A cap table (short for "capitalization table") is the official record of who owns what in a company. At the simplest, it is a list of every share or convertible instrument outstanding, who holds it, and what percentage of the company each holding represents.
At any moderately complex company (any C-Corp with SAFEs, option pools, or multiple share classes), the cap table is the most consequential financial document you have. Investors examine it before every funding round. Acquirers examine it before every deal. Get the math wrong and you are giving away equity you did not need to give.
This guide is the plain-English version of how to read a cap table.
The basic structure
A typical seed-stage cap table has four sections:
- Founder common stock. The shares issued to founders at incorporation, usually with vesting.
- Option pool. Authorized but unissued shares reserved for future employee grants.
- Outstanding option grants. Options granted to employees, with vesting schedules.
- Convertible instruments. SAFEs and convertible notes that will convert into equity at a future round.
Plus, after a priced round:
- Preferred stock. Issued to investors in a priced round (Series Seed, Series A, etc.).
Two kinds of percentages
Cap tables show ownership two ways: outstanding and fully diluted.
Outstanding
Counts only issued shares. Founder common stock + already-granted options that have been exercised. Often described as "actual" ownership.
Fully diluted
Counts every share that could be issued: outstanding shares + authorized option pool + all outstanding options (vested and unvested) + all SAFEs and convertible notes (counted as if they had converted at a specified valuation).
Fully diluted is the more meaningful number for almost every purpose. Investors look at fully diluted. Acquirers look at fully diluted. The number is always lower than outstanding (more shares in the denominator).
Founder common stock with vesting
Founder stock is almost always issued with a vesting schedule. Standard is:
- 4-year vesting. The full grant vests over 4 years.
- 1-year cliff. If you leave before the 1-year mark, you forfeit everything. After 1 year, 25% vests at once; the remaining 75% vests monthly over the next 3 years.
Vesting protects co-founders against each other and against investors. If a co-founder leaves after 6 months, they take 0% of their grant with them (it goes back to the company).
Section 83(b) election
When founder stock is issued with vesting, founders typically file a Section 83(b) election with the IRS within 30 days. This election treats the full grant as taxable income at the time of grant (typically when the company has minimal value, so the tax is minimal) rather than as taxable income as it vests (when the value can be substantial).
83(b) is critical for tax-efficient founder equity. Missing the 30-day window means filing taxes on vesting as it happens, which can be expensive.
Option pools
An option pool is a reserve of shares set aside for future employee grants. Typical pool sizes: 10% to 20% of fully diluted at seed stage; 5% to 15% incremental at each subsequent round.
The option pool is dilutive to existing shareholders. When you authorize a pool of 10%, every existing shareholder is diluted by 10% on a fully diluted basis.
Pre-money vs post-money pool
Investors typically require the option pool to be authorized before their investment. This means the dilution from the pool falls on founders, not on the new investors.
This is often called the "pre-money option pool" trick. If a Series Seed investor invests $2M at $8M pre-money and requires a 10% post-investment option pool, the founders are funding the dilution. The math:
- Pre-investment cap: founders own 100%.
- Pre-investment with new 10% pool authorized: founders own 90%, pool is 10%.
- Post-investment ($2M @ $8M pre-money, so $10M post): founders own 72%, pool is 8%, new investor owns 20%.
If the pool had been authorized after the investment, founders would have owned 80% post-investment (less dilution). Founders should negotiate pool size carefully; "just put in a 10% pool" can cost 8 percentage points of founder equity.
SAFEs and convertible notes
SAFEs and convertible notes are not stock. They are agreements that convert into stock at a future priced round.
SAFE (Simple Agreement for Future Equity)
Created by Y Combinator. No interest, no maturity. Converts at the next priced round at the lesser of: the round price (with optional discount), or the SAFE's valuation cap.
Convertible note
Older instrument. Accrues interest (typically 2 to 8%), has a maturity date. Converts at the next priced round with similar discount and cap mechanics.
How they show up on the cap table
SAFEs and notes do not have a definite share count until they convert. On a fully-diluted cap table, they are usually shown as if converted at a specified valuation. This is a modeled number, not a final one.
The valuation cap matters
The valuation cap on a SAFE sets the ceiling at which the SAFE converts. If you raise the next round at $20M pre-money and the SAFE had a $5M cap, the SAFE converts at $5M (giving the SAFE investor more shares than the round price would suggest).
Stacking multiple SAFEs at different caps creates complex dilution at the next round. Each cap is essentially a separate price.
Pro forma cap tables
A "pro forma" cap table shows what the cap table will look like after a hypothetical event. The most useful version is the post-financing pro forma: drop in a proposed term sheet, see the resulting cap table.
Things to model before signing a term sheet:
- Founder ownership post-financing.
- Option pool dilution (pre-money or post-money pool).
- SAFE conversion at the new round price (or at the cap).
- Preferred stock vs common stock distinction.
A modeled pro forma can save founders 3 to 10 percentage points of equity in negotiation, just by surfacing what each clause actually costs.
Common cap table mistakes
Issuing stock without vesting
Founders sometimes issue themselves and co-founders fully vested stock at incorporation. This is a mistake: if one co-founder leaves in month 6, they keep 100% of their grant. With vesting, the company can claw it back.
Missing the 83(b) deadline
30 days from stock issuance. Easy to miss; consequences are years of unexpected tax bills.
Authorizing a too-large option pool
Investors push for large pools because they dilute founders, not them. Negotiate the pool size based on actual hiring plans, not on a generic 10%.
Not tracking SAFE caps
Multiple SAFEs at different caps create stacked conversions. Tracking each one's cap and discount is the only way to model real dilution.
Promising equity without a cap table check
"You will get 1% of the company" is a meaningless promise without specifying: 1% of what (outstanding or fully diluted), at what valuation, with what vesting. Always issue formal grants from the option pool.
How we help
Our cap table tool (free under 50 stakeholders) handles SAFE issuance, option grants with vesting, 83(b) reminders, pro forma modeling, and investor diligence exports. For complex post-Series-A scenarios, Carta has a more sophisticated product; we cover most pre-Series-A needs.
The takeaway
Cap tables are not just spreadsheets. Every number on them affects founder ownership at exit. Learn to read them, model proposed financings before signing, and use a tool (ours or someone else's) to track every issuance accurately from day one.