This cap table example makes seed dilution visible

A cap table example is useful only when every percentage names its denominator. Founders often negotiate a split as if 55% and 45% will sit still, then discover that an option pool and a financing each changed the denominator in a different way. The arithmetic is not difficult. The sequencing is where people get hurt.

We will follow one fictional Delaware corporation, Harbor Analytics, from formation through a priced seed round. Two founders start with 10,000,000 issued common shares. The company later reserves shares for an equity plan, grants part of that reserve, and raises $2,000,000 at an $8,000,000 pre-money valuation. No SAFEs, notes, warrants, secondary sales, or pro rata purchases appear in this example. Those instruments matter, but mixing them into the first model hides the mechanics you need to see. This is an educational model, not tax or legal advice; use counsel and a tax adviser for the documents and elections behind your actual ledger.

Start with issued shares, not percentages

At formation, record the number and class of shares each founder buys. The percentage is a calculated view, not the durable fact. Harbor Analytics authorizes enough common stock in its certificate of incorporation, and its board approves issuances of 5,500,000 common shares to Lena and 4,500,000 common shares to Priya. Each founder signs a stock purchase agreement and pays the approved purchase price.

The formula in each founder row is issued shares / total issued shares. Lena owns 5,500,000 / 10,000,000 = 55%. Priya owns 4,500,000 / 10,000,000 = 45%. At this moment, issued and outstanding shares are the same in our simplified ledger.

Authorized shares do not belong in the ownership denominator. Authorization sets the ceiling the corporation may issue under its charter; it does not create an owner. Delaware General Corporation Law Section 102 requires the certificate to state the authorized share count and classes. Section 152 says the board determines the consideration and may authorize issuances in specified amounts and transactions. A cap table entry should therefore reconcile to corporate approvals and purchase records, not to a founder's memory of the deal.

The founding split also needs vesting terms, even though vesting does not change the number of issued shares on this table. A common arrangement lets the company repurchase unvested shares when a founder leaves. The founder still holds all purchased shares while the restriction applies, so the cap table may show a separate vested and unvested breakdown without pretending the unvested shares do not exist. If restricted stock is involved, ask a tax adviser immediately about an Internal Revenue Code Section 83(b) election and its deadline. Do not let the cap table substitute for that conversation.

Equal shares are not automatically fair, and unequal shares are not automatically sophisticated. Write down how you valued prior work, cash, intellectual property, expected roles, and time commitment. Then model the split after hiring and financing. Cooley GO recommends building a simple financing pro forma and working backward when allocating early equity. I agree with the method because it turns a vague argument about today's percentages into a concrete discussion about ownership after the company has paid for a team and raised capital.

An option pool changes the denominator

Creating a 1,500,000-share option pool dilutes the founders on a fully diluted view, even though the company has not granted or issued those shares. The board and stockholders approve an equity incentive plan with a 1,500,000-share reserve. Harbor Analytics now has 10,000,000 issued common shares and 1,500,000 shares available for future awards.

The 11,500,000 in the total row is a fully diluted count, not an issued share count. That distinction deserves its own columns. The issued denominator remains 10,000,000, so Lena still owns 55% of issued stock. The fully diluted denominator assumes the entire plan reserve becomes shares: 10,000,000 + 1,500,000 = 11,500,000. On that basis, Lena has 5,500,000 / 11,500,000 = 47.83%.

People use "fully diluted" casually, but deal documents define what goes into it. A financing calculation may include issued common, preferred stock on an as-converted basis, outstanding options, warrants, promised grants, and the ungranted plan reserve. Another report may exclude some of those categories. Put the definition above the table. A percentage without that definition can be mathematically correct and commercially misleading.

A plan reserve is not the same as authorized but unissued stock. The charter may authorize millions of shares that no plan has reserved and no agreement has committed. Those blank authorized shares generally stay outside the cap table's fully diluted denominator until a defined instrument or transaction pulls them in. The option reserve, by contrast, is a specific board and stockholder approved bucket for compensatory awards.

The SEC's Rule 701 provides a federal registration exemption for qualifying compensatory sales by eligible private companies, subject to conditions and limits. It does not turn a spreadsheet row into a valid equity plan or award. The company still needs plan documents, approvals, award agreements, securities-law analysis, and state-law compliance. Treat the cap table as the index to that paperwork, not as the paperwork itself.

Grants consume the pool without new dilution

Granting 500,000 options from an existing reserve does not change the fully diluted total. It moves shares from the ungranted pool row to named award rows. Harbor Analytics grants 300,000 options to its first engineering hire and 200,000 to its first sales hire, leaving 1,000,000 shares available.

