Cap Table Management and Equity Tracking: Organizing Ownership
Master cap tables. Organize equity, track dilution, manage vesting.
Key Takeaways
- Cap table basics: Document showing who owns what % of company. Columns: (1) Shareholder name, (2) Shares held, (3) % ownership. Example: Founder A (500K shares, 50%), Founder B (500K shares, 50%), Investor (200K shares post-funding, ownership dilutes to ~33% each). Critical: Accurate cap table = foundation for equity compensation, fundraising, exit planning. Cost: Low (spreadsheet or software), time to maintain. Benefit: Know exactly who owns what, avoid disputes.
- Dilution mechanics: When company raises money, existing shareholders get diluted. Example: Pre-funding (2 founders, 1M shares, 50% each), Series A (raise £2M, issue 500K new shares). Result: Founders each drop to 33% (diluted by 33%). Preferred stock: Investor gets special rights (liquidation preference, voting, participation). Impact: Founder ownership percentage drops with each round. Strategy: Plan for dilution (how much raise needed? What % will I own afterward?).
- Vesting schedule: Equity vests over time (typically 4 years, 1-year cliff). Example: Employee gets 40K shares, 4-year vesting, 1-year cliff. After 1 year, 10K shares vested. After 4 years, all 40K vested. Benefit: Retention (people stay to get equity), fairness (rewards tenure). Cliff: Employee leaves month 12? Get cliff equity, but lose everything earned. Leavers: Update cap table, subtract unvested equity (return to pool).
Managing Cap Tables and Equity Ownership
Organizing and tracking company ownership accurately. **Cap table fundamentals** Definition: - Capitalization table (cap table) - Shows who owns what % of company - Single source of truth for ownership - Updated with every equity transaction Basic structure: | Shareholder | Share Type | Shares | % Ownership | |---|---|---|---| | Founder A | Common | 500,000 | 50.0% | | Founder B | Common | 500,000 | 50.0% | | Total | | 1,000,000 | 100.0% | Share types: - Common: Standard shares held by founders, employees - Preferred: Special shares held by investors (extra rights) - Options: Earned through vesting (not yet owned) Key metrics: - Fully diluted ownership: % ownership after all options vested/exercised - Voting rights: What decisions need approval? - Liquidation preference: Order of who gets paid on exit **Cap table examples** Example 1: Pre-fundraising (seed stage) | Shareholder | Share Type | Shares | % Ownership | |---|---|---|---| | Founder A | Common | 500,000 | 50.0% | | Founder B | Common | 500,000 | 50.0% | | **Total** | | 1,000,000 | 100.0% | Notes: - 2 equal founders - No employees yet (startup stage) - Simple cap table Example 2: Post-Series A (investor funding) Before funding: - Founders: 1M common shares (50% each) Funding event: - Raise: £2M - New shares issued: 500K preferred (investor) + 100K option pool - Total post-funding: 1.6M shares | Shareholder | Share Type | Shares | % Ownership | |---|---|---|---| | Founder A | Common | 500,000 | 31.3% | | Founder B | Common | 500,000 | 31.3% | | Investor | Preferred | 500,000 | 31.3% | | Option pool | Common | 100,000 | 6.3% | | **Total** | | 1,600,000 | 100.0% | Notes: - Founders diluted from 50% to 31.3% each - Investor holds 31.3% - 100K shares in option pool for employees - Preferred stock has special rights **Share dilution analysis** Dilution = percentage ownership decrease after funding round Formula: - Pre-funding ownership: X% - Post-funding ownership: Y% - Dilution: X% - Y% Example: Founder pre-funding: 50% (500K of 1M shares) Fundraising: - Issue 500K new preferred shares (investor) - Issue 100K option pool - Total new shares: 600K - Post-funding total: 1.6M shares (1M + 600K) Founder post-funding: 500K / 1.6M = 31.3% Dilution: 50% - 31.3% = 18.7 percentage points Founder impact: - Owned 50%, now owns 31.3% - Diluted by ~37% relative (50% → 31.3%) Managing dilution: - Plan ahead (how much capital needed? What ownership afterwards?) - Estimate future rounds (Series A, B, C = cumulative dilution) - Example projection: - Seed: 20% dilution (80% founder ownership) - Series A: 30% dilution (56% founder ownership) - Series B: 25% dilution (42% founder ownership) - Series C: 20% dilution (33% founder ownership) Cumulative dilution: Founder starts at 50%, ends at 33% after 3 rounds **Equity compensation and vesting** Equity grants: - Employee receives grant of options/shares - Example: 40K shares, 4-year vesting, 1-year cliff - Vesting: Ownership accrued over time (can't cash out until vested) Vesting schedule mechanics: Standard 4-year vesting with 1-year cliff: - Year 0 (Month 0): Employee granted 40K shares (no vesting yet) - Year 1 (Month 12): Cliff date, 10K shares vest (25%), 30K remaining - Year 2 (Month 24): Another 10K vest, total 20K vested - Year 3 (Month 36): Another 10K vest, total 30K vested - Year 4 (Month 48): Final 10K vest, 100% vested Cliff purpose: - Retention: If employee leaves before 1 year, gets nothing - Incentive: Employee has reason to stay past year 1 - Fairness: Only reward people who stay meaningful time Accelerated vesting: - Double trigger: All equity vests if company acquired AND employee let go - Retention: Some equity vests faster (retention bonus) - Example: 50% vesting on acquisition, 50% vesting on termination **Cap table changes and updates** Transaction 1: New employee grant Before: - Founder A: 500K common (50%) - Founder B: 500K common (50%) - Option pool: 100K ungranted - Total: 1.6M Transaction: - Grant: 40K options to new employee, 4-year vesting - Effect: 40K moved from pool to granted options - Status: Unvested (will vest over 4 years) After: - Founder A: 500K common (31.3%) - Founder B: 500K common (31.3%) - Investor: 500K preferred (31.3%) - Employee: 40K options (unvested, 0% vested) (2.5%) - Ungranted pool: 60K - Total: 1.6M (unchanged) Notes: - Ownership % unchanged (options are contingent) - Fully diluted ownership changes (if all options vest) Transaction 2: Employee departure (before vesting) Scenario: Employee granted 40K, 1-year cliff, leaves at month 6 Effect: - Employee owns 0 shares (no cliff yet) - 40K shares return to option pool - No equity value to employee Transaction 3: Employee departure (after vesting) Scenario: Employee granted 40K, vested 20K over 2 years, leaves Effect: - Employee owns 20K vested shares - 20K unvested shares return to pool - Employee has equity value (20K shares) Transaction 4: Series B fundraising Before Series B: - Current shares: 1.6M - Series A valuation: £10M (£2M at £10M = 20% dilution, roughly) Series B funding: - Raise: £5M - Pre-money valuation: £20M (value before new money) - Post-money valuation: £25M (value after new money) - New shares: £5M / £25M valuation = 20% = 320K new shares (at post-money of 1.92M total, roughly) - Investor gets: Preferred shares = 320K Impact: - Founders: 31.3% → 26% (another round of dilution) - Series A investor: 31.3% → 26% - Series B investor: 20% - Employees: 2.5% → 2% **Cap table management best practices** Best practice 1: Use cap table software Options: - Simple: Google Sheets (free, but manual) - Medium: Pulley, Carta, Ledgy (dedicated cap table software) - Advanced: Carta (comprehensive, including option management) Benefits of software: - Automation (dilution calculations automatic) - Accuracy (less error-prone) - Reporting (easy to generate reports) - Integration (connects to payroll for equity accounting) Cost: £100-1000/month depending on complexity Best practice 2: Update cap table monthly Actions: - New grants: Add immediately - Vesting: Track (may not change cap table, but important) - Departures: Remove unvested, retain vested - Conversions: Preferred → common at exit - Board approval: Review/approve cap table changes Cadence: - Monthly cap table review - Quarterly board updates - Annual audit (accuracy check) Best practice 3: Track fully diluted ownership Definition: - % ownership if all options vested and exercised - Important for fundraising (investors care about this) Example: Current cap table (common only): - Founder A: 500K (31.3%) - Founder B: 500K (31.3%) - Investor: 500K (31.3%) - Unexercised options: 60K ungranted - Total: 1.6M Fully diluted (all options vested): - Founder A: 500K (27%) - Founder B: 500K (27%) - Investor: 500K (27%) - Employees (if all options granted and vested): 160K (9% + some vesting into future) - Total: 1.76M Fully diluted ownership: 27% (down from 31% due to employee pool) Best practice 4: Liquidation preferences Definition: - Order in which shareholders get paid on exit (acquisition or IPO) Example preferences: - 1x non-participating preferred: Investor gets £2M back first, then profits shared - 1x participating preferred: Investor gets £2M back, then shares in profits equally - Senior to common: Preferred gets paid before common shareholders Impact: - Founder might get £0 if exit <£2M (liquidation preference barrier) - Important to negotiate in fundraising (affects founder upside) **Fundraising and dilution planning** Example 5-year plan: Year 0 (Seed): 2 founders, 1M shares - Fundraising: Seed round (£500K) - Founder ownership post-seed: 80% - Founders: 800K shares, Seed investor: 200K shares Year 1 (Series A): 5 employees, 80M ARR - Fundraising: Series A (£2M) - Founder ownership post-A: 56% - Founders: ~500K shares each, Series A: 400K shares Year 2 (Series B): 15 employees, £250K ARR - Fundraising: Series B (£5M) - Founder ownership post-B: 42% - Similar dilution pattern Cumulative dilution: 50% founder ownership → 42% after Series B Key: - Plan equity upfront (how much dilution acceptable?) - Use option pool (attracts talent without over-diluting founders) - Negotiate terms (liquidation preference, vesting, etc.)