How Cap Tables Change Across Funding Rounds
Cap tables, or capitalization tables, track a company's equity structure, showing who owns what and how ownership evolves through funding rounds. From pre-seed to Series A, cap tables grow in complexity as new investors, share classes, and instruments like SAFEs and convertible notes are introduced. Here's a quick breakdown:
Pre-seed: Founders, friends, and family dominate the cap table. Equity is often split among founders with vesting schedules, and advisors may receive small equity stakes (0.2%-1%).
Seed: Angel investors, seed VCs, and instruments like SAFEs and convertible notes appear. Option pools for employees (10%-20%) and preferred shares with liquidation preferences are typically introduced.
Series A: Institutional investors secure preferred stock with rights like board representation and anti-dilution provisions. Fully diluted cap tables account for all potential shares, including options and convertible instruments.
Managing cap tables accurately ensures transparency during fundraising, prevents legal issues, and builds investor trust. Tools like cap table management software and expert oversight simplify this process as startups scale.
Funding & Equity Series, Part 5 | Cap Tables and Exits
Pre-Seed Stage: Founders and Initial Ownership
At the pre-seed stage, the cap table is straightforward, typically including just the founders and a few early contributors, such as advisors or friends and family. But don’t mistake simplicity for insignificance - decisions made now will shape your company’s ownership for years to come.
Startups at this stage usually use common stock, keeping the cap table concise. A single-page listing of founders, share counts, and ownership percentages is often sufficient. However, careful planning is essential to avoid headaches down the road.
How Founders Split Equity
Dividing equity among founders is one of the most critical - and often emotionally charged - decisions you'll face. Around 73% of first-time founders opt for an equal equity split[3], but this approach can lead to challenges later. Instead, equity should reflect each founder’s contributions, roles, and expected future value. Execution matters more than the initial idea when determining these splits[3].
A standard practice is a four-year vesting schedule with a one-year cliff[3]. This means no equity is vested until the end of the first year, after which it vests gradually over the remaining three years. To protect all parties, formalize these agreements in documents like a Founders' Agreement, corporate formation records, and Restricted Stock Purchase Agreements. Early, transparent conversations about equity splits[2] are crucial, and tools like the Founder Pie Calculator or frameworks such as Slicing Pie can help ensure fair allocation[4].
"One of the things that's important to get right at the very beginning, is the conversation with your co-founders about founder vesting. One of the very big errors on a cap table is often the dead weight where a co-founder has got capital and has gone." - David Kenney, Partner at Hall Chadwick[2]
Adding Advisors and Friends-and-Family Investors
As your startup grows, you may bring in advisors or raise funds from friends and family. These contributors bring valuable expertise, connections, and capital, but their inclusion on the cap table requires thoughtful consideration.
Pro Tip: always use an Advisor Agreement to build effective working relationships, exchange advice, and provide support in exchange for a standard amount of equity.
Advisors typically receive between 0.2% and 1% equity, with total equity allocated to all advisors generally capped at 2%[7]. Friends and family investment rounds usually range from $10,000 to $250,000, often resulting in 5% to 20% of the company being given away[6]. However, many experts suggest keeping this percentage as low as possible - ideally under 10% and preferably less than 5%[5].
Timing is key. Friends and family investors should join the cap table only after you’ve invested your own money, developed a solid business plan, and committed fully to scaling your business[6]. Approaching these investors too early - before validating your business assumptions - can lead to complications[6].
To simplify things, consider using SAFEs or convertible notes rather than direct equity for friends and family investments[5]. This approach delays valuation discussions until you have more data from future funding rounds while keeping your cap table cleaner.
Be clear about potential outcomes, from total loss to exceptional success, and maintain regular communication with these investors about progress, challenges, and plans[6].
At this stage, you can still manage your cap table with basic tools like Excel. Track all current equity and ownership details, including the number of common shares assigned to each person and any vesting schedules. Keeping this information updated will make scaling your cap table easier as your company grows[1].
It’s worth noting that up to 60% of legal disputes among founders stem from equity distribution issues[7]. Taking the time to make informed decisions, document agreements thoroughly, and communicate openly with stakeholders can save you from significant problems later. A well-organized pre-seed cap table sets the stage for managing more complex ownership dynamics in future funding rounds.
Seed Funding: Adding External Investors to Your Cap Table
As you move from pre-seed to seed funding, things get more complex. External investors - like angel investors, seed funds, and early-stage venture capital firms - become part of your ownership structure. They bring much-needed capital, but they also introduce new challenges. Unlike the simpler common stock arrangements in the pre-seed stage, seed funding ushers in more advanced financial instruments and investor protections that will shape your company's growth.