The check is simple: 500,000 granted + 1,000,000 ungranted = 1,500,000 reserved. The fully diluted denominator stays 11,500,000. If your spreadsheet adds a new grant but fails to reduce the available pool, it double counts the same shares and invents dilution. I have seen that error survive into investor diligence because every individual row looked plausible.

An option grant also is not an issued common share. Before exercise, the employee usually holds a contractual right to buy shares under the award terms. The issued common column remains zero for that holder in this example. A separate vesting schedule tracks how many options have vested, but the standard fully diluted view usually includes all outstanding options, vested and unvested. Label any different convention.

Do not tell a candidate that 300,000 options equal 3% without stating the denominator and date. At grant, the engineering hire's award equals 300,000 / 11,500,000 = 2.61% on this fully diluted table, before the seed financing. After the financing, the same 300,000 underlying shares will represent 2% because the denominator grows to 15,000,000. Nothing happened to the grant. The company sold and reserved more shares around it.

Keep promised grants in a separate section until the board approves them. Investors may still include those promises in the financing denominator, especially when an offer letter specifies equity. Operationally, though, an approved award and a management promise are different states. If you merge them, counsel cannot tell what exists, finance cannot reconcile the reserve, and the recipient may think the board has acted when it has not.

The seed term sheet hides a pool top-up

A term sheet that says "$8 million pre-money, $2 million investment, and a 10% post-closing unallocated option pool" makes existing holders pay for the pool increase if the top-up sits in the pre-money capitalization. Harbor Analytics has only 1,000,000 ungranted shares before the round. Ten percent of the eventual post-money total will be 1,500,000 shares, so the company must add 500,000 shares to the reserve before pricing the investment.

This is the option pool shuffle in plain arithmetic. The new investor buys 20% of the company because $2,000,000 / ($8,000,000 + $2,000,000) = 20%. If the desired ungranted pool is also measured after closing but added before the price per share is calculated, founders and existing option holders absorb that extra dilution. The investor's 20% calculation already assumes the enlarged pre-money denominator.

Cooley GO describes the pool as the percentage of post-closing fully diluted capitalization available for future grants and warns that a needlessly large reserve can cost founders ownership even when the headline valuation looks better. That warning is more useful than the slogan "a higher valuation is always better." A higher pre-money number paired with an oversized pre-money pool can yield worse founder ownership than a lower valuation with a hiring plan sized honestly. Compare the complete pro formas, not the valuation labels.

The right negotiation is about hiring. Build a role-by-role grant budget through the next expected financing, include a sensible buffer, subtract the existing ungranted reserve, and defend that number. An investor may disagree with your hiring plan, but at least the disagreement will concern positions and grants rather than a round percentage chosen by habit.

Our example assumes no convertible instruments. If Harbor Analytics had SAFEs or notes, their conversion shares and any discount or valuation cap could change the pre-money denominator, the price per share, or both, depending on the documents. Do not paste those instruments into an "investor" row at face value. Model each conversion formula under the actual agreement, then place the resulting shares in the capitalization sequence specified by the financing documents.

Solve the pool top-up before the share price

The pool top-up can be solved with one equation instead of trial and error. Let P be pre-money fully diluted shares after the top-up, N be new investor shares, and U be the desired ungranted pool after the top-up. The term sheet requires the investor to own 20% and the ungranted pool to equal 10% of the post-money total.

Before the top-up, fully diluted shares are 11,500,000 and the ungranted pool is 1,000,000. Let T be the top-up. Because the investment equals one quarter of the pre-money valuation, investor shares will equal one quarter of pre-money fully diluted shares: N = 0.25 x P. Post-money shares therefore equal 1.25 x P.

The pool equation is:

(1,000,000 + T) / (1.25 x (11,500,000 + T)) = 10%

Solve it line by line:

1,000,000 + T = 0.10 x 1.25 x (11,500,000 + T)
1,000,000 + T = 0.125 x (11,500,000 + T)
1,000,000 + T = 1,437,500 + 0.125T
0.875T = 437,500
T = 500,000

After the top-up, the ungranted reserve is 1,000,000 + 500,000 = 1,500,000. Pre-money fully diluted shares are 11,500,000 + 500,000 = 12,000,000. The investor will receive 0.25 x 12,000,000 = 3,000,000 shares, making the post-money total 15,000,000. The reserve check works: 1,500,000 / 15,000,000 = 10%.

