Cap Table

A cap table (capitalization table) is the legal record of who owns what in a company, listing every shareholder, the number and type of shares they hold, and the percentage of the company those shares represent. Carta, the dominant equity management platform, managed cap tables for over 40,000 companies and more than $2.8 trillion in equity as of 2024.¹ The cap table is the first document investors request in due diligence and the foundation for calculating ownership dilution in every subsequent funding round.

Structure and Share Classes

A cap table is organized by shareholder and share class. Founders receive common stock at incorporation — typically issued at a par value of $0.0001 per share, often 10 million shares total, split according to contribution and negotiation.³ Each institutional funding round creates a new preferred stock series (Series A Preferred, Series B Preferred, and so on), priced at the round's per-share value derived from the pre-money valuation divided by total fully diluted shares. Employees receive stock options granting the right to purchase common shares at a strike price set equal to the 409A fair market value at grant to comply with IRS Section 409A.¹

The cap table tracks two distinct share counts: issued and outstanding shares — shares that have actually been distributed — and fully diluted shares, which add all unexercised options, warrants, and unconverted convertible instruments (such as SAFEs and convertible notes) as if they had been exercised or converted.² Ownership percentages quoted in term sheets and venture capital deals are almost always on a fully diluted basis. A Series A investor targeting 20% of a company with 8 million shares outstanding will demand that percentage be calculated against the fully diluted count, which may be 10 million shares once the option pool is included, meaning 2.5 million new shares are issued to achieve the 20% figure.⁶

Preferred shares held by investors carry contractual rights that common shares lack. A 1x non-participating liquidation preference means the investor recovers their investment amount before common shareholders receive anything in an acquisition; a participating preferred entitles the holder to both recover the investment and participate pro-rata in remaining proceeds alongside common holders.⁴ Anti-dilution provisions — typically weighted-average or full-ratchet formulas — adjust the preferred conversion ratio downward in a down round (a financing at a lower price per share than the previous round), protecting investor ownership percentage at the expense of common stockholders, most of whom are founders and employees.

Dilution Mechanics

Every new share issuance reduces existing shareholders' percentage ownership — dilution. A founder who owns 10 million of 10 million outstanding shares (100%) will own 10 million of 12.5 million shares (80%) after selling 2.5 million new shares to a seed investor at a $10 million pre-money valuation.³ Dilution compounds across rounds: a founder who raises a seed round, a Series A, and a Series B, and creates employee option pools at each stage, might retain 15–25% by a significant exit even having started at 100%.⁵

The option pool — a block of shares reserved for employee equity grants — is one of the most significant sources of dilution that founders negotiate over. Investors typically require the option pool be created or expanded before closing a new round, so the dilution falls on existing shareholders (primarily founders) rather than the incoming investor.⁷ A standard option pool at Series A is 10–20% of fully diluted shares. Carta data from 2023 showed median founder combined ownership at roughly 60–65% after a Series A and around 40–50% after Series B, with the exact figures depending heavily on round sizes, valuations, and option pool expansions.¹

Pro-rata rights — the contractual right for existing investors to participate in future rounds to maintain their ownership percentage — appear on most cap tables after a priced seed or Series A. An investor with a 15% stake who holds pro-rata rights can purchase enough shares in the Series B to keep that 15% intact. These rights matter most to early-stage funds: a seed investor who holds 10% of a company may represent hundreds of millions of dollars in fund return at IPO only if they avoided significant dilution across later rounds.⁴

Management and Common Errors

Early-stage companies track cap tables in Excel or Google Sheets, which is sufficient for a founding team and a single seed investor but becomes error-prone as the company adds option grants, SAFE conversions, and new share classes.¹ A single miscalculated conversion ratio or missed vesting acceleration clause can cause a cap table to fail reconciliation in due diligence, delaying or killing a round. The most common errors are: failing to account for SAFEs when modeling dilution at the Series A, omitting unvested shares from the option pool count, and applying pre-money option pool expansions incorrectly.⁷

Carta, Pulley, and AngelList Stack automate 409A valuations, generate option grant documents, and produce waterfall analyses — the mathematical breakdown of how acquisition or IPO proceeds would flow to each shareholder class given liquidation preferences.² Companies raising institutional rounds typically migrate to one of these platforms at or before their first priced round. An inaccurate cap table is one of the most frequently cited causes of funding round delays: if the company's ownership records don't match what investors believe they own, legal counsel must audit every historical transaction before the round can close.⁷