What is a Cap Table?

A capitalization table, commonly called a "cap table," is a detailed breakdown of a company's ownership structure, showing who owns what percentage of the company through shares, options, warrants, and other securities. Cap tables are essential tools for founders, investors, and employees to understand equity distribution, dilution effects, and the potential value of their stakes in the company.

What Is a Cap Table?

A cap table is a spreadsheet or database that tracks all securities issued by a company, including common stock, preferred stock, stock options, warrants, and convertible securities. It shows the ownership percentage of each stakeholder and how ownership would change under various scenarios such as new investment rounds, option exercises, or liquidity events.

Purpose and Importance

Ownership Tracking: Shows who owns what percentage of the company
Decision Making: Helps determine voting rights and control
Valuation Analysis: Critical for determining equity value and dilution
Fundraising: Essential for investor due diligence
Exit Planning: Shows how proceeds would be distributed
Equity Compensation: Tracks employee stock option plans

Key Stakeholders

Founders: Track their ownership dilution and maintain control
Investors: Monitor their ownership percentages and returns
Employees: Understand the value of their equity compensation
Board Members: Make informed governance decisions
Legal and Finance Teams: Ensure compliance and accurate reporting

Components of a Cap Table

Common Stock

Founder Shares: Typically issued to founders at incorporation
Employee Shares: Issued to employees through stock purchases
Advisor Shares: Granted to advisors and consultants
Common Rights: Voting rights, residual claims on assets

Preferred Stock

Preferred Stock Features

• Series A, B, C, etc.: Different rounds of preferred stock
• Liquidation Preferences: Priority in exit proceeds
• Anti-Dilution Protection: Protection against down rounds
• Dividend Rights: Preferential dividend treatment
• Conversion Rights: Can convert to common stock

Stock Option Pool

Reserved Shares: Shares set aside for employee grants
Outstanding Options: Options already granted to employees
Available Options: Remaining options available to grant
Vesting Schedules: Timeline for option vesting

Convertible Securities

Convertible Notes: Debt that converts to equity
SAFE Agreements: Simple Agreement for Future Equity
Warrants: Rights to purchase shares at specific prices
Conversion Terms: Conditions and mechanics for conversion

Cap Table Structure and Format

Basic Cap Table Example

Shareholder	Shares	Ownership %	Share Class
Founder A	3,000,000	40.0%	Common
Founder B	2,000,000	26.7%	Common
Employee Option Pool	1,000,000	13.3%	Options
Series A Investors	1,500,000	20.0%	Preferred A
Total	7,500,000	100.0%

Fully Diluted vs. Outstanding Shares

Outstanding Shares: Shares actually issued and held by stakeholders
Fully Diluted: Includes outstanding shares plus all options, warrants, and convertibles
Treasury Method: Standard method for calculating dilution from options
As-Converted Basis: Assumes all convertible securities convert to common

Multiple Scenarios

Common Cap Table Views

Current Outstanding: Only issued and outstanding shares
Fully Diluted: Including all potential dilution sources
Post-Fundraising: After planned investment round
Exit Scenario: Distribution of proceeds in liquidity event

Dilution and Its Effects

What Is Dilution?

Dilution occurs when a company issues new shares, reducing the ownership percentage of existing shareholders. While dilution decreases ownership percentages, it can increase absolute value if the company's total value grows proportionally more than the dilution.

Sources of Dilution

New Investment Rounds: Issuing preferred stock to new investors
Option Exercises: Employees exercising stock options
Convertible Conversions: Notes or SAFEs converting to equity
Warrant Exercises: Exercise of warrants by holders
Stock Splits: Increasing share count while maintaining value

Dilution Example

Pre- and Post-Investment

Pre-Investment:

Founder: 5M shares (80%)
Employee pool: 1.25M shares (20%)
Total: 6.25M shares

Post-$2M Series A at $8M pre-money:

Founder: 5M shares (62.5%)
Employee pool: 1.25M shares (15.6%)
Series A: 1.75M shares (21.9%)
Total: 8M shares

Anti-Dilution Protection

Weighted Average: Adjustment based on price and amount of down round
Full Ratchet: Adjustment to lowest price paid by any investor
Participating Preferred: Receive liquidation preference plus upside
Preemptive Rights: Right to participate in future rounds to maintain ownership

Equity Compensation and Option Pools

Employee Stock Option Plan (ESOP)

