Cap Table Management 101

Your cap table is one of your most important documents. Mess it up early and you'll regret it forever. Here's how to get it right.

Cap Table Basics

What Is a Cap Table? A spreadsheet showing:

• Who owns what % of your company
• How many shares each person has
• What type of shares (common, preferred)
• Vesting schedules
• Options pool

Why It Matters:

• Determines ownership and control
• Affects fundraising ability
• Impacts exit proceeds
• Shows dilution over time
• Required for legal compliance

Starting Out Right

Founder Equity Split

Equal Split (50/50 or 33/33/33): Pros:

• Simple and fair
• Shows commitment
• Avoids early conflict

Cons:

• May not reflect contributions
• Can cause resentment
• Doesn't account for risk

Unequal Split: Pros:

• Reflects contributions
• Accounts for risk/timing
• Can be more fair

Cons:

• Harder to determine
• Can cause conflict
• May need adjustment

Factors to Consider:

• Who had the idea?
• Who's full-time vs. part-time?
• What's each person's role?
• What skills do they bring?
• What's the opportunity cost?
• Who's taking more risk?

My Recommendation:

• Start equal if all full-time
• Adjust for part-time founders
• Use vesting to protect company
• Document reasoning
• Revisit in 6-12 months

Vesting Schedule

Standard Terms:

• 4-year vesting
• 1-year cliff
• Monthly vesting after cliff

Why Vesting Matters:

• Protects against early departures
• Aligns incentives
• Shows commitment to investors
• Standard market practice

Example:

• Founder gets 25% equity
• Vests over 4 years
• 1-year cliff = 6.25% after year 1
• Then 2.08% per year (monthly)
• Fully vested after 4 years

Acceleration:

• Single trigger: Vesting accelerates on acquisition
• Double trigger: Requires acquisition + termination
• Investors prefer double trigger
• Negotiate for partial acceleration

Employee Equity

Option Pool Size

Typical Sizes:

• Pre-seed: 10-15%
• Seed: 15-20%
• Series A: 10-15%
• Series B+: 5-10%

Important:

• Created before funding round
• Dilutes founders, not investors
• Size depends on hiring plan
• Refresh as needed

Equity Grants

By Role (% of company):

• CEO: 5-10%
• CTO/CPO: 2-4%
• VP: 0.5-1.5%
• Director: 0.25-0.75%
• Senior IC: 0.1-0.3%
• Mid-level: 0.05-0.15%
• Junior: 0.01-0.05%

Factors Affecting Size:

• Stage of company
• Role and seniority
• Market conditions
• Cash compensation
• Candidate leverage

Vesting Terms:

• 4-year vesting standard
• 1-year cliff
• Monthly vesting
• 90-day exercise window (or longer)

Funding Rounds and Dilution

How Dilution Works

Example:

• You own 100% (1M shares)
• Raise $1M at $4M post-money
• Investor gets 25% (333K shares)
• You now own 75% (1M shares)
• Your 25% dilution

Dilution by Round:

• Seed: 15-25%
• Series A: 20-30%
• Series B: 15-25%
• Series C+: 10-20%

After Multiple Rounds:

• Start: 100%
• After Seed (20%): 80%
• After Series A (25%): 60%
• After Series B (20%): 48%
• After Series C (15%): 40.8%

Maintaining Control:

• Negotiate for smaller dilution
• Raise less money
• Achieve higher valuations
• Use alternative funding
• Grow profitably

Common Cap Table Mistakes

1. Too Many Small Investors

Problem:

• Complex cap table
• Difficult to manage
• Slows future rounds
• 409A valuation issues

Solution:

• Use SPVs (Special Purpose Vehicles)
• Set minimum check sizes
• Limit number of investors
• Clean up cap table early

2. Advisors Getting Too Much Equity

Problem:

• 1-2% for advisors is too much
• Dilutes founders unnecessarily
• Doesn't reflect value

Solution:

• 0.1-0.5% for advisors
• Vest over 2 years
• Tie to specific deliverables
• Use cash when possible

3. Not Using Vesting

Problem:

• Founder leaves with full equity
• Remaining founders stuck
• Investors won't fund

Solution:

• Always use vesting
• Even for founders
• 4-year standard
• No exceptions

4. Messy Early Deals

Problem:

• Convertible notes with different terms
• SAFEs with various caps
• Unclear ownership
• Difficult to track

Solution:

• Standardize terms
• Use same instruments
• Keep good records
• Clean up before Series A

5. Giving Equity to Everyone

Problem:

• Contractors get equity
• Early customers get equity
• Equity for everything
• Cap table bloat

Solution:

• Reserve equity for employees
• Pay contractors cash
• Use discounts, not equity
• Be selective

Cap Table Tools

Software Options:

Carta

• Industry standard
• 409A valuations
• Electronic signatures
• Investor relations
• $2K-$10K/year

Pulley

• More affordable
• Good for early stage
• Clean interface
• $500-$2K/year

AngelList

• Free for startups
• Integrated with fundraising
• Good for rolling funds
• Limited features

Spreadsheet

• Free
• Full control
• Flexible
• Error-prone

My Recommendation:

• Start with spreadsheet
• Move to Carta/Pulley at Series A
• Use for 409A valuations
• Worth the investment

409A Valuations

What Is It?

• IRS-required valuation
• Determines strike price for options
• Must be done by independent firm
• Updated annually or after funding

Cost:

• $2K-$5K for early stage
• $5K-$15K for later stage
• Required for option grants
• Protects against IRS penalties

Timing:

• Before first option grants
• After each funding round
• Annually
• After material events

Exit Scenarios

Understanding the Waterfall

Example Exit: $50M

Cap Table:

• Founders: 40% ($20M)
• Employees: 10% ($5M)
• Series A: 25% ($12.5M)
• Series B: 25% ($12.5M)

With Liquidation Preferences:

Series B: 1x preference on $10M

• Gets: $10M preference + $2.5M pro-rata = $12.5M

Series A: 1x preference on $5M

• Gets: $5M preference + $7.5M pro-rata = $12.5M

Remaining: $25M

• Founders: $20M (40% of $50M)
• Employees: $5M (10% of $50M)

Important:

• Liquidation preferences matter
• Participating vs. non-participating
• Can significantly impact proceeds
• Negotiate carefully

Best Practices

Do:

• Keep accurate records
• Use standard terms
• Implement vesting
• Plan for dilution
• Get professional help

Don't:

• Give away equity casually
• Skip vesting
• Ignore cap table
• Use non-standard terms
• Try to do it all yourself

When to Get Help

Hire a Lawyer When:

• Forming the company
• Bringing on co-founders
• Raising first money
• Granting first options
• Any complex situation

Hire a CFO/Accountant When:

• Raising Series A
• Complex cap table
• Multiple share classes
• International employees
• Planning for exit

Your cap table is too important to mess up. Invest in getting it right from the start. The cost of fixing mistakes later is much higher than doing it right the first time.