Cap Table

How a cap table works

A cap table is a ledger, not a report. Each row is one holder plus one security, and the columns are facts about that security: certificate or grant number, share class, issue date, price paid per share, number of shares, and, for options and warrants, strike price and vesting schedule. Everything people usually mean by "the cap table", meaning percentages, dilution and exit proceeds, is derived from those rows. If the rows are wrong, every derived number is wrong.

Two share counts matter and they are not the same. Outstanding shares are shares actually issued and sitting with a holder: founder common stock, restricted stock purchases, exercised options, and preferred stock held by investors. Fully diluted shares add everything that could become a share: granted but unexercised options, the unissued pool reserved under the equity incentive plan, warrants, and convertible instruments such as SAFEs and convertible notes.

Ownership percentage = shares held by the holder / fully diluted shares outstanding

Dilution follows from the same arithmetic. When a company issues new shares, existing holders keep the same share count and the denominator grows, so their percentage falls.

Post-round ownership = existing shares held / (fully diluted shares before + new shares issued)

There is no single authoritative definition of "fully diluted." Some counts include the unissued option pool and some exclude it; some treat outstanding SAFEs as converted at their caps and some park them in a footnote until a priced round fixes the price. Y Combinator's post-money safe user guide is explicit that the safe's own denominator, Company Capitalization, includes outstanding options, promised options and the unissued option pool, and excludes the option pool increase adopted as part of the priced round. That is one convention, written into one document. Ask which convention a given percentage uses before comparing two cap tables.

Three views of the same data get used for different jobs:

• The current cap table: what is issued and reserved today.
• The pro forma cap table: the same table projected forward through a proposed financing, with the new money, converting SAFEs and notes, and any option pool increase all reflected. This is the version attached to a term sheet, and it is the one founders should model before signing.
• The exit or waterfall view: proceeds at a given sale price allocated through liquidation preferences and conversion elections rather than by flat percentage. At many exit prices, percentage ownership and percentage of proceeds are different numbers.

Worked example

Suppose a company has 8,000,000 shares of founder common outstanding, 1,000,000 options granted to employees, and 1,000,000 shares still unissued in the option pool. Fully diluted shares are 10,000,000. Founders hold 8,000,000 / 10,000,000 = 80 percent fully diluted.

The company raises a priced Series A. The investor will put in 4,000,000 dollars for 20 percent post-money, and the term sheet also requires the pool to be topped up to 12 percent of the post-money fully diluted count, funded out of the pre-money.

Step one: solve for the post-money fully diluted share count. If the new investor's 20 percent and the refreshed pool's 12 percent both come out of the post-money total, existing holders and existing options retain 68 percent. Existing fully diluted shares excluding the unissued pool are 9,000,000 (8,000,000 common plus 1,000,000 granted options). Treating the old unissued pool as absorbed into the refreshed pool, 9,000,000 shares must equal 68 percent of the post-money count, so the post-money count is 9,000,000 / 0.68 = 13,235,294 shares.

Step two: size the pieces. The investor receives 20 percent of 13,235,294 = 2,647,059 shares. The refreshed pool is 12 percent of 13,235,294 = 1,588,235 shares.

Step three: price per share. 4,000,000 dollars divided by 2,647,059 shares is 1.5111 dollars per share. The pre-money fully diluted capitalization the term sheet prices against is the post-money count less the new shares, 10,588,235 shares, which already includes the refreshed pool. At 1.5111 dollars that is about 16,000,000 dollars pre-money, and post-money is about 20,000,000 dollars.

Step four: read the dilution. Founders now hold 8,000,000 / 13,235,294 = 60.4 percent, down from 80 percent. Of the roughly 19.6 points they gave up, about 4.4 points went to the pool refresh and about 15.1 points to the new investor. Taking the steps in the order the term sheet describes shows why: funding the pool out of the pre-money moves founders from 80 percent to 8,000,000 / 10,588,235 = 75.6 percent, and the new money then dilutes that 75.6 percent by a fifth, to 60.4 percent. The pool refresh is real dilution to founders even though no cash changed hands for it, because it was funded out of the pre-money. This is a hypothetical company and the pool percentage is an assumption, not a market rate.

Where it shows up

The cap table is referenced rather than published, which is why errors in it survive so long.

In a Series A financing on the National Venture Capital Association model documents, the cap table is attached to the stock purchase agreement as the capitalization schedule, and the agreement's capitalization representation is given against it. That schedule is the cap table, and the company stands behind it. The NVCA model certificate of incorporation then defines the share classes that the cap table's class column points at, and the voting agreement and right of first refusal and co-sale agreement bind named holders from the same table.