Most seed rounds raise around $500,000 to $1.5 million. At this point, your cap table transitions from a basic spreadsheet to a more intricate document. It now has to account for instruments like SAFEs, convertible notes, and option pools, preparing you to manage the complexities of future funding rounds.
SAFEs and Convertible Notes
Simple Agreement for Future Equity (SAFE) notes and convertible notes are two of the most common financing tools used in seed rounds. SAFEs are particularly popular for raises under $3 million [8]. These tools let you secure funding without immediately setting a valuation or racking up high legal costs [10].
The main difference lies in how they work. SAFEs don’t require repayment, don’t accrue interest, and don’t have a maturity date [10]. On the other hand, convertible notes are short-term debt that converts to equity when a specific event occurs [10]. This difference impacts dilution - convertible notes can lead to more dilution because of accrued interest [11].
Both SAFEs and convertible notes convert into equity during a triggering event, often using terms like discounts or valuation caps to reward early investors. Discounts typically hover around 20% [8].
Here’s an example: Suppose you raise $500,000 through a convertible note with a 5% annual interest rate. After two years, that note accrues $50,000 in interest. If the conversion price is $10 per share, the investor would receive 55,000 shares ($550,000 ÷ $10 per share) [10]. If there’s a $4 million valuation cap, the conversion price drops to $4 per share, giving the investor 137,500 shares ($550,000 ÷ $4 per share) [10].
For SAFEs, the mechanics are similar, but there’s no interest accumulation. For example, an investor putting in $100,000 with a $5 million valuation cap would get 20,000 shares if the next round values the company at $10 million. This effectively sets the conversion price at $5 per share ($100,000 ÷ $5 per share) [10].
To learn more about the key differences between SAFEs and Convertible Notes, check out our recent article.
Option Pools and Employee Equity
Seed funding often aligns with team expansion, making equity compensation a key tool for attracting talent. Employee option pools typically account for 10% to 20% of the company’s total shares [9], which impacts existing ownership through dilution.
Investors usually require you to create or expand the option pool before they invest. This means the dilution cost is borne by existing shareholders, not the incoming investors. At this stage, it’s important to track both current ownership and the fully diluted ownership structure, which includes the reserved employee options. Employee equity often involves stock options that vest over a four-year period with a one-year cliff. The exercise price is based on the company’s fair market value at the time of the grant.
Preferred Shares and Investor Rights
Seed investors generally receive preferred shares instead of common stock, introducing a new class of equity. One of the most important features of preferred shares is the liquidation preference. This determines how payouts are distributed during a sale or liquidation. A standard 1× liquidation preference ensures that preferred shareholders get their original investment back before common shareholders see any returns.
Preferred shares often come with anti-dilution provisions. These protect investors from losing value in future funding rounds at lower valuations by adjusting the conversion ratio. When preferred shares convert to common stock - usually during an IPO or acquisition - the conversion rate depends on which option benefits the investor more: sticking with the liquidation preference or converting to common stock.
Understanding how preferred shares work is critical. They don’t just impact your current ownership; they also influence how future fundraising rounds will play out. These seed-stage terms set the stage for the more intricate structures you’ll encounter in Series A rounds.
Series A: Institutional Investors and Complex Cap Tables
When a startup moves from seed funding to Series A, its cap table becomes more intricate. Series A funding introduces a new layer of complexity, as venture capitalists and institutional investors secure a substantial amount of preferred stock through their investments[14]. This influx of capital allows startups to scale their teams, refine or expand their product offerings, and explore new markets. However, investors typically expect the executive team to maintain at least 50% equity[15].
New Classes of Preferred Shares
Series A investors are granted Series A Preferred Stock, which comes with specific rights and priorities. These include liquidation preferences, dividend rights, and governance provisions - often accompanied by board representation[17]. With these rights, preferred shareholders can influence key decisions by appointing board members, shifting the board's structure from being founder-dominated to one where investors also hold significant sway.
While preferred shares usually lack voting rights, certain agreements may restore these rights if dividends remain unpaid[16]. Additionally, these shares give investors priority over dividends and asset distributions in a liquidation scenario. Many preferred shares are also convertible into common stock, offering flexibility under favorable conditions[16].
Fully Diluted Cap Tables
Series A funding demands a more detailed view of ownership beyond just the issued shares. A fully diluted cap table accounts for all issued shares as well as potential shares from options, warrants, and convertible instruments. Keeping track of these securities is crucial for accurate ownership calculations and long-term planning. This broader perspective helps founders and investors anticipate dilution and understand how ownership dynamics will evolve.
