Equity

What is a cap table?

A cap table is two things at once. It's a record: the list of securities a company has issued, who owns them, how many, and what type. It's also an analysis tool, the thing you open to see what a financing round does to ownership before you agree to it.

A pre-financing cap table shows the share classes and ownership as they stand today. A pro-forma, or post-financing, cap table shows what that picture looks like after a round closes. Most of the work in modeling a cap table is getting cleanly from the first to the second.

What is a cap table?

Common and preferred shares

Two kinds of stock show up on most venture cap tables.

Common stock is ownership in its plainest form. Founders and employees hold it, it carries the voting rights set out in the company's agreements, and in a liquidation it gets paid last, after everyone with a priority claim.

Preferred stock is what institutional investors almost always buy. It's ownership too, with two things common doesn't have. First, a priority claim in a liquidation, so preferred is paid before common. Second, a choice at exit: a preferred holder can keep the preferred and take its negotiated proceeds, or convert to common and take the common distribution, whichever is worth more.

Preferred is rarely a single thing. A company that has raised a few rounds will have several series of preferred (Series A, Series B, and so on), each with its own price per share, liquidation preference, rights, and seniority relative to the others. The cap table tracks them separately because the exit waterfall pays them separately.

Share counts: authorized, issued, fully-diluted

Four distinct numbers, easy to confuse, used for different things.

• Authorized. The maximum shares the company can legally issue, set in the Certificate of Incorporation. Tracked by share class. Raising the authorized count requires board and stockholder consent plus a charter amendment.
• Issued and outstanding. Shares actually held by shareholders today. Counts common and preferred (and any other class) that has actually been issued. Does not count options, warrants, SAFEs, or convertible notes. This is the baseline for voting on most matters.
• Fully diluted. Issued and outstanding plus everything that could become a share without further pricing: authorized-but-ungranted options, granted-but-unexercised options, and warrants. Preferred is counted at its current conversion ratio to common, which is normally 1:1.
• Fully diluted, as-converted. Fully diluted with all preferred converted at its actual ratio rather than assumed 1:1. If anti-dilution has fired on Series A, that series might convert at 1.08:1, so 1mm preferred shares count as 1.08mm common-equivalents. Sometimes also includes as-if-converted SAFEs and notes at an assumed conversion price; that piece is a modeling assumption rather than a real number, since the actual share count depends on the next round.

What each number is used for:

• Authorized governs legal capacity. Increase this before any issuance that would exceed it.
• Issued and outstanding is the baseline for voting on most matters and for some preferred protective provisions tied to share counts at issuance.
• Fully diluted is the denominator in the price-per-share calculation for a round, the basis for sizing option pools, and the ownership percentage usually quoted in fundraising conversations.
• Fully diluted, as-converted is what the exit waterfall uses for the keep-vs-convert test and for proceeds-per-share, and it's the right ownership figure to quote once anti-dilution has fired or when subseries within a round have different conversion ratios.

SAFEs and unconverted convertible notes sit separately on the cap table. They aren't shares yet, so they don't count in any of the four numbers above until they convert. See SAFEs and Convertible Notes.

Issuing equity in a priced round

A priced round sells newly issued shares at a price set by a valuation. The investor wires money, the company issues shares, and the rights attached to those shares come from the share agreements.

The first question is always the same: how many shares does an investor get? That part is simple division.

Shares issued = Amount invested / Price per share

Two things to watch. Companies can't issue fractional shares, so you round the share price and the share count, then recalculate the amount actually invested so it ties out. And convertibles that carry interest often fold the accrued interest into the amount invested; if rounding leaves a small unpaid balance, that gets paid out as cash.

So the real work is the price per share. In its simplest form:

Price per share = Premoney valuation / (Fully-diluted shares prior to the round + dilutive shares included in the calculation)

Premoney valuation is what the company is worth before the round. Postmoney is what it's worth after, so premoney + amount invested = postmoney.

The denominator is where it gets interesting. Founders and new investors can agree on several ways to handle the dilution from converting convertibles and creating option pools, and each choice changes what goes into that "dilutive shares included" term. Learning to build the denominator is most of what modeling a cap table actually is. The methods are covered in SAFEs and Convertible Notes.

Practical considerations

A few things I keep coming back to after twenty years of building these models.

• Work in share counts, not percentages. This was my first lesson and it still holds. Ownership percentages are an output. Share prices and share counts are the inputs, and the math only behaves if you build it in that order: prices, then counts, then ownership.
• Don't be afraid of circular references. A lot of cap table math is genuinely circular: the share price depends on the share count, and the share count depends on the share price. You can untangle some of it with algebra, but a circular reference often keeps the model simpler and clearer. Turn on iterative calculations and let the spreadsheet solve it. (More on circular references.)
• Be wary of "calculate it here, paste it there." People dodge circular references by computing a number and hard-pasting it somewhere else. It feels safer. It's often wrong, because it breaks the link that's supposed to keep the model consistent when an input changes.
• Round on purpose. Companies can't issue fractional shares. Round share prices and counts the way the stock purchase agreement specifies, not the way that happens to be convenient.
• When in doubt, read the legal documents. Templates get modified for specific deals. If you can't remember how a conversion or an adjustment works, the source document spells it out, and what it says beats common practice every time.

