Cap Tables & Dilution
The Hook
A cap table is the single document that answers the only question that matters when the company sells: who actually owns what. Founders who do not understand dilution can wake up one day owning far less than they thought. You will see it coming, and you will know exactly what each round costs you.
Plain English
A capitalization table, or cap table, is simply the list of who owns the company and how much. Every share, every option, every investor stake lives on it. The thing that changes a cap table is dilution. When a company sells new shares to raise money, the total number of shares grows, so everyone who already owned shares now owns a smaller percentage of a bigger pie. Your number of shares does not change, but your slice does. Dilution is not automatically bad: if the company raises money at a higher value, your smaller percentage can be worth far more than your old larger percentage. The math is what tells you whether a round helped you or hurt you. Two things complicate the picture: an ESOP, the pool of shares set aside for employees, which also dilutes everyone, and instruments like SAFEs, which convert into shares later and dilute you then.
The Math
Ownership percentage is always your shares divided by the total shares outstanding. The key move is tracking what happens to that fraction when new shares are issued. Two numbers drive every funding round: the pre-money valuation (what the company is worth before the new money arrives) and the post-money valuation (pre-money plus the new investment). The investor's ownership is simply their investment divided by the post-money valuation.
- Ownership percentage = your shares / total shares outstanding
- Post-money valuation = pre-money valuation + new investment
- Investor's ownership percentage = investment / post-money valuation
You own 1,000,000 shares and the company has 1,000,000 shares total, so you own 100 percent. An investor offers 2,000,000 dollars at a pre-money valuation of 8,000,000 dollars. Post-money valuation = 8,000,000 + 2,000,000 = 10,000,000 dollars. The investor's ownership = 2,000,000 / 10,000,000 = 20 percent. To give them 20 percent, the company issues 250,000 new shares (so total becomes 1,250,000 and 250,000 / 1,250,000 = 20 percent). You still hold your 1,000,000 shares, but now 1,000,000 / 1,250,000 = 80 percent. You were diluted from 100 percent to 80 percent. But notice: your 80 percent is now a slice of a 10,000,000 dollar company, worth 8,000,000 dollars, versus your old 100 percent of a company worth far less. Dilution shrank your percentage and grew your value at the same time.
Before the round in Example 1, the investor insists on a 10 percent employee option pool (an ESOP), created from the pre-money. This is a classic term that quietly costs founders. Because the pool is carved out before the investment, it dilutes the existing shareholders (you), not the new investor. So the company first sets aside 10 percent for the ESOP, reducing your stake, and then the investor takes their 20 percent on top. After both, your ownership lands near 72 percent rather than 80 percent. The investor still gets a clean 20 percent. The lesson: where the option pool comes from (pre-money versus post-money) decides who pays for it, and the answer is almost always the founders. Always ask whether the pool is in the pre-money.
Start with 60 percent ownership after an early round. A new Series A investor comes in and takes 25 percent of the company. Your stake is now reduced by that 25 percent across the board: 60 percent x (1 - 0.25) = 60 percent x 0.75 = 45 percent. Then a Series B investor takes another 20 percent. Your stake again drops proportionally: 45 percent x (1 - 0.20) = 45 percent x 0.80 = 36 percent. You started this stretch owning 60 percent and now own 36 percent, even though you never sold a single one of your own shares. This is how dilution compounds round after round. Each raise can still make your shrinking percentage more valuable, but only if the valuation climbs faster than your ownership falls. That race is the entire game of fundraising.
The Lingo
- Cap table
- The capitalization table: the master list of who owns the company, including all shares, options, and convertible instruments.
- Dilution
- The drop in your ownership percentage when the company issues new shares, even though your share count stays the same.
- Pre-money valuation
- What a company is judged to be worth just before new investment comes in.
- Post-money valuation
- The pre-money valuation plus the new money raised. The company's value right after the round.
- ESOP (employee stock option pool)
- Shares set aside to grant to employees. Creating or expanding it dilutes existing shareholders.
- Fully diluted shares
- The total share count assuming every option and convertible instrument has been exercised or converted.
- SAFE (simple agreement for future equity)
- An investment that converts into shares at a later round rather than now, diluting owners when it converts.
Practice
In the Room
The Trap
Focusing on your ownership percentage instead of your ownership value. Founders panic over dropping from 80 percent to 60 percent and miss that the company tripled in value, so they are richer, not poorer. The flip side is just as dangerous: failing to track the option pool and outstanding SAFEs, which dilute you on terms you agreed to long ago. The real skill is reading the fully diluted cap table and asking one question every round: is the valuation climbing faster than my percentage is falling?
Quick Check
Q1.What does dilution actually change?
Q2.A round is done at a 8,000,000 dollar pre-money valuation with a 2,000,000 dollar investment. What is the post-money valuation?
Q3.An investor puts in 2,000,000 dollars at a post-money valuation of 10,000,000 dollars. What ownership do they get?
Q4.You own 60 percent. A new investor takes 25 percent of the company. What is your ownership now?
Q5.An investor requires the new employee option pool to come out of the pre-money. Who mainly pays for it?
Practice Out Loud
An investor offers 2,000,000 dollars at an 8,000,000 dollar pre-money but wants a 10 percent option pool from the pre-money. In 90 seconds, explain to your co-founder what this does to your ownership and why the pool placement matters. The AI will play your co-founder, who says: but the valuation went up, so who cares about a few percent?
Try it in real life
Sketch a simple cap table for a fake startup, then add a new round and watch the founder's percent drop.
Wrap up this lesson
Submitting the Quick Check counts. Or mark it here when you feel ready.