How to Read a Cap Table Before You Sign Anything
You've just been offered 8% of the company as part of your cofounder package. But the cap table shows a fully diluted percentage of 6.5% after the option pool — and there's a SAFE investor at a $6M post-money cap converting at your Series A. What does that actually mean for your stake? This guide teaches you to read a cap table before you sign anything. No finance background required.
What a Cap Table Actually Shows
A cap table (short for capitalization table) shows: who owns what in the company, how much each ownership stake is worth at current and future valuations, and how dilution will affect each party as new rounds close. It's your company's ownership map. Every financing document you sign changes it.
The Core Columns: What You're Looking At
Authorized vs. Issued vs. Outstanding
Authorized shares: The maximum number of shares your company is allowed to issue. Issued shares: Shares actually issued to founders, employees, and investors. Outstanding shares: Issued shares + shares that could be issued via options, warrants, or convertible instruments. Fully diluted shares: Outstanding + ALL potential shares (option pool, SAFEs converted, etc.).
Always look at fully diluted percentage, not issued percentage. A cofounder with 10% of issued shares might only own 7% fully diluted after the option pool.
The Option Pool: What It Is and Why It Scares Founders
Early-stage companies typically reserve 10–20% of their fully diluted cap table for an employee option pool. When a Series A investor puts money in, they often require the company to increase the option pool BEFORE the round closes — called "option pool shuffle."
Example: Pre-round: Founders 80%, SAFE holders 20%. Series A lead requires 10% option pool expansion. Post-pool: Founders now own ~72%, SAFE holders ~18%. The investor gets their %; founders take the hit. This is standard — but it needs to be visible in your cap table model before you sign.
Reading Dilution: The Progression
Step 1: Know your current fully diluted % — list all outstanding equity. Step 2: Model the new round — new investment ÷ post-money valuation = new investor's %. Step 3: Calculate your new % — your old fully diluted shares ÷ (old + new shares) = your new %.
Example: Current: 1,000,000 fully diluted shares. Your stake: 400,000 = 40%. Raise $1M at $5M post-money (investor gets 20%). New fully diluted: 1,250,000. Your new stake: 400K / 1.25M = 32%. You went from 40% to 32% — an 8 percentage point dilution from a single round.
The Three Types of Equity
Common Stock (Founders + Employees): Basic ownership. Returns realized after preferred holders are paid in M&A or liquidation. Preferred Stock (Investors): Series A+ investors get special rights — liquidation preferences, anti-dilution, board seats, veto rights. SAFE Equivalents: SAFE holders have future equity — they don't yet have shares. When a priced round closes, their SAFE converts to common stock.
The Numbers That Actually Matter
- Your fully diluted ownership % — not issued shares, fully diluted. This is the real number.
- Option pool size as % of fully diluted — larger pools dilute you more.
- Total SAFE outstanding and their caps — model the conversion at Series A.
- Valuation at current round vs. previous rounds — understand growth trajectory and down-round implications.
- Liquidation preference stack — in an exit, order of payment matters.
Common Cap Table Mistakes Founders Make
Mistake 1: Not modeling dilution before signing. You sign a SAFE at $5M post-money cap and raise $1M — investor gets 20%. But at Series A, the SAFE conversion interacts with the new round in ways you may not expect.
Mistake 2: Ignoring the option pool shuffle. If your option pool is 8% and a Series A lead wants 15%, founders absorb the difference.
Mistake 3: Treating SAFEs as a fixed % when they're not. Multiple SAFEs at different caps create complex conversion math. Run the scenarios.
Mistake 4: Not tracking option grants separately. Options issued to employees dilute founders just as much as investor shares.
How to Request and Review a Cap Table
When an investor sends a term sheet, they should also send a cap table model showing: current cap table, post-money cap table after the new investment, and fully diluted ownership for all parties. If they don't, ask. If they can't produce one, that's a red flag. Tools like Carta, Pulley, or a simple Google Sheet work at early stages — just keep it accurate.
If the numbers in your cap table don't add up or you want someone to walk through it before you sign — that's exactly what these calls are for.
Book a free 15-minute intro call with Attorney Courtney Logan
Bottom Line
Before you sign anything — your SAFE, your option grant, your term sheet — make sure your cap table is clean and you understand your dilution. Book a free 15-minute intro call with Attorney Courtney Logan.