This exact result depends on our clean inputs. Real financing spreadsheets often produce fractional shares during the first pass. The final capitalization, price, and investment amount must follow the rounding rules and exact figures in the legal documents. Do not silently round each intermediate cell to a displayed value; keep full precision in formulas and display fewer decimals only for reading. Otherwise a tidy table can fail to reconcile to the stock purchase agreement by one or more shares.

Price the seed shares from pre-money capitalization

The seed price per share equals the pre-money valuation divided by the agreed pre-money fully diluted share count. After the 500,000-share pool top-up, Harbor Analytics has 12,000,000 pre-money fully diluted shares.

Price per share = $8,000,000 / 12,000,000
Price per share = $0.6666666667

Investor shares = $2,000,000 / $0.6666666667
Investor shares = 3,000,000

The company issues 3,000,000 shares of Series Seed preferred stock. On an as-converted basis, we assume each preferred share converts into one common share, so the cap table counts 3,000,000 fully diluted shares. Actual preferred stock carries rights set in the amended certificate of incorporation and financing agreements. Delaware General Corporation Law Section 151 permits classes and series with specified preferences and rights; the phrase "preferred stock" alone does not tell you what those rights are.

Do not calculate price per share as $8,000,000 / 10,000,000 founder shares. That gives $0.80 and ignores both the 500,000 outstanding options and the 1,500,000 ungranted pool included in the negotiated pre-money capitalization. At $0.80, the investor would receive only 2,500,000 shares. The table would no longer give the investor the agreed 20% post-money stake under the stated pool convention.

Also keep valuation and cash distinct. The $8,000,000 pre-money valuation is a negotiated equity value used to set the financing price. It is not cash in the bank, revenue, an appraisal, or the sum of par values. The $2,000,000 investment is new cash paid to the company in this primary financing. A secondary purchase from a founder would transfer existing shares and cash to the seller; it would not create the same share count or company proceeds.

The pre-money + investment = post-money shortcut works here because we excluded conversions and other adjustments and defined both values consistently. In a more complicated round, ask counsel which instruments sit inside or outside each valuation definition. A spreadsheet should mirror the deal language. It should never invent its own economic sequence.

The post-money cap table must prove itself

A correct post-money table passes three tests: shares sum to the denominator, ownership sums to 100%, and the rows reproduce the negotiated investor and pool percentages. Harbor Analytics closes with this capitalization on an as-converted, fully diluted basis:

Lena moved from 55% of issued shares at formation to 47.83% after the initial pool, then to 36.67% after the pool top-up and seed financing. Priya moved from 45% to 39.13% to 30%. The hires' combined 500,000 options moved from 4.35% immediately after grant to 3.33% after closing. Those changes are dilution: their numerators stayed fixed while the fully diluted denominator increased.

The investor row proves the financing economics: 3,000,000 / 15,000,000 = 20%. The reserve row proves the hiring capacity: 1,500,000 / 15,000,000 = 10%. The founders together hold 10,000,000 / 15,000,000 = 66.67%. Outstanding employee options account for 3.33%. All four groups sum to 100%.

Do not round row percentages and then use those rounded percentages for later calculations. The displayed 36.67% is really 5,500,000 / 15,000,000 = 36.666...%. Store shares and formulas as the source data. Percentages are outputs. If a board consent, investor schedule, and cap table show different totals, stop the closing process long enough to reconcile them. A difference that looks cosmetic can reveal a missing grant, duplicate certificate, or wrong financing denominator.

Economic ownership also does not equal voting power or exit proceeds. Preferred stock may have liquidation preferences, protective provisions, conversion mechanics, and other rights. A 20% as-converted ownership row cannot tell you what the investor receives in every sale outcome. Use a separate waterfall model for proceeds and read the charter for rights. The cap table answers who holds which securities and how a stated denominator allocates ownership. It does not answer every question about control or payout.

Read the dilution in chronological slices if you want to know which term caused which change. Immediately before the top-up, the founders jointly own 10,000,000 / 11,500,000 = 86.96% on a fully diluted basis. Adding 500,000 reserve shares changes their pre-money position to 10,000,000 / 12,000,000 = 83.33%. The pool negotiation alone costs the founders 3.62 percentage points. The financing then multiplies every existing holder's pre-money percentage by 80%, because the investor takes 20% of the post-money company. That turns the founders' 83.33% into 66.67%.

