Cap Tables Explained: Who Owns What

Understanding Equity Distribution in Your Company

A capitalization table is the definitive record of your company's ownership. It is a dynamic document that tracks every piece of equity and who holds it, serving as the financial blueprint for your business. For founders, investors, and employees, it answers the fundamental question of who owns what at any given moment.

Maintaining an accurate cap table is not an administrative afterthought; it is a critical operational practice. Errors or oversights can derail fundraising, create legal liabilities, and damage trust among stakeholders. This guide provides the practical steps to build, manage, and utilize your cap table effectively.

Core Components of a Capitalization Table

At its heart, a cap table is a ledger of your company’s equity ownership structure. It moves beyond a simple list of names to document the specific financial instruments that represent ownership. A well-constructed table typically includes the following data points for each stakeholder:

• Holder Identification: The legal name of the individual or entity (e.g., founder, investor fund, employee trust).
• Security Type: The class of equity held, such as Common Stock, Preferred Stock (Series A, B, etc.), Stock Options, Warrants, or convertible instruments like SAFEs.
• Quantity Held: The absolute number of shares, options, or units.
• Ownership Percentage: The holder's stake expressed as a percentage of the total fully-diluted shares outstanding.
• Key Terms & Dates: For investors, this includes the price per share paid, the investment date, and critical terms like liquidation preferences or voting rights.

A cap table focuses on equity and equity-like instruments. It typically does not include pure debt, such as bank loans, unless that debt is convertible into equity under specific conditions.

Identifying the Stakeholders on Your Table

Your cap table evolves as your company grows. Understanding who appears and when is key to anticipating dilution and managing ownership. The common parties you will track include:

• Founders: Holders of the initial common shares, usually representing the largest initial blocks of ownership.
• Employees: Granted stock options or Restricted Stock Units (RSUs) from a dedicated option pool created by the company.
• Advisors & Consultants: Often receive small equity grants, typically in the form of options, for their early guidance.
• Angel Investors: Early-stage individuals who may purchase common shares or simple preferred shares.
• Venture Capital Funds: Institutional investors who purchase preferred shares with specific, negotiated rights and protections.
• Convertible Note & SAFE Holders: These are listed as holders of the convertible instrument until a triggering event (like an equity round) converts them into actual shareholders.

Each entry concretely answers: “Who is this, what do they own, and what fraction of the company is that?”

Visualizing Ownership and Dilution

A cap table makes abstract ownership concrete. Consider a simple early-stage scenario before any external investment:

Holder	Security Type	Shares	% Ownership
Founder A	Common Stock	600,000	60%
Founder B	Common Stock	300,000	30%
Employee Option Pool	Stock Options	100,000	10%
Total		1,000,000	100%

Now, imagine the company raises a seed round. An investor invests $500,000 for 250,000 newly created Series Seed Preferred shares. The cap table must be updated to reflect this:

• Total Shares Outstanding increase from 1,000,000 to 1,250,000.
• The investor now owns 250,000 / 1,250,000 = 20% of the company.
• Founder A's percentage is diluted: 600,000 / 1,250,000 = 48%.
• Founder B's percentage becomes: 300,000 / 1,250,000 = 24%.
• The unissued option pool is diluted to: 100,000 / 1,250,000 = 8%.

This process illustrates the fundamental math of the cap table: Ownership % = (Shares owned by holder) / (Total shares outstanding)

Even though Founder A's share count (600,000) didn't change, their economic and voting power was reduced—this is dilution. A cap table allows you to model this impact before a financing event occurs.

Practical Applications and Best Practices

A cap table is a living tool for strategic decision-making, not just a static record. Its primary uses include:

• Fundraising Planning: Model different investment amounts and valuations to see how much dilution founders and existing investors will experience. Determine how large an option pool needs to be created to support hiring plans.
• Corporate Governance: Clarify who controls what percentage for voting on major corporate actions, board composition, and approval rights tied to investor protective provisions.
• Transaction Due Diligence: During an acquisition or a later-stage funding round, buyers and investors will perform exhaustive due diligence on your cap table. Inaccuracies can delay or terminate a deal.
• Compliance & Reporting: Ensure accurate filings for tax purposes (like 409A valuations for options) and comply with securities laws regarding shareholder reporting.

In practice, your cap table must be the single source of truth for ownership. To achieve this, follow these actionable steps:

Initial Setup & Maintenance Checklist:

1. Start with a clean, well-organized spreadsheet (e.g., Excel/Google Sheets) but plan to migrate to dedicated cap table management software (like Carta, Pulley, or AngelList) after your first significant round of funding.
2. Record every issuance of equity, options, warrants, or convertible securities immediately, including signed legal documents (e.g., stock purchase agreements, option grant notices).
3. Update the table after every single transaction: a new hire's option grant, an advisor's award, an investor's conversion.
4. Always calculate ownership based on fully-diluted shares outstanding. This includes all issued shares plus all shares reserved in the option pool and committed via convertible instruments.
5. Perform a quarterly reconciliation audit. Cross-check your cap table against your corporate ledger, your signed agreements, and your equity management platform (if used).

Scenario Modeling Exercise: Before your next fundraise, model a "waterfall analysis" to understand economic outcomes for different stakeholders in a potential sale.

1. List all shareholders in order of liquidation preference (typically investors with preferred stock first).
2. Apply a hypothetical exit sale price (e.g., $10 million, $50 million).
3. Apply each investor's specific terms (e.g., "1x non-participating preferred").
4. Distribute the remaining proceeds to common shareholders (founders, employees). This exercise reveals how different exit valuations translate into actual dollars for each person on your cap table, making the abstract concept of ownership powerfully concrete.