

Daria (13:28): Yeah, I agree with you especially about the strategic versus financial VCs. Sometimes some VCs, they're just giving you the check and then they're less involved with your startup, but then there are others who are helping you as go to market strategy thinking through some of the operational items, recruiting. So we at Fin Capital are definitely helping founders through all of those milestones.

Pauline (13:52): Actually, speaking of that, I would say for the institutional type that we mentioned, strategic financial, I almost always tell founders or close friends that sometimes you want to raise from a really big dominant strategic, more financial VCs, but then I always think it's great to have one or two more co-investor type of VCs on your cap table because a bigger, you are a bigger chunk of their whole portfolio. And actually, a lot of times they were able to introduce your customers; they were able to really help with hiring finance folks. Having those can be very, very helpful. Sometimes, especially second time founders, they usually tell me they prefer that, especially in the early stage.

Daria (14:40): Could you talk a little bit about the party rounds? What are they and why are they called party rounds?

Pauline (14:48): Yeah, usually, well, through a lot of founders, there's something called the power law that you might hear a lot of VCs, they kept saying the power law and power law basically means that a small amount of your portfolio is going to generate the majority of the return for your fund. And so for you can think about Sequoia of the world, they usually try to buy up ownerships when you continue to raise your series A, B, C. And so because they foresee that that is going to be the major return of their fund. And so when I say party round is usually you see 10, 20, 30 investors in one round and they can be on different, because a lot of founders nowadays raise on YC saves, and so they can be a, and so those generally could mean that oh, a major investor, they don't want to take up too much ownership and they might not have as high a conviction versus another investments where they are aggressively trying to push out other investors and want to own more. And so therefore sometimes you see what we call a clean cap table is like the same investors continue to buy up ownership continuously, progressively on different rounds. And so there is no grade or not great, I think party rounds of its own merits versus the other round. But this is generally how the outside world and how the VCs view a cap table.

Daria (16:15): Got it. What are common mistakes, I guess, have you seen this other early stage founders when they're managing their cap tables? Could you maybe share some examples?

Pauline (16:28): I've worked on a lot of M&A for founders,I've helped them sell to public companies while at Pilot. I've actually seen a couple of mistakes. I would say the biggest one is, for example, a founder has never received a couple hundred thousand wire from investors from three years ago. When we do diligence during M&A, and we're trying to match their books versus Carta and it's not really matching and that can create, you can imagine, a lot of legal questions, a lot of financial questions. I would say really reconcile your cap table versus your accounting records. There are a lot of tools that are great, but I would say they might not have very good operational hygiene. Ultimately, there's still a tool, a platform, so always reconcile. Also, some fractional CFOs that you can use that will help founders know exit scenarios, because when you raise on SAFEs, on different caps, valuation caps, you want to know at what valuation the cash outcome is going to be. Understanding that is also very, very helpful when you think about your exit.

Daria (17:50): Another example, we come across is when founders, they give away too much equity in the pre-seed or seed rounds, either by raising too much capital too soon or mispricing risk or not understanding the implications of large option pools or SAFE conversion terms. Then that can limit their flexibility on later rounds or leave founders with less than 20% by series B, which is a tough long-term alignment for the company. Another one, which is I think is pretty crucial, is not setting up a proper option pool early. So either they forgot to do it or they create one that's just way too small. And when it's time to hire top talent for the company to drive growth, they don't have enough room without having to go back to the board or the investors and ask for additional options.

Pauline (18:52): It's generally just for the founders, so every round you expect to lose between 10 to 20%, which is very common because that's what we mentioned. A lot of investors love power law. By series B, if you raise your pre-seed and thinking about how much ownership you give up, you still want to align your incentives, want your investors want your incentives to align with them. And so they want you to still own a sizeable ownership by later stage. Therefore, if you think about ownership, you already lose that amount. And so every subsequent round you need to lose 20%. That's a big ownership stake. And so what you said Daria, thinking about that, it's so important.

Daria (19:40): Yeah. I mean speaking about equity, how would you think about equity allocation between founders, early employees, advisors and investors? What advice would you give to some of their early stage founders as they're thinking about this?