Dilution and Ownership Changes
Using a fully diluted cap table as a foundation, startups can model the effects of each funding round. Series A funding often leads to noticeable dilution for existing shareholders, as new investors enter the picture and ownership stakes are redistributed[13]. Regularly modeling these changes helps founders and investors grasp the potential impact of specific financing terms before finalizing agreements.
"Regular reviews and updates to your cap table ensure transparency and prepare founders for strategic decisions such as managing dilution, onboarding new investors, and planning exits effectively." - Trevor Randall, Leading Expert in Financial Advisory[12]
While dilution reduces individual ownership percentages, the funds raised through Series A can help achieve critical milestones, ultimately boosting the company’s overall value[14]. Clear communication about how each funding round affects ownership is essential for maintaining stakeholder trust. Successfully navigating these changes is key to driving growth and keeping investor confidence intact.
How to Manage and Update Cap Tables
Keeping your cap table accurate is crucial during every funding round. Even a small mistake in ownership percentages or share calculations can lead to serious legal and financial headaches later. As mentioned earlier, a well-organized cap table is the backbone of successful funding rounds. Once you hit Series A and beyond, the complexity increases, making it essential to have structured processes and expert oversight to ensure everything stays on track.
"A well-maintained and accurate cap table is a vital tool for startup leaders and investors alike. It provides a single source of truth that allows for a clear understanding of ownership structures within the company." – LTSE [20]
Updating Cap Tables After Each Round
After closing a funding round, update your cap table immediately. This includes adjusting ownership percentages to reflect the new investment, recording newly issued shares, and converting any SAFEs or convertible notes triggered during the round. Each of these transactions must be backed by the appropriate legal documentation.
Many startups find it helpful to review and update their cap tables regularly - often monthly. This ongoing maintenance ensures that employee option grants, advisor equity, and share transfers are accounted for in real time. When the next funding round comes around, the cap table will already reflect the true ownership structure, saving you from last-minute reconciliations.
Proper documentation is key. Every equity transaction - whether it’s stock issuance or an option grant - needs to be recorded. This creates a clear audit trail that legal teams and investors can review during due diligence. If any discrepancies arise, this documentation makes it easier to identify and fix errors.
It’s also important to model the impact of each funding round. By calculating dilution effects in advance, founders can better communicate these changes to shareholders and make informed decisions about financing terms. This level of transparency builds trust with stakeholders and shows that you’re managing the company’s finances responsibly.
Pro Tip: Try this free cap table modeling tool from Tactyc.
To make these updates easier, many companies turn to automated tools.
Using Cap Table Management Tools
Managing a cap table with spreadsheets becomes inefficient as the company grows. Cap table management software can automate complex equity calculations, track vesting schedules, and ensure compliance, significantly reducing the risk of human error.
Modern platforms often include features like quick data migration, user-friendly interfaces, and scenario modeling tools. For example, you can test different financing structures before committing to terms (Carta and AngelList are two of the most widely used). These platforms also offer strong security features to protect sensitive ownership data.
Ellen Dinsmoor, COO of Vow, shares how centralized tools simplify their operations:
"The short and sweet of that is the cap table that we use in Cake is our source of truth. That's the tool that we use on a day-to-day basis to update it as we're adding new employees to Vow... So Cake becomes a very easy one-stop shop where we can go and because we have the day-to-day processes in place where that's updated, then we can very easily go and download what the cap table looks like." [21]
When choosing cap table software, look for options that can grow with your business and offer transparent pricing. Features like 409A valuation support, equity compensation automation, and seamless integration with your financial systems are also important. Implementing proper access controls ensures that sensitive information stays secure while allowing authorized team members to access what they need.
While software simplifies the process, expert guidance is still essential for compliance and strategic accuracy.
Working with Legal and Financial Experts
Even with automation, professional oversight is critical to maintaining a reliable cap table. Legal experts who specialize in startup equity can ensure compliance by reviewing transactions and verifying that all documentation meets regulatory requirements. They can also catch issues - like improperly structured option grants or incorrect share transfers - before they become costly problems.
"What lawyers of investors are usually looking at, percentages and shares, and those need to be correctly calculated... mistakes are done in the past that need to be corrected." – Seedblink [19]
Financial advisors add another layer of expertise. They can help model dilution scenarios, structure equity compensation plans, and guide decisions about employee equity pools. Their insights help founders understand how different financing terms will affect the company’s ownership structure. Rachel Obenshain, President & Co-founder of Xeni, highlights the importance of using the right tools:
"We spent thousands and thousands of dollars on lawyers to keep all this information current in the last system and that was just on top of how much it already costs for just the subscription of the last system. It's so much easier to do it on Cake." [21]
Investors pay close attention to cap tables during due diligence, searching for signs of professional management and any potential red flags. A clean, well-maintained cap table not only reflects a well-run company but also makes the investment process smoother and more efficient. Regular audits and reviews by experienced professionals can catch errors early, especially before major events like funding rounds, acquisitions, or IPOs. A reliable cap table not only ensures accuracy but also builds trust among stakeholders.
