Equity & Cap Tables

The managerial question: who owns the company, really?

Every fundraising conversation, hiring negotiation, and board debate eventually lands on the same artifact: the cap table (capitalization table, the ledger of who owns equity and how much). Founders who cannot read a cap table negotiate blind. They accept option pool expansions without feeling dilution. They celebrate a $10M valuation while giving away 25% of the company and two board seats. Employees hear "0.5%" without knowing whether that is pre- or post-money, vested or granted, basic or fully diluted.

The managerial question is: After this round, this hire, and this option grant, who owns what percentage of outcomes? Ownership drives incentives, control, and exit proceeds. A cap table is not accounting trivia. It is the map of who gets paid when the company sells or goes public, and who can block the deal.

Lesson 2 established Delaware C-Corp structure, founder stock, and vesting. This lesson quantifies ownership: shares, percentages, pools, and dilution (ownership percentage shrinking when new shares are issued). Lesson 4 covers SAFE Notes, which sit off the cap table until they convert and then dilute everyone.

Cap table basics: authorized, issued, and outstanding

Corporate equity starts with authorized shares, the maximum the charter allows the board to issue. Early Delaware startups often authorize 10,000,000 common shares at negligible par value (nominal legal price per share, often $0.00001). Authorized is a ceiling, not what anyone owns yet.

Issued shares have been sold or granted to founders, investors, or the option pool. Outstanding shares typically means issued minus treasury (repurchased) shares. Day-to-day founder talk blends these; diligence separates them.

Each holder has:

• Share count
• Ownership % = holder shares ÷ relevant denominator
• Class rights (common vs preferred, voting, liquidation preference)

The denominator matters. Basic ownership divides by issued common today. Fully diluted ownership includes all shares that would exist if every convertible instrument converted and every unexercised option vested. Investors quote fully diluted after financing because that is the economic reality at exit.

Cap tables are maintained in spreadsheets or tools (Carta, Pulley, AngelList Stack). Every board-approved issuance should update the ledger the same week. Drift between "what we think" and "what the lawyer has" kills deals.

Fully diluted math: the denominator founders must memorize

Fully diluted share count = outstanding common + preferred (if converted) + all options and warrants (granted and unexercised) + shares reserved in the pool not yet granted + converting instruments like SAFEs (Simple Agreements for Future Equity, Y Combinator-standard documents that convert to stock in a priced round*) when modeled.

For a pre-convertible note stage company:

Fully diluted = founder shares + investor shares + allocated pool + unallocated pool reserve

Ownership % = holder shares ÷ fully diluted count

Example sanity check: if founders hold 8,000,000 of 10,000,000 fully diluted, they own 80%. Issue 2,000,000 new shares to an investor without pool refresh: investor owns 2,000,000 / 12,000,000 = 16.67%; founders now 8,000,000 / 12,000,000 = 66.67%. Total dilution to founders: 80% → 66.67%, a drop of 13.33 percentage points, not "20% of the company sold" phrased ambiguously.

Always ask: percentage of what denominator?

Option pools: why they exist and when they dilute

Startups cannot pay market cash salaries early. They compete with RSUs (restricted stock units, employer equity that vests over time) and options at Google or Stripe. An option pool is shares set aside for employees and advisors, approved by the board under an equity incentive plan.

Standard practice: create a 10% to 20% fully diluted pool before a priced round (pre-money pool), so dilution for the pool hits existing shareholders, not only the new investor. Investors insist because they want their ownership percent calculated after the pool is refreshed for hiring until the next round.

If the pool is too small, you expand it at the next financing. Expansion dilutes everyone, including founders. Founders who grant huge early advisor slices without a plan often rebuild the pool twice by Series A.

Granted vs unallocated pool: Unallocated pool counts in fully diluted math even if no employee holds it yet. That is intentional: it shows the true slice available for future hires.

Dilution in priced rounds: pre-money, post-money, and ownership

A priced equity round sells new shares at a negotiated price. Key terms:

• Pre-money valuation: company value immediately before new money enters
• Investment amount: new cash
• Post-money valuation = pre-money + investment (in the simple formulation)
• New investor ownership ≈ investment ÷ post-money (simplified, ignoring pool refresh mechanics)

Classic example from the thin prior content, expanded:

Raise $2M at $8M pre-money:

Post-money = $8M + $2M = $10M

New investor % = $2M / $10M = 20%

Existing shareholders dilute by 20 percentage points of the post-money whole, not each by 20% of their prior stake. If a founder had 40% pre-round of fully diluted, post-round approximate ownership: 40% × (1 − 20%) = 32%, because 40% × 0.8 = 32%. Check: new investor 20%, founder 32%, others 48%; sums depend on full cap table.

Price per share ties valuation to share count:

Pre-money price per share = pre-money valuation ÷ pre-money fully diluted shares

New shares issued to investor = investment ÷ price per share

After issuance, denominator grows; everyone else's percentage falls unless they buy pro-rata.