Pauline (19:58): Generally speaking, I think from an investor perspective, they always like to see there is one controlling founder that owns a stick that they're able to make decisive decisions. When the scenario came with if there a lot of co-founders and maybe everyone owned the same amount, I think it is a good exercise to think about who are, if that person leaves a company, the company might not survive and therefore carefully thinking about their cap table. It's very important because that goes back to every round, you lose 20% and so you still want to have a founder that can have voting and can decide the company's future. I think one of the very common examples that people don't think of is actually for Google and for Meta, Mark still has controlling voting rights because they're different share costs. Thinking about really having the voting rights and down the road, it's one of the considerations that founder can think about.

For early employees, I would say it's always important to incentivize your employees or people who work for you in the correct way. Organization design is one of the most important factor of whether the companies can go a long way, and so a warning them accordingly. Very important I think. And VCs, as you know, every round they come in, they want to own 10, 20%. Finally, the advisory share, I would say I would prioritize early employees, co-founders and VCs first, and then maybe advisors or maybe some other law firms who work on your deal, but definitely prioritize early stage employees and VCs.

Daria (21:52): Is there any advice you would give to first time founders who are navigating valuation conversations for the first time?

Pauline (21:59): I always tell founders, I think there are two things. I think number one, in terms of negotiation, always leave it up to the VC to decide. A lot of experienced founders they know, they will say, let the market decide the valuation. This is to generate a relatively competitive dynamic for VCs to really think hard about the valuation. But more importantly, for a founder themselves, I always think it'svery important to know which public company that you've benchmark to and very methodically think about, okay, what are their gross margin? What do they spend operating expenses on sales and marketing and on professional fees and all the different important drivers so that this biggest perfect public companies a lot of times have perfected the financials. You want to know which are your closest role model competitors that you want to work to us and then see where you are at.

From there, you know that, okay, when you're public, when you're at that scale, when you're growing at that rate, that is how there are being valued, that's their revenue multiple and then compared to yourself and think about what's a reasonable range. It's always healthy that you have an internal estimate or a range and then you see how the investors price.

Daria (23:20): Love that, love that advice. The last question to wrap this up, when is it worth giving up more equity for a strategic investor versus optimizing for valuation?

Pauline (23:36): Number one, think about what kind of businesses thatyou're in. For example, in healthcare, I've seen businesses where they think that their very logical strategic buyers are only two or three big players in the industry. In those scenarios, it might actually be worth it that you partner with them early, you started to talk early, so then instead of them talking to your other competitor, which actually did happen when I was in VC - one of our early portfolio got sold to Lyft because there's just competitive dynamics of whether they will talk to you or talk to your competitor. So I think in that scenario, really think about the pros and cons and talk to the strategic investors early.

I would say in another scenario, you still want VCs to incentivize to invest in you, and there is a power law. Sometimes if you're doing well and growing at 300%, then you think about whether that is a right valuation and whether you want to give up more ownership. But if you're not yet cashflow positive, not close to breakeven and still burning, then there are pros and cons in whether you want to get some bridge round, some of the lifeline that we call it, so that you can reach to the next milestones that you want to get. In that scenario, maybe consider giving up ownership. It is always the pros and cons and therefore we mentioned knowing your evaluation, knowing how you compare to a public company is actually really helpful.

Daria (25:18): Amazing. Love the advice, and thank you so much for your time.

Pauline (25:24): I wanted to add a last thing, when we talked about gross margin and cost and what is a one-time hiccup vs what is structural - I actually have worked with companies where they're negative, they have a negative gross margin and they didn't know you should have a positive growth margin. So, eventually when the company scales and your sales and marketing and GNA doesn't account for that much anymore, and you can be cashflow positive. It’s so important to really think more about your growth margin.

I'll give you an example for AI companies, which a lot of them use TBTs model, OpenAI model, a lot of founders that I've heard, they migrate to open source and so that they want to get back their growth margin from and the 70% range to 90% range. And so there are different levers that founders can pull on gross margin and founders should really actively think more about that.

Daria (26:22): Got it. No, definitely agree with you. The gross margin is very important for the overall health of the company and managing the bottom line. Well, thank you so much Pauline. This was amazing conversation. I really enjoyed it.

Pauline (26:41): No, thank you so much, Daria, I loved the conversation. I hope to see more coming and really great chatting today.