Cap tables explained, row by row

A cap table lists every holder of an equity interest and the instrument they hold. Founders and employees hold common stock or options over common stock. Investors hold preferred stock, usually one series per round, each with its own rights. Convertible instruments sit outside the issued table until they convert.

Each series of preferred is a separate row group because the rights differ. Series A preferred and Series B preferred may have different liquidation preferences, different anti-dilution formulas and different protective provisions, and in an exit those differences decide the order of payment.

Issued shares are what has actually been created and delivered. Fully diluted ownership assumes every option is exercised, every reserved share is granted, and every convertible instrument has converted. The two views can differ by twenty percentage points or more.

Investors negotiate exclusively on the fully diluted basis, and any ownership number quoted without specifying which basis it uses should be treated as unreliable. Founders who track only issued shares consistently overestimate what they own.

The percentages describe ownership, not proceeds. An exit waterfall applies the terms in order: preferences first, in the priority the documents specify, then remaining proceeds distributed to common holders, with each preferred holder choosing whichever route pays them more.

Modelling the waterfall at three exit prices — a disappointing one, a plausible one and a strong one — is the only way to know what the current cap table actually means for each shareholder. It should be re-run after every financing.

The most common defect is verbal grants: a promise of two percent to an early advisor that never became a signed document. Years later the advisor's expectation and the company's records disagree, and the disagreement surfaces during diligence when it is most expensive to resolve.

Second is stale records after option exercises, cancellations and departures. When someone leaves, unvested options must be cancelled and the pool updated. Skip that for a couple of years and the pool figure in the spreadsheet stops matching the legal reality.

Use dedicated cap table software once there are more than about ten holders. Spreadsheets are fine for three founders and one investor and become a liability at twenty employees, several rounds and a pool that has been topped up twice.

Every grant should be approved by the board, documented, and reflected in the table the same week. Every convertible instrument should appear in a modelled conversion view even before it converts. A cap table that is accurate continuously is barely any work; one that is reconstructed before a financing takes weeks and finds problems.

Garage to IPO maintains a simplified cap table across a run and settles it at the exit. Each financing adds a preference layer, each option pool expansion dilutes the founder, and the founder ledger reports what the stake was actually worth after everything senior to it was paid.

Players regularly discover that the run with the highest valuation was not the run with the biggest payout — which is the same lesson the waterfall teaches in reality.