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Cap table modeling — rounds, dilution, option pools, liquidation preferences.
When to Activate
Building or updating a capitalization table for a startup or private company
Modeling the impact of a new funding round on existing shareholders
Calculating dilution from option pool creation or expansion
Analyzing liquidation preferences and waterfall scenarios
Evaluating conversion scenarios for convertible instruments (notes, SAFEs)
Preparing for a liquidity event (M&A, IPO) and computing shareholder proceeds
Advising founders on the true cost of a proposed term sheet
Core Concepts
Cap Table Construction
A capitalization table records every equity interest in the company — common shares, preferred shares, options, warrants, convertible instruments:
Fully diluted share count: Includes all issued shares plus all shares issuable upon exercise of options, warrants, and conversion of convertible instruments. This is the denominator for ownership calculations
As-converted basis: All preferred shares shown as if converted to common. Used for ownership percentage calculations
Share classes: Common (founder, employee), Preferred (Series Seed, A, B, C — each with its own terms)
Authorized vs. issued vs. outstanding: Authorized is the maximum; issued includes treasury shares; outstanding excludes treasury
Ledger format: Each transaction (grant, exercise, transfer, repurchase, conversion) recorded chronologically
Share Class Economics
Each preferred series has distinct economic rights that affect payout at exit:
Liquidation preference: Dollar amount preferred holders receive before common shareholders. Typically 1x the original investment
Dividend rights: Cumulative (accrues whether declared or not) or non-cumulative. Participating or non-participating
Conversion ratio: Initially 1:1 (one preferred share converts to one common share). Adjusted by anti-dilution provisions
Voting rights: Preferred may vote on an as-converted basis or have specific class votes (protective provisions)
Redemption rights: Rare in VC but some Series have a put right after 5-7 years
Dilution Math
Dilution is the reduction in ownership percentage when new shares are issued:
Dilution % = New Shares Issued / (Pre-Existing Shares + New Shares Issued)
Pre-round ownership: Shares Held / Pre-Money Fully Diluted Count
Post-round ownership: Shares Held / Post-Money Fully Diluted Count
Primary dilution: New shares issued in a funding round
Option pool dilution: Creating or expanding the ESOP. If done pre-money, existing shareholders (including the new investor in economic terms) bear the dilution
Anti-dilution dilution: If anti-dilution protection triggers, additional shares are issued to prior investors — diluting common and unprotected shareholders further
Pre-money option pool: The term sheet states the option pool as a percentage of pre-money fully diluted shares. This means existing shareholders create the pool before the new investment, bearing all the dilution
Post-money option pool: Pool created after the investment — dilution shared proportionally among all shareholders including the new investor. Less common but more founder-friendly
Pool sizing: Typically 10-20% at Series A. Should cover 18-24 months of hiring. Undersizing requires expansion (more dilution) sooner; oversizing wastes founder equity
Shuffle: Investors insist the pool is created pre-money, effectively lowering the real pre-money valuation of the operating company
Stated pre-money: $20M
Option pool (15%): $3M worth of shares created pre-money
Effective pre-money: $17M (value attributable to existing shareholders before pool)
Investment: $5M
Post-money: $25M
Investor ownership: $5M / $25M = 20%
Pool: 15%
Founders + existing: 65% (not 80%)
ESOP (Employee Stock Option Plan)
Vesting: Typically 4-year vesting with 1-year cliff (25% vests at month 12, remainder monthly)
Exercise price (strike price): Must be set at fair market value (409A valuation in the US). Determines the option holder's cost basis
Diluted vs. vested: Cap table should show both — fully diluted (all granted options) and vested only. Unvested options may be forfeited upon departure
Early exercise: Some plans allow early exercise (before vesting) subject to repurchase right. Creates 83(b) election opportunity for tax planning
Cashless exercise: At liquidity event, exercise price is netted from proceeds — no out-of-pocket cost for the holder
Liquidation Preferences
Determine how proceeds are distributed in a liquidity event (sale, dissolution, deemed liquidation):
1x Non-Participating Preferred:
Investor gets back 1x their investment OR converts to common and shares pro rata — whichever is greater
At low exit values, the preference protects downside. At high exit values, conversion to common yields more
Conversion threshold: The exit value at which converting to common yields more than the preference. = Liquidation Preference / Ownership %
Participating Preferred:
Investor gets 1x preference PLUS pro rata share of remaining proceeds as if converted to common
Double-dips: gets the money back and shares in the upside
Significantly more investor-favorable than non-participating
Participating with Cap:
Participating up to a total return cap (e.g., 3x). After the cap, treated as converted to common
Compromise between non-participating and fully participating
Multiple liquidation preferences:
2x or 3x preference: Investor gets 2x or 3x their investment before common shareholders receive anything
Increasingly rare but appears in later-stage rounds, especially bridge or down rounds
Conversion Scenarios
Voluntary conversion: Preferred holder converts to common when the pro rata common share exceeds the liquidation preference
Automatic conversion: Triggers upon IPO (typically at a minimum offering price and size) or upon vote of the preferred class
Shadow preferred / Series stacking: Each series may convert independently. In a waterfall, Series C gets paid first, then B, then A, then common. Earlier series may be "underwater" — their preference exceeds their pro rata value but conversion also yields less
Pay-to-Play
Compels existing investors to participate in subsequent rounds to maintain their preferential rights:
Full ratchet conversion: Non-participating investor's preferred converts to common (losing liquidation preference, anti-dilution, and other preferred rights)
Shadow preferred: Non-participating investor converts to a lesser class of preferred with reduced rights
Purpose: Prevents free-rider problem where existing investors refuse to participate in a down round while retaining their liquidation preference that subordinates new investors
Methodology
Gather all equity instruments: Collect articles of incorporation, stock purchase agreements, option grants, convertible note and SAFE agreements, warrant agreements
Build the share ledger: Record every issuance, transfer, exercise, and cancellation chronologically
Model each round: For each funding round, compute pre-money shares, new shares issued, post-money cap table, and per-share price
Layer in convertibles: Model conversion of notes and SAFEs at the applicable discount, cap, or both — computing the effective price and resulting shares
Option pool analysis: Show the pool creation, allocated vs. unallocated, vested vs. unvested
Waterfall analysis: Model the distribution of proceeds at various exit values, applying liquidation preferences in priority order
Sensitivity table: Show each stakeholder's proceeds at different exit values ($10M, $25M, $50M, $100M, $250M, $500M+)