Key Takeaways for Cap Table Management
Managing the evolution of your cap table is just the beginning. The real challenge lies in maintaining it accurately as your startup grows. From the pre-seed stage to Series A and beyond, your ownership structure will inevitably become more intricate, involving multiple share classes, option pools, and investor rights.
The golden rule? Accuracy from day one. Melissa Withers, Managing Partner & Co-Founder at RevUp Capital, puts it perfectly:
"Long before I became an investor, I worked in restaurants, where there is one cardinal rule: clean as you go. The same holds true for managing your company data. Broken spreadsheets and out-of-date documents are toxic waste that founders cannot afford to accumulate. Your data room doesn't need to win a beauty pageant. But if it doubles as a Superfund site, you'll pay for it in time wasted, opportunities lost, and money down the drain." [24]
This highlights the importance of ongoing data upkeep. It’s not enough to set up your cap table correctly - you need to keep it updated. Many startups find success by reviewing their cap tables monthly, ensuring every option grant, advisor equity agreement, and share transfer is properly recorded [22]. This consistent effort prevents small errors from snowballing into major headaches.
As your funding rounds progress, having a clean and clear cap table becomes even more critical. Laura Stoffel, Partner at Gunderson Dettmer, explains:
"A clean and accurate cap table ensures that investors have a clear understanding of the ownership structure, which builds trust and facilitates investment decisions." [24]
To streamline this process, consider using specialized cap table management software. These tools reduce human error, automate calculations, and provide transparency for stakeholders [20]. Additionally, consulting with legal and financial experts ensures compliance and strategic oversight [23].
It’s also wise to establish a formal cap table policy [22]. This includes training your team on proper procedures, keeping detailed transaction records, and maintaining open communication with stakeholders about their equity. Modeling the impact of financing rounds in advance can further help you make informed decisions and manage ownership changes effectively [18].
FAQs
How can startups divide equity fairly among founders at the pre-seed stage?
When it comes to dividing equity among founders at the pre-seed stage, startups need to take a thoughtful approach, considering each founder’s contributions, skills, and responsibilities. The goal? To ensure everyone feels the split is fair while fostering a sense of collaboration and trust.
Some startups opt for an equal split, especially when all founders contribute in similar ways. Others go for a proportional split, factoring in things like the amount of initial investment, specific expertise, or the workload each person is expected to handle. No matter the approach, vesting schedules are a smart move - they help secure long-term commitment and reduce the risk of issues if someone decides to leave early.
Finally, it’s crucial to document the agreement clearly from the outset. A well-written agreement can help avoid misunderstandings and keep things running smoothly as the business grows.
What’s the difference between SAFEs and convertible notes, and how do they affect the cap table during seed funding?
SAFEs vs. Convertible Notes: How They Affect Your Cap Table
When it comes to raising early-stage funding, SAFEs (Simple Agreements for Future Equity) and convertible notes are two popular options. While both can simplify the fundraising process, they impact your cap table in different ways.
SAFEs are agreements that let investors secure equity in your company at a later date, usually during a future funding round. They don’t come with interest or repayment deadlines, which makes them easier to handle in the short term. However, when they eventually convert into equity, the terms can sometimes lead to noticeable dilution of ownership.
Convertible notes, on the other hand, function as debt. These agreements accrue interest and have a maturity date, meaning they must be repaid or converted into equity by a certain time. When they do convert, it’s typically at a discount or based on a valuation cap, which can result in more immediate dilution of ownership.
While both tools make early fundraising more accessible, having too many SAFEs or convertible notes outstanding can complicate your cap table in later funding rounds. Tracking ownership percentages and managing equity distribution can become increasingly tricky as these agreements convert.
Why is it important to keep a fully diluted cap table, and how does it impact decisions during Series A funding?
A fully diluted cap table is crucial because it gives a detailed view of ownership, factoring in shares from options, warrants, and convertible securities. This clarity helps everyone involved understand ownership percentages, potential dilution, and who holds control within the company.
In the context of Series A funding, having a fully diluted cap table allows founders and investors to make well-informed decisions. It clearly shows how new investments will impact current shareholders and voting rights. Plus, it streamlines negotiations and ensures everyone is on the same page regarding the company’s valuation and equity distribution.