Cap tables and dilution, with the arithmetic
What a cap table is, how to build one in ten minutes, how each round dilutes everyone, what an option pool does to founders, and the three cap tables investors refuse to fund.
A cap table is a list of who owns what. It is the simplest document in a raise and the one founders most often get wrong, because dilution compounds across rounds in ways that are not obvious until someone shows you the arithmetic. Ten minutes with a spreadsheet now saves you discovering at Series A that you own 31%.
Building one
Four columns: shareholder, number of shares, percentage, share class. Start with today. A typical two-founder company: 100 shares, 60 to one founder, 40 to the other, all ordinary. That is the cap table. Every round adds rows and changes percentages; the number of shares each existing holder has never goes down — only their share of the total.
How a round dilutes everyone
A round issues new shares to the investor. The new shares are worked out from the post-money: investor's percentage = raise ÷ post-money; new shares = existing shares × investor% ÷ (1 − investor%).
Worked: 100 shares in issue, raise £400k at £1.6m pre (£2.0m post). Investor gets 20%. New shares = 100 × 0.2 ÷ 0.8 = 25. Now 125 shares: founder A 60 (48%), founder B 40 (32%), investors 25 (20%). Everyone who existed before was diluted by 20% of their holding — A went from 60% to 48%.
The option pool, and who pays for it
Investors often ask for an option pool — say 10% — to be created before their money goes in, so the pool dilutes the founders and not them. On the example above: a 10% pool pre-money means the founders are diluted to 90% first, then the investor takes 20% of everything. Founder A ends at 43.2%, not 48%. Over two rounds that is the difference between control and not. The counter is to size the pool to actual hiring plans (what options will you grant in the next eighteen months?) rather than accept a round number, and to argue for the pool being created post-money so everyone shares the dilution.
Three rounds, one founder
| Event | Founder A | Founder B | Pool | Seed | Series A |
|---|---|---|---|---|---|
| Start | 60% | 40% | |||
| 10% pool pre-money | 54% | 36% | 10% | ||
| Seed: 20% | 43.2% | 28.8% | 8% | 20% | |
| Series A: 25% | 32.4% | 21.6% | 6% | 15% | 25% |
Two rounds and a pool, and the founders together hold 54%. Fine — if the business is worth ten times more. Disastrous if it isn't. This is why valuation and round size are decided together, and why "raise as little as possible" is not the same as "give away as little as possible".
Three cap tables investors won't fund
- A departed co-founder holding 30% for six months' work. Dead equity. Fix it before you raise — buy them out, or agree a vesting reset — because no investor will fund a company where a third of it belongs to someone who has left.
- Founders already under 50% before the seed round. Usually the result of a friends-and-family round at a silly valuation or an adviser taking 10% for introductions. Investors worry that the people doing the work have no reason to keep doing it.
- Fifty shareholders from a crowdfund without a nominee. Every decision needs fifty signatures. Institutional investors will insist on cleaning it up, at your cost.
Keeping it clean
One class of ordinary shares until an institutional investor insists otherwise. Options in a proper EMI scheme, not promised in emails. Every share issue filed at Companies House within the month. A cap table in a spreadsheet you can send the same day someone asks. That is the whole discipline, and it is rarer than it should be.
Questions founders ask
"An adviser wants 5% for introductions. Is that normal?"
It is common and almost always a mistake. Pay introducers cash on completion if you must — a few percent of the money they bring — not equity. Equity given for a one-off service dilutes you for ever.
"Should I give my first employee shares?"
Options, not shares, through an EMI scheme, vesting over four years. See EMI share options.
"What's a fully diluted cap table?"
The one that assumes every option and convertible has been exercised. It is the one investors use to calculate their percentage, so it is the one you should use too.