The cap table (capitalization table) is the authoritative record of who owns equity in your company and in what form. Getting it right from day one prevents expensive problems at fundraising, acquisition, or IPO.
What's on a cap table
A basic cap table has three sections:
Common Stock: Founder shares and employee shares (typically vesting over 4 years with a 1-year cliff). Founders usually start with common stock with no vesting — though adding founder vesting early is increasingly common and viewed favorably by investors.
Preferred Stock: Investor shares from priced rounds (Series Seed, Series A, Series B...). Preferred stock has liquidation preferences and other rights not available to common stockholders.
Options / Warrants: Employee Stock Options (from the ESOP), advisor warrants, and any other derivative securities. Options typically vest over 4 years with a 1-year cliff and have a strike price equal to the 409A fair market value at grant.
Fully diluted vs issued shares
Issued shares: Shares actually held by someone today.
Fully diluted shares: Issued shares + all options/warrants, whether vested or not, whether exercised or not.
Investors almost always quote ownership on a fully diluted basis — "I own 20% fully diluted" means 20% of the total if all options were exercised. This is the correct way to calculate dilution.
The option pool (ESOP)
The employee stock option pool (ESOP) reserves shares for future employee grants. Typical sizes: 10–20% of fully diluted shares.
Investors usually require you to increase the option pool before their investment closes — which dilutes founders, not investors. This is the "option pool shuffle."
To minimize it: negotiate the option pool size carefully. Only reserve what you actually plan to grant in the next 18–24 months. An investor asking for a 20% pool for a 5-person company is excessive — push back with a hiring plan.
Common mistakes
No vesting on founder shares: If a co-founder leaves year 1, they shouldn't keep all their equity. Implement 4-year vesting with 1-year cliff from day one.
No 83(b) election: Founders with unvested shares must file an 83(b) election within 30 days of grant to lock in their tax basis. Missing this window can result in massive phantom income tax as shares vest.
Messy cap table history: SAFEs and notes that aren't converted before a priced round create complexity. Clean up your cap table before Series A.
Oral agreements: Verbal equity promises without a signed agreement are unenforceable and create disputes. Document everything in writing.
Use the Equity Dilution Calculator to model how funding rounds will affect your cap table.