Convertibles, briefly

Before a priced round, companies often raise on convertibles: instruments that take in money now for the right to shares later, at a price the round will set.

A convertible note is debt that converts to equity at a milestone, a date or a financing event, and until then it's treated as unsecured debt. It can carry a discount rate (a discount to the round's equity price), a valuation cap (a ceiling on the conversion valuation), an interest rate (usually accrued, then converted or paid at conversion), and a maturity date. Legal docs usually express a 20% discount as "80% of the equity price."

A SAFE (Simple Agreement for Future Equity) is a warrant-like right to buy shares. It isn't debt, has no interest rate and no maturity, and can carry a cap or a discount. Y Combinator introduced the SAFE in 2013 to make early-stage financings cheaper and simpler, and in 2018 replaced the premoney SAFE with the postmoney SAFE, which pins down the conversion math more precisely.

The postmoney SAFE quietly added anti-dilution protection for SAFE investors, which is still debated: Why startups shouldn't use YC's post-money SAFE, a fix for post-money SAFEs, and a corrected "SAFE for founders". It also dropped prorata rights by default, reinstatable with a side letter.

How convertibles convert, and who bears the dilution when they do, is the subject of SAFEs and Convertible Notes.

Raising a round

Raising a round means taking in capital through one of these structures, issuing securities at a set price or the right to buy at a later one. A single round can aggregate several investments at different valuations, which is common once convertibles are in the mix.

SAFEs, convertible debt, and warrants list separately on a cap table. The holders don't own shares yet, and the share count at conversion depends on the next round.

Converting investments

Convertibles convert into equity when a priced round closes, usually at a lower price than the new equity pays. That lower price is the reward for taking the earlier risk.

Pro-rata rights and Major Investors

Most preferred share agreements grant existing investors the right to participate in future rounds, sized to maintain their ownership percentage. The agreements typically reserve those rights for "Major Investors" rather than every preferred holder, which means the cap table needs a way to track who qualifies.

Two common ways to define Major Investor status:

• By share count. A minimum number of preferred shares (or as-converted common). E.g. holders of 500,000 or more registrable securities.
• By dollar amount. A minimum invested. E.g. holders who paid 300,000 or more for their preferred. Better when subseries within a round were issued at different original issue prices, since SAFE-converted shares often have a lower OIP than new-money shares in the same round.

Watch for rounding. An investor who wired 299,999.40 because the share price did not divide their target evenly is not a Major Investor under a strict 300,000 threshold. The legal docs rarely soften this; either round dollars up at allocation or use the share-count threshold.

For a future round of size R, each Major Investor's pro-rata allocation is:

Allocation = R * (their fully-diluted shares / total fully-diluted shares)

Fully-diluted in the denominator typically means issued and outstanding plus authorized options plus as-converted preferred. Definitions vary; the NVCA Investors' Rights Agreement is the standard reference.

Glossary

Term	Definition
Investment Amount	New capital invested in a round
Premoney Valuation	Company value before a round
Postmoney Valuation	Premoney + amount invested
Company Capitalization	Definition of shares used in the price-per-share calculation
Price per Share	Premoney / shares in company capitalization
Common Shares	Common Stock
Preferred Shares	Preferred Stock
Authorized Shares	Shares the company can legally issue, per the Certificate of Incorporation. By share class
Issued and Outstanding	Shares actually held by shareholders. Excludes options, warrants, SAFEs, and notes. Less than authorized
Fully Diluted	Issued and outstanding plus authorized-but-ungranted options, granted-but-unexercised options, and warrants. Preferred at its current conversion ratio (normally 1:1)
Fully Diluted, as-converted	Fully diluted with preferred converted at its actual ratio (relevant when anti-dilution has fired). Used for waterfall and proceeds-per-share calculations
Fractional Shares	Rounded to avoid fractional issuance
Secondaries	Existing shares transferred between investors. No new money to the company

Option pool math: Cap Table and Exit Waterfall Tool

Where this lives in your legal docs

The price-per-share calculation, share class definitions, and conversion math live in the Certificate of Incorporation. The Stock Purchase Agreement governs the round itself. Pro-rata rights and Major Investor thresholds live in the Investors' Rights Agreement. The NVCA model documents are the canonical templates; most law firms start there and modify.

Adding more rounds