How to read a cap table

Northwind’s lawyer sends the cap table as a spreadsheet. One cell says that Ada owns 30.91%. A report from the same file says 27.20%. A third view says 25.39%. All three numbers are correct. This lesson shows you how to read the table, and how to know which number an investor uses.

A table of who owns what

A cap table (short for capitalization table) records who owns which securities in the company. Its shape is simple:

Each row is a holder: a founder, an employee, an investor, or a group of them.
Each column is a type of security: common stock, each series of preferred stock, options, and SAFEs that did not convert yet.
Other columns give the total for each holder and the holder’s percentage.

The percentage is always one division:

Ownership = Holder's shares ÷ Total shares
50%       = 5,000,000       ÷ 10,000,000

The difficult part is the bottom of the division. The next sections show what goes into the total, column by column.

The columns: what each holder has

Common stock

Common stock is the class that founders and employees hold. Ada and Ben each bought 5,000,000 shares when they formed Northwind. They paid a very low price, because the company had no value yet. In a sale of the company, common stock gets money only after preferred stock.

Preferred stock

Preferred stock is the class that investors buy in a priced round, a round that sells shares at a set price for each share. It has more rights than common stock. The primary right is a liquidation preference: in a sale, preferred holders get their money back before common holders. Thus a preferred share costs more than a common share.

Each priced round sells a new series. Northwind’s seed round sold Series Seed preferred at $1.088 a share. Its two pre-seed SAFEs converted in the same round at lower prices, $0.60 and $1.00. Shares with different prices get different preferences, so lawyers usually give each SAFE its own sub-series, for example Seed-1 and Seed-2. This sub-series is a shadow series.

Options and the unissued pool

The option pool is a block of shares that the company keeps for employees, advisors, and directors. A cap table divides it into two parts:

Granted options belong to employees. A stock option is the right to buy a share later at a fixed price. It becomes a share only when the employee pays that price. This purchase is the exercise of the option.
The unissued option pool is the part that the company did not grant yet. It belongs to nobody, and it waits for future hires.

Northwind granted 1,200,000 options. The other 1,005,882 options in its pool are unissued.

SAFEs

A SAFE is not stock. It is a promise of shares at the next priced round. Its valuation cap is the highest valuation at which it converts. Many cap tables show each SAFE as converted: the shares that it will get at its cap. A post-money SAFE gets its money ÷ its cap of the company. Northwind’s $2M bridge SAFE has a $30M post-money cap, so it gets 6.67%.

Which total you divide by

This is the key skill. Ada has the same 5,000,000 shares in every view, but three totals exist:

Outstanding shares count only the stock that holders own today: common and preferred.
Fully diluted shares add each item that can become a share: granted options, warrants, and the unissued pool. A warrant is a right to buy shares at a set price, and companies often give warrants to lenders.
Fully diluted with the SAFEs as converted also adds the shares that the SAFEs will get.

Predict first

Ada holds 5,000,000 of Northwind's 16,176,471 outstanding shares, which is 30.91%. What does she own when you also count the options, the pool, and the bridge SAFE?

Type a guess before you continue. A guess first, even a wrong one, makes the answer easier to remember.

Outstanding:                5,000,000 ÷ 16,176,471 = 30.91%
Fully diluted:              5,000,000 ÷ 18,382,353 = 27.20%
Fully diluted, with SAFE:   5,000,000 ÷ 19,695,378 = 25.39%

Investors negotiate on the fully diluted number. When an investor offers “20% of the company”, the investor means 20% of the fully diluted shares after the round. Founders must count in the same way, or they compare two different things. Each term sheet defines “fully diluted”, and the definition can change from one deal to the next. Read the definition before you compare numbers.

Two numbers never go into the total. Authorized shares are the most shares that the charter lets the company issue. The authorized shares that the company did not issue give ownership to nobody. Shares that the company bought back are not outstanding. The lesson on shares and ownership explains these counts.

Annotated cap table

Northwind Labs between its seed and its Series A

Select a part of the table to read what it means. Then change the basis and watch the ownership column.

Divide by

Part of the table

Part 1: Rows. Each row is one holder. Northwind has seven rows: the two founders, the pre-seed SAFE holders, the seed investors, the employees, the unissued pool, and the bridge SAFE. A real cap table often has one row for each person or fund.