SAFEs on the cap table: modeled, not issued

SAFEs do not appear as issued stock until conversion. For planning, founders model as-if converted ownership at a hypothetical priced round. Lesson 4 details mechanics. Cap table literacy requires knowing SAFE holders are shadow dilution until conversion.

Show two views to the board:

1. Current cap table (issued only)
2. Pro forma cap table (after SAFE conversion and new round)

Investors lead with pro forma. Founders who only stare at current issued miss a third of dilution.

Managerial reads: dilution is not defeat

Dilution is the cost of capital and talent. Owning 40% of a $1B outcome beats 80% of a $5M outcome. Still, negotiate valuation, pool size, and pro-rata rights (investor right to invest in future rounds to maintain ownership) consciously.

Board questions before signing a term sheet:

1. What is founder fully diluted ownership after round, pool refresh, and SAFE conversion?
2. Is the option pool sized for 18-month hiring plan or padded for investor protection?
3. Who must approve pool expansions and new classes of stock?

Preferred stock and liquidation preference (priced rounds preview)

When institutional investors buy preferred stock, they negotiate economics beyond simple ownership percent. The most common concept is liquidation preference (the right to receive proceeds before common stock in a sale or winding up, often equal to invested amount or a multiple).

A 1x non-participating liquidation preference means the investor chooses the better of: (a) return of their investment amount first, or (b) their ownership percent of total proceeds. Founders still care because high preferences change who gets paid in a modest acquisition.

Participating preferred (investor takes preference amount and then shares remaining proceeds with common) is harsher for founders. Seed and Series A term sheets vary by market; read the stack, not only valuation.

This lesson focuses on share counts and percentages. The legal stack on top of those shares determines cash outcomes at exit. Lesson 5 Fundraising discusses process; your lawyer translates preference language into waterfall models.

Pro-rata and anti-dilution (why prior investors reappear)

Investors with pro-rata rights can invest in later rounds to maintain ownership. That is not free dilution protection: they pay new money at the new price. Founders should know which angels will show up again because pro-rata participation changes available allocation for new leads.

Anti-dilution provisions adjust conversion price for preferred holders if a later round is a down round (financing at lower price per share than a prior round). Weighted average anti-dilution is common; full ratchet is founder-punitive and rare at seed. These clauses live in preferred documents, not basic common cap tables, but they affect future share issuance math.

Reading a cap table row like an operator

When an engineer asks "what is my 0.25% worth?", translate:

1. 0.25% of what? Fully diluted post-money after latest round?
2. Vested vs granted? Unvested options disappear if they leave.
3. Exercise price? Options are worth exit proceeds minus strike price.
4. Preference stack? In a $80M sale, common may see little if preferred absorbs first dollars.

Example sketch: company sells for $100M. One Series A investor owns 20% with 1x non-participating preference on $4M invested. Investor chooses max($4M, 20% × $100M = $20M) → $20M. Remaining $80M splits among common and others per full waterfall. An employee with 0.25% fully diluted of common might receive $200,000 before tax if no other senior claims, but waterfall spreadsheets trump napkin math.

Operators do not need to master legal waterfalls day one. They do need to stop promising "0.25% of whatever we sell for" without caveats.

Continue RelayField from Lesson 2. Founders Alex (6,000,000) and Priya (4,000,000) incorporated with 10,000,000 founder shares. They raise a small pre-seed from angels before institutional seed.

Part A: Setup before outside money

Board approves 1,500,000 share option pool (15% of 10,000,000) before angel money. No grants yet; all pool unallocated.

Check: 6,000,000 + 4,000,000 + 1,500,000 = 11,500,000 ✓; 6,000,000 / 11,500,000 = 52.17% Alex fully diluted ✓

Founders often speak in "60/40" on founder common only; investors speak fully diluted. Alex at 52.17% fully diluted is the number that matters in fundraising.

Part B: Angel round $1.5M at $8.5M pre-money

Terms: $8.5M pre-money, $1.5M new money, post-money $10M. No additional pool refresh in this simplified angel round.

Price per share = pre-money / pre-money fully diluted shares
= $8,500,000 / 11,500,000 = $0.7391 per share (rounded)

New shares to angels = $1,500,000 / $0.7391 = 2,029,630 shares (rounded)

Post-money fully diluted shares = 11,500,000 + 2,029,630 = 13,529,630

Check investor %: $1.5M / $10M = 15% ✓; 2,029,630 / 13,529,630 = 15.00% ✓

Alex dilution: 52.17% → 44.35%, drop 7.82 percentage points.

Part C: Employee grants from pool

RelayField hires two engineers. Board grants 400,000 options total from pool (still 1,100,000 unallocated in reserve).

Fully diluted count unchanged at 13,529,630; pool splits:

Ownership percents unchanged until options exercise; fully diluted already counted pool reserve.

Managerial read: Hiring did not dilute founders further because grants came from reserved pool. If grants exceeded pool, board would need to expand pool, diluting everyone.