The same bridge works for an individual row. Lena starts the round at 47.83%, falls to 5,500,000 / 12,000,000 = 45.83% when the reserve grows, and finishes at 36.67% after new money. Priya moves from 39.13% to 37.50% to 30.00%. Showing those intermediate columns prevents the entire change from being blamed on the investor purchase. Part of it bought hiring capacity that all post-closing holders share.

You can also express dilution as a relative reduction rather than a percentage-point change. Lena's stake declines by about 4.17% relative to her pre-top-up position when the reserve grows: (47.83% - 45.83%) / 47.83%. It then declines by exactly 20% relative to 45.83% when the investor shares enter. Do not mix these two descriptions. A fall from 45.83% to 36.67% is 9.16 percentage points and a 20% relative reduction. Both statements are true, but they answer different questions.

This bridge is also the fastest way to compare term sheets. Run the pool adjustment first, record each existing holder's revised pre-money percentage, then apply the ownership sold in the financing. If two offers use different valuations, investments, or pool targets, the bridge reveals which term moves founder ownership instead of collapsing every effect into one final percentage.

Copy these rows and formulas into a spreadsheet

A useful spreadsheet separates inputs, security rows, and checks. Do not bury the negotiated terms inside formulas. Put the pre-money valuation, new investment, target post-money ungranted pool, existing issued shares, outstanding awards, and current ungranted reserve in labeled input cells. Then someone reviewing the file can change a term without reverse engineering your arithmetic.

Use these columns for the pro forma sheet:

Create separate rows for each founder, each investor, each outstanding award, and the ungranted reserve. For a board-level view, you may group employee awards, but keep a supporting grant ledger that ties to the grouped number. Never replace the detail with a single "team" percentage that nobody can reconcile.

Add these checks below the table:

1. Total ownership equals 100% within a tiny display tolerance.
2. Investment cash equals new preferred shares x price per share.
3. Post-money valuation equals pre-money valuation + primary investment under the deal's definition.
4. Ungranted reserve equals target pool percentage x post-money FD shares.
5. Granted awards plus ungranted reserve equals the approved plan reserve, including the top-up.

For this example, check four returns $2,000,000 = 3,000,000 x $0.6666666667 subject to the document's precision, and check five returns 500,000 + 1,500,000 = 2,000,000. The second equation shows the equity plan after the top-up: 500,000 shares under outstanding grants plus 1,500,000 available shares.

Version the file at every signed financing and material equity action. Use transaction dates, security identifiers, certificate or notice references, board approval dates, vesting commencement dates, exercise prices, and cancellation status in the supporting ledger. The polished ownership tab should pull from that ledger. Manual retyping is how a canceled option comes back from the dead during diligence.

The cap table still is not the legal record

The cap table is a model of the legal record, so every row needs evidence behind it. For founder stock, keep the board approval, stock purchase agreement, proof of payment, vesting terms, and any tax-election records. For options, keep the approved plan, grant approval, award agreement, exercise price, vesting schedule, exercises, and cancellations. For the seed round, keep the amended charter, stock purchase agreement, disclosure schedules, board and stockholder approvals, and closing records.

The National Venture Capital Association publishes model venture financing documents as an internally consistent set, including a certificate of incorporation and stock purchase agreement. That is a useful reminder about dependencies: copying only a cap table schedule does not reproduce the deal. Your counsel should adapt the complete document set to the negotiated terms, company history, and governing law.

Run a reconciliation before you send the cap table to an investor. Match issued shares to the stock ledger, granted options to board consents, the available reserve to plan approvals, and financing shares to signed purchase documents. Confirm that terminated grants and exercised options moved to the correct rows. Confirm that the charter authorizes enough shares of each class for the closing. Delaware law gives the board room to approve issuances, but the corporation still must act within its charter and document the action.

When a mismatch appears, preserve both versions and trace transactions in date order. Do not overwrite the old number until you understand why it changed. The usual causes are mundane: an unsigned grant, a stale pool figure, a split applied to some rows but not others, or a SAFE conversion entered twice. A clean audit trail makes correction possible; a spreadsheet passed around as final-final-2 does not.

Sisters members can use the community to ask other women founders how they prepared for a financing discussion or to get honest feedback on a plan before taking it to counsel. Peer review helps you find the awkward question, but it does not replace company records or professional advice.

The number to carry into your next negotiation is not today's founder percentage. Carry a dated cap table with explicit issued and fully diluted denominators, a hiring-based pool budget, and a pro forma that reproduces every term. If the investor's model gives a different answer, compare the sequence line by line until both sides can point to the exact assumption that differs.