Cap Table Basics

Essential Knowledge: Understanding cap tables is crucial for founders, investors, and employees. This guide covers everything you need to know about equity ownership and capitalization tables.
Estimated Reading Time: 15 minutes
Beginner Equity Fundamentals

What is a Capitalization Table?

A capitalization table (cap table) is a detailed spreadsheet that shows the ownership stakes, equity dilution, and value of equity in each round of investment by founders, investors, and other stakeholders.

Key Components:
  • Shareholders: All equity owners
  • Share Classes: Common, Preferred, Options
  • Ownership Percentages: Stake in the company
  • Dilution Tracking: How ownership changes over time
  • Valuation: Company worth at each round
  • Liquidation Preferences: Payout priority
  • Voting Rights: Decision-making power
  • Vesting Schedules: When equity becomes yours
Why Cap Tables Matter

Cap tables determine who owns what percentage of your company, how much each person gets paid in an exit, and who has control over major decisions. Getting this right from the start is crucial for your company's success.

Types of Equity Securities

Common Stock

Who gets it: Founders, employees, advisors

Characteristics:

  • Voting rights
  • Last in liquidation preference
  • Subject to vesting
  • Lower cost basis
Example: Founders typically receive common stock with 4-year vesting and 1-year cliff.
Preferred Stock

Who gets it: Investors (VCs, angels)

Characteristics:

  • Liquidation preference
  • Anti-dilution protection
  • Special voting rights
  • Board seats
Example: Series A investors get 1x liquidation preference, meaning they get their money back first in an exit.
Stock Options

Who gets it: Employees, contractors

Characteristics:

  • Right to purchase stock
  • Strike price (exercise price)
  • Vesting schedule
  • Expiration date
Example: Employee gets 10,000 options at $0.10 strike price, vesting over 4 years.

Sample Cap Table Structure

Here's what a typical early-stage startup cap table looks like:

Shareholder Security Type Shares Ownership % Liquidation Preference
John Doe (Founder) Common Stock 4,000,000 40.0% None
Jane Smith (Co-founder) Common Stock 3,000,000 30.0% None
Employee Option Pool Stock Options 1,500,000 15.0% None
Angel Investor Series Seed Preferred 1,000,000 10.0% 1x Non-participating
Advisor Pool Common Stock 500,000 5.0% None
Total - 10,000,000 100.0% -
Key Observations:
  • Founders retain majority control (70%)
  • Employee pool allocated for future hires
  • Angel has liquidation preference protection
  • Advisors get smaller equity grants
Important Note

This is a simplified example. Real cap tables include vesting schedules, exercise prices, anti-dilution provisions, and more complex terms.

Understanding Vesting Schedules

Vesting determines when you actually own the equity granted to you. It protects the company from people leaving early with large equity stakes.

Common Vesting Terms:
  • 4-year vesting: Total time to fully vest
  • 1-year cliff: Must stay 1 year to get any equity
  • Monthly vesting: After cliff, vest 1/48th each month
  • Acceleration: Vesting speeds up on exit or termination
Example Vesting Schedule:
Time Vested % Shares Owned
0 months 0% 0 shares
12 months (cliff) 25% 250,000 shares
24 months 50% 500,000 shares
36 months 75% 750,000 shares
48 months 100% 1,000,000 shares
Why Vesting Exists
  • Protects company from early departures
  • Ensures commitment from team
  • Maintains equity pool for new hires
  • Standard practice expected by investors

Understanding Dilution

Dilution occurs when new shares are issued, reducing existing shareholders' percentage ownership. While your percentage decreases, the company's total value hopefully increases.

Types of Dilution:
  • Investment Dilution: New investors buy shares
  • Employee Dilution: Option pool grants
  • Conversion Dilution: Convertible notes convert
  • Warrant Dilution: Warrants are exercised
Dilution Example

Before: You own 1M of 10M shares (10%)

After: Company issues 2M new shares

Result: You own 1M of 12M shares (8.33%)

Good vs. Bad Dilution

Good Dilution: Your percentage decreases but your shares are worth more due to increased company value.

Bad Dilution: Your percentage decreases without corresponding increase in company value.

Cap Table Best Practices

Do's
  • Keep your cap table updated in real-time
  • Use professional cap table software
  • Plan for future financing rounds
  • Reserve adequate employee option pool
  • Document all equity grants properly
  • Get legal review for complex structures
  • Communicate changes to stakeholders
Don'ts
  • Don't give away too much equity too early
  • Don't ignore vesting schedules
  • Don't forget to account for dilution
  • Don't create overly complex structures
  • Don't neglect founder vesting
  • Don't promise equity without documentation
  • Don't ignore tax implications
Common Mistakes
  • Founder Mistake: Not implementing founder vesting from day one
  • Employee Mistake: Not understanding the difference between options and shares
  • Investor Mistake: Focusing only on percentage ownership without considering liquidation preferences

Ready to Build Your Cap Table?

Now that you understand the basics, it's time to put this knowledge into practice with Model My Exit.

Next Steps:
  1. Start Building: Create your company profile and initial cap table
  2. Add Stakeholders: Input all founders, employees, and investors
  3. Set Up Vesting: Configure appropriate vesting schedules
  4. Plan Ahead: Model future financing rounds and dilution
  5. Stay Updated: Keep your cap table current as you grow
Start Building Getting Started Guide Learn About Financing
In This Guide
What is a Cap Table? Types of Equity Sample Cap Table Vesting Schedules Understanding Dilution Best Practices
Related Tutorials
Getting Started Financing Rounds Exit Scenarios Stakeholder Management