Cap table

The cap table is the list of shareholders or equity owners for a company, and how much each of them owns. It’s a vital element of negotiation with investors as it determines who will own what once the investment has been realised.

As more shares are issued (to new investors), %age ownership of the company associated with the previous share allocations is reduced. This is known as dilution.

Very simply, if two co-founders each own 50% of a company with 2,000 shares each and they are looking to raise $500k in a seed round, then an Angel that wants 20% of the company for that amount will reduce the value of each founder to 40% and sets the valuation of the company at $2.5m, and the share value at $500 each. The founders have been diluted from 50% to 40%. 

In the next round, if the company valuation has risen to $5m, and the founders need another $1m, then they will issue 1,000 new shares at $1,000 each. That’s a 16% share after investment, so the Angel is diluted to 16% and each founder to 33% (ignoring decimal places on the %ages).

Excessive founder dilution is undesirable as the investors need the founders to be financially motivated to make the company succeed, and if they have very little ownership they have less reason to do so.

Note also that when investors take equity, it is in the form of preferred stock which means that it is paid out before (in preference to) common stock.