Cap Table: What it is, How to Set It Up and How to Calculate Partner Dilution
Every startup that seeks growth via venture capital, that has partners with different stakes or that plans to issue stock options needs an accurate and updated cap table. Errors in this table can generate corporate conflicts, problems with investors and even make future funding rounds unfeasible.
In this complete guide, you will learn what the cap table is, how to set it up from scratch, how to calculate the dilution in each investment round and what are the best practices for managing your company's equity over time. Use our Cap Table Calculator to simulate dilution scenarios.
What is Cap Table?
Cap Table (Capitalization Table) is the table that lists all equity holders in a company — founding partners, investors, holders of stock options and anyone else entitled to a portion of the equity. For each holder, the cap table shows the number of shares or quotas and the percentage of total participation.
The cap table is essential for:
- Calculate the dilution of each partner in each fundraising round
- Determine how much each partner receives in a sale or liquidation
- Manage the stock options pool (ESOP)
- Present the capital structure to investors and lawyers
Anatomy of a Cap Table
A basic cap table contains:
| Column | Description |
|---|---|
| Holder's Name | Partner, investor, ESOP |
| Instrument Type | Common Stock, Preferred Stock, Options, SAFEs |
| Number of Shares | Number of shares or quotas |
| % Share | Percentage calculated on the total |
| Value per Share | Price paid per share |
| Issue Date | When were they issued |
| Vesting Schedule | For shares with vesting |
Assembling a Cap Table from Scratch
Phase 1: Foundation
Two partners, A and B, found a company and issue 1,000,000 shares (common stock):
| Holder | Actions | % |
|---|---|---|
| Partner A | 600,000 | 60% |
| Partner B | 400,000 | 40% |
| Total | 1,000,000 | 100% |
Phase 2: Creation of the ESOP (Employee Stock Option Pool)
To hire talent, partners create an option pool of 150,000 shares (15% of the total after creation):
To create a 15% post-creation total ESOP:
Ações a emitir para ESOP = Total_Atual × % / (1 − %)
ESOP = 1.000.000 × 15% / 85% = 176.471 ações (arredondado para 180.000)
| Holder | Actions | % |
|---|---|---|
| Partner A | 600,000 | 51.3% |
| Partner B | 400,000 | 34.2% |
| ESOP (pool) | 180,000 | 15.4% |
| Total | 1,180,000 | 100% |
The founders were diluted by the creation of the ESOP.
Phase 3: Seed Round — Angel Investor
An angel investor contributes $500,000 for 10% post-money:
Post-Money Valuation = Investimento / % do Investidor
Post-Money = R$ 500.000 / 10% = R$ 5.000.000
Pre-Money = R$ 5.000.000 − R$ 500.000 = R$ 4.500.000
Preço por ação = Pre-Money / Ações pré-rodada = R$ 4.500.000 / 1.180.000 = R$ 3,81/ação
Novas ações emitidas = R$ 500.000 / R$ 3,81 = 131.234 ações
| Holder | Actions | % |
|---|---|---|
| Partner A | 600,000 | 45.9% |
| Partner B | 400,000 | 30.6% |
| ESOP | 180,000 | 13.8% |
| Angel Investor | 131,234 | 10.0% |
| Total | 1,311,234 | 100% |
Calculating Dilution
Dilution is calculated by the formula:
% Dilution = 1 − (Old Shares / Total New Shares)
Or directly:
New Participation = Previous Participation × (1 − % of New Investor)
In the example above, Partner A had 60% in the foundation:
- After ESOP: 60% × (1,000,000/1,180,000) = 50.8%
- After Seed: 50.8% × 90% (investor took 10%) = 45.7% ≈ 45.9%
Types of Instruments in the Cap Table
1. Common Stock
- Owned by founders and employees
- Vote in assemblies
- Last in the settlement queue (after preferential)
- Lower protection in liquidation events
2. Preferred Stock
- Issued to VC investors
- They generally have Liquidation Preference (they receive payment first in liquidation)
- May have Anti-Dilution protection
- They may have pro-rata rights (right to participate in future rounds)
3. SAFEs and Convertible Notes
- SAFE (Simple Agreement for Future Equity): Simple instrument that converts into equity in the next pricing round
- Convertible Note: Debt that converts into shares at a discount or valuation cap
- Do not appear as shares in the current cap table, but affect future dilution
4. Stock Options (ESOP)
- Right to buy shares in the future at a pre-determined price (strike price)
- They generally have a vesting of 4 years with a cliff of 1 year
- Appear in the cap table as "unexercised options" until exercise
Vesting: How It Works and Why It Matters
vesting is the process by which a partner or employee gradually acquires the right to their shares over time. Protects the company if the partner or employee leaves early.