Pool Size: Typically 10-25% of fully diluted shares for early-stage companies
Refresh Rounds: Adding more shares to pool before fundraising
Exercise Price: Price employees pay to exercise options (409A valuation)
Vesting Schedule: Typically 4 years with 1-year cliff

Types of Equity Grants

Incentive Stock Options (ISOs): Tax-advantaged options for employees
Non-Qualified Stock Options (NQSOs): Options without special tax treatment
Restricted Stock: Shares with vesting restrictions
RSUs: Restricted Stock Units that settle in cash or shares

Vesting and Exercise

Standard Vesting Terms

• 4-year vesting: Total vesting period
• 1-year cliff: No vesting until 1 year of service
• Monthly vesting: 1/48th vests each month after cliff
• Acceleration: Faster vesting upon certain events

Liquidation Preferences and Waterfalls

Liquidation Preferences

1x Non-Participating: Get money back OR convert to common (not both)
1x Participating: Get money back AND participate in upside
Multiple Preferences: 2x, 3x, etc. liquidation preferences
Capped Participation: Participation up to a certain multiple

Waterfall Analysis

The liquidation waterfall shows how proceeds from a liquidity event are distributed among different classes of shareholders based on their preferences and rights.

Example Waterfall ($100M Exit)

Series B: $20M invested, 1x preference = $20M
Series A: $10M invested, 1x preference = $10M
Remaining $70M distributed pro rata among all shareholders
Series B gets additional share of $70M based on ownership
Common shareholders split their portion of remaining proceeds

Cap Table Management

Best Practices

Regular Updates: Update after every transaction or grant
Version Control: Track changes and maintain historical versions
Accuracy: Regular reconciliation with legal documents
Security: Limit access to sensitive ownership information
Scenario Modeling: Model different fundraising and exit scenarios

Common Tools and Software

Spreadsheets: Excel/Google Sheets for simple cap tables
Dedicated Software: Carta, Shareworks, CapTable.io
Legal Platforms: Clerky, Forge, AngelList
Features: Automated calculations, scenario modeling, reporting

Record Keeping

Essential Documentation

Stock purchase agreements
Option grant agreements
Board resolutions authorizing issuances
Convertible note and SAFE agreements
409A valuations
Transfer and assignment records

Cap Table Evolution Through Company Stages

Early Stage (Pre-Seed/Seed)

Simple Structure: Primarily founders and early employees
High Founder Ownership: 70-90% founder ownership
Small Option Pool: 10-15% for early employees
Convertible Securities: SAFEs and convertible notes common

Growth Stage (Series A/B/C)

Professional Investors: VCs join the cap table
Preferred Stock: Multiple series of preferred shares
Expanded Option Pool: 15-25% for growing team
Founder Dilution: Founders typically own 30-60%

Later Stage (Series D+, Pre-IPO)

Complex Structure: Multiple classes and preferences
Strategic Investors: Corporate investors and funds
Large Option Pools: Significant employee ownership
IPO Preparation: Simplification for public markets

Cap Table Mistakes to Avoid

Common Errors

Inaccurate Records: Failing to update after transactions
Missing Documentation: Incomplete supporting documents
Calculation Errors: Incorrect dilution or ownership percentages
Version Confusion: Multiple versions with different information
Security Breaches: Unauthorized access to sensitive information

Founder Mistakes

Ignoring Dilution: Not understanding long-term dilution effects
Poor Option Planning: Inadequate option pool for hiring needs
Unfavorable Terms: Accepting unfavorable liquidation preferences
Timing Issues: Poor timing of option grants and exercises

Prevention Strategies

Best Practices

Use professional cap table management software
Regular reconciliation with legal counsel
Educate team members on equity basics
Model scenarios before making decisions
Maintain detailed audit trails

Conclusion

Cap tables are fundamental tools for understanding company ownership, making strategic decisions, and managing equity compensation. While they start simple, they become increasingly complex as companies grow and take on investment. Proper cap table management is essential for founders, investors, and employees to understand their stakes and make informed decisions.

Understanding cap tables helps stakeholders appreciate the effects of dilution, the value of their equity, and how different scenarios might affect their ownership and returns. Regular maintenance, accurate record-keeping, and scenario modeling are critical for effective cap table management.

As companies evolve from startup to scale-up to potential exit, the cap table serves as both a historical record of the company's funding journey and a planning tool for future decisions. Whether you're a founder, investor, or employee, understanding how cap tables work is essential for navigating the equity aspects of company ownership and growth.