The secret to startup success: understand your cap table

It’s very simple: if you want your startup to succeed, you need to get your cap table just right. Mastering your cap table is essential for startup success, whether you're raising your first funds or preparing for a Series B. It’s a core motivator, keeping founders, investors, and employees with enough stake in the business to stay on board for the long haul. In this blog post, we’ll discuss what a cap table really is, what it’s made of and how to work with it as your company scales.

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What’s a cap table?

A cap table, short for capitalization table, is a document that tracks who owns what in your company. At its simplest, it shows who owns what in your company right now. At a deeper level, it tracks equity commitments like convertible notes, warrants, and grants. This ihelps model fully diluted capitalization (the total shares if all options and convertible securities are exercised) and gives you a “full picture” of the ownership structure over time.

Cap table plays a pivotal role in your company’s survival - because it makes sure that everyone on the team is motivated by having enough skin in the game. As the famous startup saying goes, anything in business can be fixed—except for a broken cap table.

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As your company grows, ownership will shift. Here’s a guide to typical ownership benchmarks at the most universal stages of company growth:

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Pre-seed: Founders typically hold at least 80-90% of equity.

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Seed: When the first investors join, founders’ ownership percentage typically drops to around 60-70%, with an ESOP of 10-15 % set aside for talent. Investors typically own between 15-30% at this stage.

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Series A: Founder ownership drops to 50-55% as institutional investors come on board. At this stage, investors typically own around 35-45 % of equity and the ESOP pool is often “topped up”.

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What’s your cap table made of?

Your cap table covers key information about each stakeholder and their ownership. A well-structured cap table will include:

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Company valuation: This is the value of your startup during each funding round. It’s the baseline for calculating ownership percentages of each stakeholder (founders, investors and employees).

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Share class: This refers to the type of shares each stakeholder owns. You’ll typically see common shares (owned by founders, employees and early investors), preferred shares (held by institutional investors) and convertibles (instruments like convertible notes, SAFEs, warrants or options that can convert to equity at a later stage).

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Stakeholders: A list of all people who own equity or a convertible that can transform into equity. You’ll need to include founders, investors and employees.

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Fully diluted shares: This information gives you the number of all company shares if every convertible is exercised (and converted into equity). It offers a full, long-term picture of you company’s ownership. It’s also the basis for calculating the fully diluted ownership of each stakeholder.

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How does your cap table change over time?

A cap table is a living document. It shifts as your startup scales, evolving through funding round, ESOP grants, and changes in the founding team. In this section, we’ll break down all key events and show you how to navigate them to keep motivation at 100%.

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#1 Distributing founders’ equity

Founder equity should prioritize active contributors to drive growth. If a founder leaves or becomes inactive, it can create the so-called "dead equity” - equity owned by ex-founders who no longer contribute to the company’s growth.

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Solution: Set up a mechanism to address inactive founders, like reverse vesting or forced buyback. With reverse vesting, if a founder leaves before the so-called (reverse) vesting period is over, they lose a proportional part of their shares. Forced buyback lets the company repurchase shares from inactive founders.

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#2 Onboarding new investors

Whenever new investors come on board, there’s a risk of giving away too much equity too soon which inevitably limits your future choices. Specifically, it can mean that you don’t have enough shares to attract new hires or investors.

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Solution: First off, consult industry benchmarks. They can inform your first idea of how much equity to give away. Before finalizing any agreement, ask yourself: is this equity exchange proportional to the investor’s contribution and risk profile? Will it limit my future hiring or fundraising options?

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#3 Implementing ESOP

ESOP is essential for attracting and retaining talent, but it the numbers around ESOP pool size and grant size work. A small ESOP pool won’t motivate your people. An excessively large one will either swallow founder equity or limit your future fundraising options. When designing ESOP pool size.

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Solution: To start with, set aside 10-15% of equity for the ESOP. Use an allocation calculator to distribute it wisely. Make sure the vesting schedules align with long-term goals, keeping employees motivated while protecting founders’ stakes.

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Dos and don’ts

Here are some practical tips to keep your cap table strong and your entire team motivated:

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Dos:

• model funding scenarios to see how they impact company ownership (including dilution)
• plan fundraising and runways carefully to keep a strong position when negotiating funding terms
• set up a mechanism to deal with inactive founders, like reverse vesting or forced buyback
• at seed, reserve 10-15% of equity for an ESOP to motivate your team
• use cap table management tools to keep the admin light

Don’ts:

• overcomplicate your cap table
• give away too much equity too soon. It can discourage future investors if founder control is already weak
• set sky-high growth expectations in your scenario modeling. Be ready for worst-case scenarios too
• skip double-checking all calculations because small errors can lead to big issues
• set ESOP vesting schedules that clash with your long-term goals. Keep them balanced to motivate your team and protect founder control

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In a nutshell

A well-built cap table is the backbone of your startup’s growth. From structuring ownership at the beginning to preparing for negotiations with investors, a clean cap table keeps you ready. Start by understanding the basics, set aside an ESOP to attract talent, and use benchmarks to guide equity distribution for future hires and investors. Remember, your cap table isn’t just a document, it’s a dynamic tool for managing control, motivating your team, and planning for growth.

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If you need guidance on refining your cap table, reach out to us. We’ll give you a hand and make sure your startup’s ready for growth.

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