Standard 4-year vesting with 1-year cliff:
- In the first 12 months: ZERO vested shares (cliff)
- Upon completion of 12 months: 25% of shares invested at once
- Months 13 to 48: 1/36 of the remaining shares wear per month
Example:
- Employee receives options for 48,000 shares
- 1-year cliff: after 12 months, 12,000 shares (25%) wear
- Following months: 1,000 shares wear per month for 36 months
If the employee leaves after 18 months: receives 12,000 (cliff) + 6 × 1,000 = 18,000 vested shares.
Common Errors in the Cap Table
Not creating the cap table from the beginning: Partners who have never formalized the corporate structure face immense problems when seeking investment.
Do not separate invested from non-vested shares: The cap table must reflect the current vesting, not the total promised.
Forget SAFEs and convertible notes in future dilution analysis: Investors always calculate the "fully diluted cap table" (including all options and convertible instruments) — you should too.
Create an ESOP that is too small: Early-stage startups often underestimate the talent they will need to hire. A 10% ESOP may be insufficient for a number of strategic hires.
Not having a vesting for founders: If a co-founder leaves after 6 months, but retains 40% of the company without vesting, the impact for the company can be devastating (and for future rounds, a deal-breaker).
How to Present the Cap Table to Investors
Investors analyze:
- Fully diluted cap table: Total including unexercised ESOP and convertible instruments
- Round History: Each share issuance event documented
- Liquidation preferences: Exit structure in different sales scenarios
- Sufficient Option Pool: Ability to hire talent without needing to create new ESOP right after investment
Frequently Asked Questions (FAQ)
1. What is fully diluted cap table?
It is the cap table that includes ALL shares ever issued plus all options, warrants and convertible instruments (SAFEs, notes) that could convert into shares in the future. Represents the total holdings when all instruments are exercised. Investors always calculate their share on the fully diluted cap table.
2. What is the difference between common and preferred shares on the cap table?
Ordinary shares (common stock) are those held by founders and employees — they have voting rights but are at the end of the payment queue in the event of liquidation. Preferred shares are those of VC investors — they have liquidation preference, generally receiving 1x to 2x the amount invested before common holders receive anything.
3. What is liquidation preference and how does it affect founders?
Liquidation preference is the right of preferred investors to receive back their investment (with multiple) before any other shareholder receives anything in a sale or liquidation. If a VC invested $ 2M com 2x liquidation preference, ele recebe $ 4M before the founders. In small exits (company sold for less than total preferences), the founders may not receive anything.
4. When should I create the company's ESOP?
The ideal is to create the ESOP before the first round of investment. Investors generally require the company to have an option pool of 10% to 20% already created — and if created after the round, it dilutes investors. If created earlier, it dilutes the founders (which is standard market practice).
5. How to calculate the strike price of stock options?
The strike price must be the fair market value of the share on the option issuance date. For private startups, this is determined by an assessment called a 409A (in the US) or similar assessment. A strike price well below the current value can generate immediate taxation for the beneficiary.
6. How much equity should I give to the first investor?
It depends on the stage and valuation. In pre-seed/angel rounds, it is common for investors to receive between 5% and 20%. In series A, typically 20% to 30%. The rule of thumb: do not deliver more than 30% in any individual round to avoid losing control of the deal. Monitor the accumulated cap table — after seed and series A, founders usually keep 40% to 60%.
Build Your Cap Table
Use our Cap Table Calculator to:
- Simulate investment rounds with automatic dilution calculation
- Manage ESOP and unexercised options
- Calculate the fully diluted cap table
- Design different exit scenarios
Related calculators:
- Valuation Calculator — determine the value of the company in each round
- ROI Calculator — calculate return on investment
- Payback Calculator — calculate the recovery period
- Break-even point — calculate when the business pays for itself