Cap tables explained, row by row

At minimum, a cap table lists shareholders, the number of shares each holds, the class of those shares, and the resulting percentage of the company. Add the option pool, any convertible instruments not yet converted, and warrants, and you have the full picture of who could own the company rather than who owns it today.

That distinction — issued shares versus fully diluted shares — causes more confusion than any other line. Your percentage on an issued basis always looks better than your percentage fully diluted, because the fully diluted view assumes every option is exercised and every note converts. Investors quote fully diluted. Founders instinctively quote issued. Both are correct and only one of them is relevant on exit day.

Founders and employees hold common stock. Investors almost always hold preferred stock, which is the same underlying ownership wrapped in extra rights: a liquidation preference that pays them first, anti-dilution protection if a later round prices lower, and usually a vote on major decisions.

This is why two people holding ten percent each can walk away with very different sums. In a modest sale, preferred holders take their preference off the top and common holders divide what is left. In a large exit, the preferred usually converts to common because straight ownership is worth more than the preference, and the gap disappears. The structure only bites in the middle outcomes, which are the most common ones.

Every company that intends to hire reserves a block of shares for employees. The pool sits on the cap table as authorised but unissued, and it dilutes everyone whose shares already exist at the moment it is created.

Timing is everything here. A pool created before the round closes is paid for entirely by existing shareholders — mostly founders. A pool created after the round is shared with the new investor. The difference on a ten million dollar pre-money with a fifteen percent pool is well over a million dollars of founder value, decided by a single sentence about ordering.

Two founders split ten million shares evenly, fifty percent each. They create a one-million-share option pool, so each founder now holds roughly forty-five percent fully diluted. A seed investor puts in two million dollars at an eight million pre-money and receives shares equal to twenty percent of the post-money company; the founders drop to about thirty-six percent each.

At Series A the company raises eight million at a thirty-two million pre-money — another twenty percent to the new investor, plus a pool top-up of five percent. The founders land near twenty-seven percent each. By Series B, with another eighteen percent sold and a further top-up, each founder is somewhere in the low twenties. Nothing went wrong in this story. This is the shape of a healthy cap table.

Garage to IPO tracks a single founder equity percentage rather than a share-by-share ledger, but the mechanics that move it are the same ones described here: every accepted term sheet applies dilution from the raise itself plus any option pool attached to the deal, and the reduction compounds across rounds.

Because the endgame score weighs retained ownership against final valuation, the cap table is effectively your scoreboard. Reading the pool line on a term sheet before accepting it is one of the cheapest ways to improve a run.