Cap Table & Dilution
Ownership, dilution, and the basic terms behind a raise, in plain language.
What is this?
A cap table ("capitalization table") is the record of who owns what percentage of your company — founders, employees, and investors — and how that changes over time.
This playbook explains the core concepts in plain language. It is educational, not individualized legal or financial advice, and the numbers below are simple illustrative examples, not a real cap table.
Why it matters
Every fundraising decision changes who owns how much of your company. Understanding these mechanics before you raise money helps you make informed decisions instead of being surprised by them later.
Step by step
- 1Understand ownership: each shareholder owns a percentage of the total shares outstanding.
- 2Understand dilution: when new shares are issued (usually to a new investor), everyone else's percentage ownership goes down, even though the number of shares they hold doesn't change.
- 3Understand pre-money vs. post-money valuation: pre-money is the company's value before new investment is added; post-money is pre-money plus the new money raised. An investor's ownership percentage is roughly the amount they invest divided by the post-money valuation.
- 4Understand SAFEs: a SAFE (Simple Agreement for Future Equity) is a common early-stage instrument where an investor gives money now in exchange for equity later, usually when a future priced round happens — it is not a loan and not immediate equity.
- 5Understand priced rounds: unlike a SAFE, a priced round sets an actual valuation and issues real equity immediately.
- 6Understand option pools: a block of shares set aside (usually before a raise) to grant to future employees — creating an option pool also dilutes existing shareholders.
What good looks like
Example (illustrative only, not advice): if your company is valued at $4M pre-money and an investor puts in $1M, the post-money valuation is $5M, and that investor owns roughly 1M / 5M = 20% of the company going forward — with everyone else's existing percentage diluted accordingly. You should be able to reconstruct a simple example like this yourself before you raise real money, and to talk to a real lawyer or advisor before you sign anything.
Common mistakes
- Confusing a SAFE with a loan — a SAFE has no interest rate or repayment obligation.
- Not realizing that a large option pool created right before a raise dilutes the founders, not the incoming investor.
- Assuming ownership percentage only changes at a priced round — SAFEs, option pools, and any new share issuance can all dilute existing holders.
- Signing multiple SAFEs with inconsistent or unclear terms without understanding how they'll convert together later.
Checklist
- You can explain dilution in one sentence, in plain language.
- You know the difference between pre-money and post-money valuation.
- You understand that a SAFE is not equity yet and not a loan.
- You know that an option pool for future hires also dilutes existing shareholders.