Northwind Labs cap table on the basis of fully diluted shares
Holder	Ownership	Common	Preferred	Options	SAFE
Ada, founder	27.2%	5,000,000
Ben, founder	27.2%	5,000,000
Pre-seed SAFEs	13.6%		2,500,000
Seed investors	20%		3,676,471
Employees	6.53%			1,200,000
Unissued pool	5.47%			1,005,882
Bridge SAFE	—				1,313,025
Total	100%	10,000,000	6,176,471	2,205,882	1,313,025

Ada: 27.2%; 5,000,000 shares
Ada and Ben: 54.4%
Investors: 33.6%; Preferred stock
Shares counted: 18,382,353

Ada holds 5,000,000 shares in every view. As a part of fully diluted shares, she owns 27.2%. Investors negotiate on a fully diluted basis such as this one, so this is the number to quote.

Work it out

Ben holds 5,000,000 shares. Northwind has 18,382,353 fully diluted shares. What is Ben's fully diluted ownership?

Work it out

A different company has 12,050,000 fully diluted shares. An investor signs a $1M SAFE with a $10M post-money cap. How many shares does the SAFE get as converted?

The pro forma cap table

A pro forma cap table shows the cap table as it will be after a deal closes. “Pro forma” means “as if”: the table shows the company as if the deal closed today. It shows the SAFEs as converted, the new pool, and the shares of the new investors.

Founders make a pro forma cap table before they sign a term sheet, the short document with the primary terms of a round. The reason is simple: the headline percentage tells you what the new investors buy, not what you keep. Northwind has a Series A term sheet: $15M at a $60M pre-money valuation, with an unissued pool of 12% after the round. The worked example shows how its lawyer makes the pro forma table.

Worked example · step 1 of 5

Northwind's pro forma cap table for the Series A

1
Convert the bridge SAFE
The SAFE gets $2M ÷ $30M = 6.67% of the company capitalization, which includes the SAFE shares. Thus the current 18,382,353 fully diluted shares are the other 93.33%.
```
SAFE shares = 18,382,353 × 6.67% ÷ 93.33% = 1,313,025
SAFE price  = $30M ÷ 19,695,378           = $1.5232
```

Now change the term sheet yourself. Watch the change column: the new money is only one of three items that get a part of the founders’ share.

Pro forma cap table

What Northwind looks like after the Series A

Change the term sheet. The table shows each holder today and after the round closes.

Series A money

Pre-money valuation$60M

Unissued pool after the round12%

As a part of the post-money fully diluted shares.

Price per share: $2.7288
Series A investors: 20%; $15M ÷ $75M
Ada and Ben: 36.38%; 54.4% today
Pool top-up: 2,292,264; new options

Northwind today and after the Series A, fully diluted
Holder	Before	After	Change, points	Shares after
Ada (founder)	27.2%	18.19%	−9.01	5,000,000
Ben (founder)	27.2%	18.19%	−9.01	5,000,000
Pre-seed SAFEs	13.6%	9.1%	−4.50	2,500,000
Seed investors	20%	13.38%	−6.62	3,676,471
Employees	6.53%	4.37%	−2.16	1,200,000
Unissued pool	5.47%	12%	+6.53	3,298,146
Bridge SAFE	—	4.78%	+4.78	1,313,025
Series A investors	—	20%	+20.00	5,496,911
Total	100%	100%		27,484,553

The Series A investors pay $15M for 20%. But Ada and Ben go from 54.4% to 36.38%, a decrease of 18.02 percentage points.

Three items get a part in the same round. The bridge SAFE converts into 4.78% of the company. The pool increases by 2,292,264 options to 12%. The new money buys 20%. A pro forma table shows you this result before you sign the term sheet.

The pool top-up in this example is an option pool shuffle: the term sheet puts the new pool in the pre-money, so the current holders pay for it. The lesson on the option pool shuffle explains this term. The lesson on SAFE conversion explains the SAFE step in detail.

Keep the documents, not only the table

The cap table is a summary. The legal documents prove who owns what: the stock purchase agreements, the option grant letters, the board consents, the SAFEs, and the 409A valuation reports. A 409A valuation is an independent appraisal of the common stock. Most companies start with a spreadsheet. After a short time, they move to cap table software that records grants and vesting.

Why do some cap tables show 'Seed-1' and 'Seed-2' when only one seed round occurred?

The SAFEs that convert in a priced round pay a lower price for each share than the new investors pay. That price sets rights such as the liquidation preference. Thus each group that paid a different price gets its own sub-series. On the cap table, they are separate columns, but they all belong to the same round.

Quiz · question 1 of 5

Test what you learned

A company has 6M common shares (the founders), 2M preferred shares, 1M granted options, and an unissued pool of 1M. One founder holds 3M shares. What is her fully diluted ownership?

In this lesson you will learn