A cap table is the ownership record behind startup equity

A cap table, short for capitalization table, is a company’s ownership ledger. It records who holds equity, the securities they hold and the ownership percentage those holdings represent. It helps a startup model how financings, employee grants and convertible instruments change ownership.

It is not a valuation by itself or a balance sheet. A cap table allocates the company’s equity among holders. In a funding round, the agreed pre-money and post-money valuation and the new investment determine investor ownership and dilution.

What a cap table is used for

At incorporation, the document may be short: two founders, their common shares and 100% of the outstanding equity. It becomes more detailed as a company issues options, raises priced rounds, accepts convertible financing or changes ownership. It serves as a record of current ownership and a model for proposed transactions.

• Fundraising: Model ownership from a proposed round, including a new preferred share class and its terms.
• Hiring: Track equity awards and shares reserved in an employee option pool.
• Recordkeeping: Update the ownership picture after financing rounds, option grants, exercises, expirations and other equity events.

Cap tables are also used to review ownership and outstanding securities during fundraising. Keeping the table current matters because the share count and ownership percentages change as new securities are issued or existing rights change.

The fields a useful cap table contains

The layout varies, but the basic calculation is consistent: a holder’s ownership percentage equals that holder’s shares divided by the relevant total share count. A working cap table commonly identifies:

• Holder: The founder, employee, advisor, fund or other person or entity with an equity interest.
• Security type: Common stock, preferred stock, options, warrants or convertible instruments such as notes or SAFEs.
• Share count and price: Issued shares, option quantities, or terms that determine potential future shares.
• Ownership percentage: Each holder’s portion of the relevant total.
• Terms: Share-class rights, vesting schedules, exercise details and conversion terms that can affect ownership or economics.

Outstanding shares versus fully diluted ownership

Outstanding-share ownership divides a holder’s issued shares by shares currently outstanding. Fully diluted ownership adds potential shares to the denominator, including the complete option pool, outstanding warrants and convertible securities where their terms permit a calculation.

The exact treatment of a SAFE, note or warrant depends on its terms. A cap table should make its assumptions clear rather than treating a projected ownership percentage as settled fact.

A cap table financing example

Consider an illustrative company with two founders. Each owns 500,000 shares, so the company has 1,000,000 shares outstanding and each founder owns 50%.

1. Inputs: A new investor puts in $1 million at a $15 million pre-money valuation.
2. Post-money valuation: $15 million + $1 million = $16 million.
3. Investor ownership: $1 million / $16 million = 6.25%.
4. Existing holders’ ownership: 100% - 6.25% = 93.75% combined.
5. Share result: Keeping the founders’ 1,000,000 shares outstanding requires about 1,066,667 total post-money shares. The investor receives about 66,667 newly issued shares, or 6.25% of that total.

Neither founder sold a share in this example. Their share count remains 500,000 each, but their percentage falls to 46.875% each because the total share count grew. That is dilution: an ownership percentage declines when new shares, or included potential shares, enter the denominator.

Why sequence can change the answer

An option-pool increase or the conversion of notes and SAFEs may occur before or after a new equity financing. The sequence can shift dilution among founders, existing holders and the new investor because it changes the share count used to price and allocate the round. The American Bar Association’s illustrations show that deferring an option-pool increase and note conversion until after an investment causes the new investor and noteholders to share in that dilution in its example.

A cap table is therefore both a list of ownership and a way to test transaction order, assumptions and security terms before a financing closes.

Frequently asked questions

What is the difference between outstanding and fully diluted shares on a cap table?

Outstanding-share ownership uses shares currently issued and outstanding. Fully diluted ownership includes potential shares such as the complete option pool, warrants and convertible securities when their terms allow them to be counted. The larger denominator can reduce the percentage shown for current holders.

How does a funding round dilute existing shareholders?

A priced equity round can issue new shares to the investor. Existing holders may keep the same number of shares while their ownership percentage falls because total shares increase. In the illustrative $1 million investment at a $15 million pre-money valuation, the investor owns 6.25% after the round and existing holders collectively own 93.75%.

Why can an option pool or convertible note change founder ownership?

An option pool adds shares reserved for employee grants, while notes or SAFEs can convert into shares under their terms. Adding those shares before or after a financing can change the share count used in the transaction and shift who bears the dilution.

Sources

• Capitalization (Cap) Table: What It Is and How to Create and Maintain One — www.investopedia.com
• Cap Tables for Startups: What They Are and How They Work - Stripe — stripe.com
• Understanding the Basics of Cap Table Math in Start-Ups — www.americanbar.org
• Cap Tables Explained for Early Stage Founders - CRV — www.crv.com