Reading a cap table

A cap table lists who owns a company and on what terms. It looks like an administrative document and is in fact the clearest statement of incentives a company produces.

Pre-money, post-money and dilution

If a company raises two million at an eight million pre-money valuation, the post-money valuation is ten million and the new investor holds twenty per cent. Every existing shareholder is diluted proportionally. Dilution is not a problem in itself; it is the price of capital, and the question is what the capital buys.

The option pool

Pools are usually created before the round, out of the existing shareholders' ownership. A ten per cent pool agreed pre-money is paid for by the founders and earlier investors, not by the incoming investor. This is one of the most common points founders miss in a term sheet.

Preferences change the outcome

A one times non-participating preference means the investor takes either the invested amount or their pro rata share of the proceeds, whichever is higher. Participating preferences take both. In a modest exit the difference decides whether the common shareholders receive anything at all.

• Fully diluted ownership, not headline percentages

• Liquidation preference and whether it participates

• Anti-dilution provisions

• Vesting on founder shares

• Convertibles and SAFEs that have not yet converted

Reading a cap table well means being able to state, for any exit value, who receives what. If that calculation cannot be done, the case is not finished.