Part D: Seed round with pool refresh (preview)

Institutional seed incoming: $2M at $8M pre-money, plus requirement to increase option pool to 20% post-money fully diluted (common investor term). Exact pool refresh math is iterative because adding pool shares changes the denominator. Lawyers spreadsheet this; founders should know the directional effect: founders dilute more than headline 20% investor stake when pool expands simultaneously.

Directional outcome after seed (illustrative, not exact iterative solution):

• New money investor ~20% of post-money
• Refreshed pool ~20% post-money
• Founders + angels + employees remainder ~60%

Founders feel "we sold 20% but lost 35 points." That is pool refresh plus investment. Negotiate pool size against a hiring plan.

Simpler case for arithmetic practice. LumenGrid has 10,000,000 fully diluted shares, all founder common. Raises $2M at $8M pre-money, no pool change.

Post-money = $10M

Investor ownership target = 20%

New shares = 20% × post-money shares → investor shares / (10,000,000 + investor shares) = 20%

Investor shares = 2,500,000

Post total = 12,500,000

Each founder % multiplied by 0.8. A founder at 40% pre → 32% post. Check: 32% / 40% = 0.8 ✓

Price per share = $8M / 10M = $0.80

Shares issued = $2M / $0.80 = 2,500,000 ✓

RelayField enters institutional seed negotiations. Lead investor offers $2M at $8M pre-money with a requirement: after financing, the option pool must be 20% of post-money fully diluted shares.

Before round (from Part B angel example):

Investor also targets 20% ownership of post-money for their $2M. Post-money valuation = $10M.

Let P = new pool shares issued in refresh. Let I = new investor shares. Let S = 13,529,630 pre-round fully diluted.

Equations (simplified):

1. I / (S + P + I) = 0.20
2. (1,500,000 + P) / (S + P + I) = 0.20
3. Investment: I × price = $2M, with price tied to pre-money / (S + P)

Exact solution is iterative (adding pool shares changes pre-money price per share). Spreadsheet output for this fact pattern (typical counsel model):

Numbers are illustrative; your counsel's model is authoritative. The lesson is directional: pool refresh plus new money costs founders more than the headline "we sold 20%" suggests. Alex fell from 44.35% post-angel toward low thirties in one financing event.

Board questions:

1. Could we size pool to 15% with a hiring plan spreadsheet instead of accepting 20%?
2. Which hires must close before seed to justify a smaller refresh?
3. Do angels have pro-rata into this round, further compressing new lead allocation?

TrailPack cap table before financing:

TrailPack raises $2M at $8M pre-money. No pool refresh. Round closes.

Tasks:

1. Compute post-money valuation.
2. Compute price per share and new investor shares issued.
3. Build post-round cap table with ownership percentages.
4. How many percentage points does Founder A lose?
5. Explain why the option pool percentage of total changes even though pool share count is unchanged.

Solution

1. Post-money valuation

$8M + $2M = $10M

2. Price per share and new shares

Price = $8,000,000 / 10,000,000 = $0.80 per share

New investor shares = $2,000,000 / $0.80 = 2,500,000

Post-round fully diluted = 10,000,000 + 2,500,000 = 12,500,000

3. Post-round cap table

Check: 2,500,000 / 12,500,000 = 20% ✓; sum shares ✓

4. Founder A percentage points lost

Pre: 5,000,000 / 10,000,000 = 50.00%

Post: 40.00%

Loss: 10.00 percentage points

5. Pool percentage changes

Pool still 2,000,000 shares, but denominator grew to 12,500,000. Pool % = 2,000,000 / 12,500,000 = 16%, down from 20%. Same shares, smaller slice of a bigger pie. This is why founders feel pool "shrink" visually after rounds even without new grants.

Explain each in two to three sentences.

Solution

A. True. Fully diluted counts reserved pool shares because they will become ownership when granted and exercised. Investors want the complete picture.

B. False. A 15% pool means each founder's fully diluted % is 50% × (1 − 15%) only if no other investors exist: each 42.5% of total, not 50%. Pool and investors dilute founders below nominal split.

C. Depends. Higher pre-money reduces shares sold for the same dollars, but term sheets bundle pool refresh, participating preferred, and other terms. A higher headline pre with mandatory 25% post-money pool can dilute founders more than a lower pre with 10% pool.

Key takeaways

• The cap table is the ownership map for outcomes, control, and incentives; read it fully diluted.
• Option pools reserve hiring equity; unallocated pool still dilutes founders in investor math.
• Priced round dilution: new investor % ≈ investment ÷ post-money; multiply prior % by (1 − that fraction) for a quick founder estimate.
• Update the cap table after every board equity action; model SAFE conversion before signing term sheets.
• Dilution trades ownership for capital and talent; negotiate pool size and valuation together.

1. Build a one-tab cap table for your company: founders, pool, investors, fully diluted percents. Update for your last round or hypothetical raise.
2. Calculate your ownership after a modeled $2M raise at your target pre-money, with and without a 5 point pool refresh.
3. Continue to Lesson 4: SAFE Notes.