In the term sheet, the cap table appears twice: as a stated pre-money and post-money valuation with a target investor percentage, and as an option pool provision specifying the percentage of the post-financing fully diluted capitalization that must be available for future grants. That second clause is the one that quietly changes founder ownership, because it is conventionally funded pre-money.

In a Y Combinator post-money safe, the cap table appears as the defined term Company Capitalization, which is the denominator used to compute the Safe Price when the safe converts in an equity financing. The same document defines a separate denominator, Liquidity Capitalization, for a sale of the company, which excludes the unissued option pool because an acquirer buys only outstanding equity.

In diligence, an investor's counsel reconciles the cap table against the corporate record: board consents approving each issuance, stock purchase agreements, the equity incentive plan and its amendments, option grant notices, 409A valuation reports supporting the strike prices, and the stock ledger. A cap table that does not reconcile to board consents is a common diligence finding at Series A.

Common mistakes

• Treating the spreadsheet as the source of truth. The legal record is the board consents, signed agreements and stock ledger. The spreadsheet is a summary of them. When the two disagree, the spreadsheet is wrong.
• Quoting a percentage without saying which denominator. "You own 2 percent" means different things on an outstanding basis, a fully diluted basis including the unissued pool, and a fully diluted basis with SAFEs converted at their caps.
• Ignoring outstanding SAFEs and notes until the priced round. Convertible instruments are committed dilution the moment they are signed. Founders who raise several SAFEs at different caps and never model the stack are surprised at conversion.
• Forgetting that the option pool refresh is pre-money dilution. It is negotiated in the term sheet and paid for by existing holders.
• Confusing ownership percentage with exit proceeds. Liquidation preferences, participation and conversion elections mean a 20 percent holder does not automatically get 20 percent of a sale.
• Letting grants outrun documentation. Promised but ungranted options are a real claim; the post-money safe even defines Promised Options and counts them, precisely because companies let them accumulate.
• Never reconciling after a conversion. SAFE and note conversions issue new shares, and those issuances need board approval and ledger entries like any other.

Related terms

A cap table is the object that dilution acts on, so read it with dilution, option pool, and vesting. The instruments that occupy rows on it include preferred stock, SAFE, and convertible note. The valuation mechanics that set the price of a new row are pre-money valuation and post-money valuation, negotiated in the term sheet, with strike prices supported by a 409A valuation. At exit, the cap table feeds the liquidation preference stack and the waterfall.

Frequently asked questions

What is a cap table in simple terms?

It is the list of everyone who owns part of a company and how much they own. Each line shows a person or fund, what kind of security they hold, how many shares or options it covers, and what they paid. The percentages people quote are calculated from those lines, usually by dividing one holder's shares by the total fully diluted share count.

What should a cap table include?

Every issued share by class and holder, every option grant with strike price and vesting, the unissued option pool reserved under the equity incentive plan, every warrant, and every outstanding convertible instrument such as a SAFE or convertible note with its cap, discount and purchase amount. It should also carry the supporting references: the board consent and agreement that authorized each issuance.

How do I calculate ownership percentage on a cap table?

Divide the holder's shares by the fully diluted share count, and state which denominator you used. Fully diluted normally means outstanding shares plus granted options plus the unissued pool. Whether outstanding SAFEs and notes are included is a convention that varies, and for a company with a large convertible stack the two answers can differ by many percentage points.

Do I need cap table software or is a spreadsheet enough?

A spreadsheet is workable while there are a handful of holders and no options outstanding. Once there is an equity incentive plan with vesting, multiple share classes, or convertible instruments with different caps, dedicated software reduces the reconciliation burden and produces the exports investors and auditors ask for. What matters more than the tool is that whatever you use reconciles to the signed corporate record.

What is the difference between a cap table and a pro forma cap table?

The cap table shows ownership as of today. The pro forma cap table shows ownership as it would be after a specific proposed transaction, with the new investment, any converting SAFEs and notes, and any option pool change all applied. Term sheets are evaluated on the pro forma version, because that is where the actual dilution appears.

Who owns the cap table inside a company?

Legally, the company does, and the board is responsible for approving the issuances that change it. Operationally, it is usually the founder or finance lead who maintains it, with company counsel reconciling it at each financing. Investors receive it in diligence and at closing, and holders normally see only their own position.