Cap Table 101: How Startup Equity Really Works
Your cap table (capitalization table) is the spreadsheet that determines who owns what percentage of your company.
It starts simple and gets complicated fast. Understanding it is non-negotiable.
What is a Cap Table?
A cap table tracks:
- Who owns shares (founders, employees, investors)
- What type of shares (common, preferred, options)
- How many shares each party holds
- What percentage of the company each owns
Basic Cap Table Example
Day 1: Founding
| Shareholder | Shares | % Ownership | |-------------|--------|-------------| | Founder A | 5,000,000 | 50% | | Founder B | 5,000,000 | 50% | | Total | 10,000,000 | 100% |
Simple. Two founders, equal split, 10 million authorized shares.
After Creating Option Pool
Before raising, you'll create an option pool for future employees:
| Shareholder | Shares | % Ownership | |-------------|--------|-------------| | Founder A | 5,000,000 | 42.5% | | Founder B | 5,000,000 | 42.5% | | Option Pool | 1,764,706 | 15% | | Total | 11,764,706 | 100% |
Wait—founders went from 50% to 42.5% each?
Yes. The option pool dilutes everyone equally. This is called pre-money option pool creation and it's standard.
After Seed Round
Investor puts in $1M at $4M pre-money valuation ($5M post-money):
| Shareholder | Shares | % Ownership | |-------------|--------|-------------| | Founder A | 5,000,000 | 34% | | Founder B | 5,000,000 | 34% | | Option Pool | 1,764,706 | 12% | | Seed Investor | 2,941,176 | 20% | | Total | 14,705,882 | 100% |
Investor owns 20% ($1M / $5M post-money).
Types of Stock
Common Stock
- What founders and employees hold
- Lowest priority in liquidation
- Gets whatever is left after preferred shareholders
Preferred Stock
- What investors get
- Liquidation preference (get paid first)
- Often converts to common at exit
- May have anti-dilution protection
Stock Options
- Right to buy shares at a set price (strike price)
- Must be exercised to become actual shares
- Typically vest over 4 years with 1-year cliff
Restricted Stock Units (RSUs)
- Promise of shares, not an option to buy
- No strike price; just receive shares when vested
- More common at later-stage companies
Understanding Dilution
Dilution happens whenever new shares are created:
- Fundraising rounds
- Option pool expansion
- Convertible notes converting
- Warrant exercises
The Math
Your New % = Your Shares / New Total Shares
If you own 5M shares out of 10M (50%), and the company issues 2.5M new shares to an investor:
New % = 5,000,000 / 12,500,000 = 40%
You still have 5M shares, but now they represent 40% instead of 50%.
Key Cap Table Concepts
Fully Diluted Shares
Total shares if everything converts:
- All common stock
- All preferred stock (as-converted)
- All outstanding options (vested and unvested)
- All warrants
- Any convertible instruments
This is what investors use to calculate ownership percentages.
Vesting Schedule
Standard is 4-year vesting with 1-year cliff:
- Cliff: No shares vest until 12 months
- Monthly vesting: After cliff, shares vest monthly
- Acceleration: Some shares may vest immediately on acquisition (single/double trigger)
409A Valuation
IRS-required independent valuation to set option strike prices. Usually:
- 20-30% of last preferred share price (early stage)
- Rises as company matures
- Must be updated annually or after material events
Common Cap Table Mistakes
1. Equal Founder Splits Without Vesting
Two founders split 50/50. One leaves after 6 months.
Without vesting: Departed founder keeps 50% With vesting: Departed founder keeps ~12.5% (6/48 months)
Always use vesting. Always.
2. Oversized Option Pool
Investors want large option pools (dilutes founders, not them). Standard is 10-15% at seed.
If investor demands 20% option pool, negotiate or factor it into the valuation.
3. Promising Equity Without Paper
Verbal promises of equity aren't binding. Every equity grant needs:
- Board approval
- Stock option agreement
- 409A valuation
4. Not Understanding Liquidation Preferences
If investor has 1x liquidation preference and company sells for $10M:
| Scenario | Investor Gets | Founders Get | |----------|---------------|--------------| | Investor has $10M preferred | $10M | $0 | | Investor has $5M preferred | $5M | $5M |
Liquidation preference means investors get paid back first.
5. Too Many Small Investors
20 angels with $25K each = 20 signatures needed for everything. Consider SAFEs or a lead investor to consolidate.
Cap Table Red Flags for Investors
What makes investors nervous:
- 🚩 Single founder with 100% pre-funding
- 🚩 Unvested founder shares
- 🚩 Previous investors with unusual terms
- 🚩 Large option pool already granted (no room for new hires)
- 🚩 Complicated cap table with many small holders
- 🚩 Outstanding convertible notes at low caps
Model Your Cap Table
Use our tools to understand your equity:
- Equity Calculator - Calculate option values
- Dilution Simulator - Model funding rounds
- Runway Calculator - Plan fundraising timing
Key Takeaways
- Start with vesting - protect against founder departures
- Know your fully diluted shares - that's real ownership
- Option pools dilute founders - factor into valuation negotiation
- Liquidation preferences matter - especially in down exits
- Keep it clean - complicated cap tables scare investors
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