cap-table-analysis

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
• Cumulative dilution across rounds: Multiply retention ratios: (1 - dilution_round1) * (1 - dilution_round2) * ... = cumulative retention

Option Pool Creation and Shuffling

• 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

1. Gather all equity instruments: Collect articles of incorporation, stock purchase agreements, option grants, convertible note and SAFE agreements, warrant agreements
2. Build the share ledger: Record every issuance, transfer, exercise, and cancellation chronologically
3. Model each round: For each funding round, compute pre-money shares, new shares issued, post-money cap table, and per-share price
4. Layer in convertibles: Model conversion of notes and SAFEs at the applicable discount, cap, or both — computing the effective price and resulting shares
5. Option pool analysis: Show the pool creation, allocated vs. unallocated, vested vs. unvested
6. Waterfall analysis: Model the distribution of proceeds at various exit values, applying liquidation preferences in priority order
7. Sensitivity table: Show each stakeholder's proceeds at different exit values ($10M, $25M, $50M, $100M, $250M, $500M+)

Templates

Cap Table Summary (Post-Series B)

                        Shares       % (FD)    Investment   Price/Share
Founder 1               3,000,000    24.0%     —            —
Founder 2               2,500,000    20.0%     —            —
Angel Investors            500,000     4.0%     $500K       $1.00
Series A (1x NP pref)   2,000,000    16.0%     $4.0M       $2.00
Series B (1x NP pref)   2,000,000    16.0%     $10.0M      $5.00
ESOP (allocated)         1,500,000    12.0%     —            various
ESOP (unallocated)       1,000,000     8.0%     —            —
Total Fully Diluted     12,500,000   100.0%     $14.5M

Post-money valuation:   $62.5M ($5.00 * 12.5M shares)
Pre-money valuation:    $52.5M

Liquidation Waterfall (1x Non-Participating)

Exit Value ($M):         10       25       50       100      250      500

Series B (1x NP):
  Preference claim       10.0     10.0     10.0     —        —        —
  As-converted value      1.6      4.0      8.0     16.0     40.0     80.0
  Receives               10.0     10.0     10.0     16.0     40.0     80.0

Series A (1x NP):
  Preference claim        —        4.0      4.0     —        —        —
  As-converted value      —        4.0      8.0     16.0     40.0     80.0
  Receives                —        4.0      8.0     16.0     40.0     80.0

Common + Options:
  Receives                —       11.0     32.0     68.0    170.0    340.0

Check: Total             10.0     25.0     50.0    100.0    250.0    500.0

Breakeven for common:   ~$14.5M (total liquidation preferences)
Conversion threshold:
  Series B converts at:  $62.5M ($10M / 16.0%)
  Series A converts at:  $25.0M ($4M / 16.0%)

Dilution Tracker Across Rounds

                    Seed     Post-A    Post-B    Post-C (est.)
Founders            80.0%    56.0%     44.0%     35.2%
Seed Investors      10.0%     7.0%      5.6%      4.5%
Series A              —      20.0%     16.0%     12.8%
Series B              —        —       16.0%     12.8%
Series C              —        —         —       20.0%
ESOP                10.0%    17.0%     18.4%     14.7%
Total              100.0%   100.0%    100.0%    100.0%

Founder dilution:    —       30.0%     21.4%     20.0%
Cumulative retention: —      70.0%     55.0%     44.0%

Quality Gate

• All equity instruments captured: common, preferred (each series), options, warrants, convertibles
• Share ledger reconciles to articles of incorporation and stock transfer records
• Fully diluted share count includes all outstanding and issuable shares (exercisable options, convertible instruments)
• Option pool shown as allocated (vested/unvested) and unallocated; strike prices recorded
• Pre-money vs. post-money arithmetic verified, including option pool shuffle impact
• Each preferred series' liquidation preference, participation, and conversion terms accurately modeled
• Anti-dilution provisions modeled for the relevant scenario (broad-based weighted average, full ratchet)
• Waterfall analysis computed at multiple exit values spanning downside through strong upside
• Conversion thresholds calculated for each preferred series
• Convertible notes and SAFEs modeled with correct discount, cap, and conversion mechanics
• Dilution tracker shows cumulative impact on each shareholder class across all rounds
• Pay-to-play implications modeled for non-participating investors