Reading a cap table

A cap table lists who owns a company and on what terms. It looks like an administrative document and is in fact the clearest statement of incentives a company produces.

Pre-money, post-money and dilution

If a company raises two million at an eight million pre-money valuation, the post-money valuation is ten million and the new investor holds twenty per cent. Every existing shareholder is diluted proportionally. Dilution is not a problem in itself; it is the price of capital, and the question is what the capital buys.

The option pool

Pools are usually created before the round, out of the existing shareholders' ownership. A ten per cent pool agreed pre-money is paid for by the founders and earlier investors, not by the incoming investor. This is one of the most common points founders miss in a term sheet.

Preferences change the outcome

A one times non-participating preference means the investor takes either the invested amount or their pro rata share of the proceeds, whichever is higher. Participating preferences take both. In a modest exit the difference decides whether the common shareholders receive anything at all.

  • Fully diluted ownership, not headline percentages

  • Liquidation preference and whether it participates

  • Anti-dilution provisions

  • Vesting on founder shares

  • Convertibles and SAFEs that have not yet converted

Reading a cap table well means being able to state, for any exit value, who receives what. If that calculation cannot be done, the case is not finished.

FS Portfolio Management

Research

Category: Investment Strategies

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