How should founders structure and maintain their cap table?

Full Explanation

The capitalisation table (cap table) is the definitive record of who owns what in a company. A clean, accurate cap table is essential for fundraising (investors will scrutinise it during due diligence), equity compensation (employees need to understand their ownership), and exit planning (determining payout waterfalls). A properly structured cap table includes: all ordinary and preference share classes (with their respective rights), the employee stock option pool (granted options, ungranted reserve, exercise prices, vesting schedules), all convertible instruments (SAFEs, convertible notes, warrants) modelled on both an as-issued and fully diluted basis, and any other equity-linked instruments. It should show both current ownership percentages and fully diluted percentages (assuming all options are exercised and all convertible instruments convert). From formation, founders should establish clear equity splits with vesting. The standard founder vesting schedule is 4 years with a 1-year cliff — meaning if a co-founder leaves in the first year, they forfeit all equity. This protects remaining founders from a departed co-founder holding significant equity without contributing. Reserve 10-20% for an employee option pool before your first institutional round. Maintain the cap table using dedicated software (Carta, Pulley, Capdesk, or Ledgy) rather than spreadsheets. Spreadsheets inevitably develop errors as complexity grows — multiple share classes, option grants, convertible instrument conversions, and secondary transactions create calculation challenges that purpose-built tools handle correctly. Update the cap table immediately after every equity event: new share issuance, option grants, exercises, transfers, or cancellations. Common cap table mistakes include: not modelling the dilutive impact of the option pool, ignoring convertible instruments in fully diluted calculations, failing to track vesting accurately, and not maintaining proper shareholder agreements and board resolutions for each equity event.

Related Glossary Terms

Related Questions