Our first cap table was a spreadsheet with nine rows. Founders, a placeholder for an option pool nobody had modeled, and a note at the bottom in a different color reminding us to add the advisor we had promised something to but had not yet quantified.

It fitted on one screen. That was the last time it did.

A cap table looks like a record of who owns what. It is not. It is a forecast of who will own what once everything you have already promised comes true, and the gap between those two readings is where founders lose companies they still technically control.

Outstanding versus fully diluted

There are two numbers for every line and they are rarely the same. Outstanding shares are what has actually been issued. Fully diluted includes everything that could become a share: the unissued option pool, outstanding options, warrants, and every convertible instrument you have signed.

Founders quote outstanding. Investors read fully diluted. The number that matters in every negotiation you will ever have is the second one, so start using it now, and build the model yourself rather than accepting somebody else’s summary. Not because anyone is dishonest, but because the person who built the model understands the assumptions inside it, and in a negotiation that understanding is the entire advantage.

The option pool and where it comes from

You need equity to hire. A pool of ten to twenty percent is standard, sized against the hiring plan for the next eighteen months rather than against a number somebody quoted.

The part that surprises people is when the pool gets created. Investors almost always require it to be established before their money goes in, which means it comes out of the pre-money valuation. In practice that means the founders pay for it entirely, and the arithmetic is not intuitive.

Take a round of three million dollars on a fifteen million pre-money valuation. Post-money is eighteen million, so the new investors hold one sixth of the company, about 16.7 percent. Now add a fifteen percent option pool created pre-money. That fifteen percent is fifteen percent of the post-money company, and it is carved entirely out of the existing holders. The founders do not end up with 83.3 percent minus a bit. They end up with roughly 68.3 percent, and the fifteen points went somewhere they had not modeled.

This is not a trick and it is not hidden. It is standard practice and it is negotiable at the margin. What is not acceptable is being surprised by it on the day the term sheet arrives, because a founder who is doing this arithmetic for the first time in a meeting has already lost the argument about pool size.

SAFEs, and the trap in the word post-money

Most early money now arrives as a simple agreement that converts into equity later, usually at a valuation cap. It is fast, cheap and lawyer-light, which is why it won. It also defers the moment anybody has to think, which is why it hurts.

The critical detail is whether the cap is pre-money or post-money. Under the post-money version, which is now the common one, the investor is promised a fixed percentage of the company as it stands at conversion. That percentage does not dilute when you issue the next instrument. Only the founders dilute.

Work it through. You raise one million dollars on a ten million post-money cap. That investor is promised ten percent. Six months later you raise another million on a twelve million post-money cap. That investor is promised 8.33 percent. The first investor still gets their ten percent. The founders now hold 18.33 percent less than they did, before any priced round, before any option pool, and before anyone has valued the company in a negotiation.

Three or four of these stacked up is common, and the result is a founding team that discovers at their first priced round that they collectively hold less than half of their own company and have no idea when it happened. The instrument did not do anything unfair. Nobody modeled the conversion.

So model the conversion. Before you sign each one, build the row where all outstanding instruments convert at a plausible next round, add the pool, and look at what the founders hold. If that number makes you uncomfortable, the time to act is before signing, not after.

The small grants that add up

The large numbers get scrutiny. The small ones get waved through, and collectively they do more damage because nobody is tracking the total.

• Advisors. The market range is roughly a quarter of a percent to one percent, vesting over one or two years, with a defined commitment such as a monthly call. Anyone requesting five percent for advice is not an advisor. Vesting matters here more than anywhere else, because advisor engagement reliably decays.
• Agencies and contractors taking equity instead of cash. This is attractive when cash is short and it is almost always expensive. You are selling the most valuable asset you have at the lowest price it will ever carry, to a party whose involvement ends when the project does.
• Uncapped notes from friends and family. Well intentioned, and they convert at whatever the next round decides, which means the person who took the earliest risk gets the worst terms. That produces a conversation you will not enjoy.
• Verbal promises. A percentage mentioned in a conversation and never documented is not on the cap table, but it is absolutely in somebody’s head. Those surface during diligence, always at the worst moment.

Three ways this goes wrong

You keep the cap table in a spreadsheet past the point where that works. It works for about a year. It stops working the first time somebody exercises an option, or a note converts, or a founder departs mid-vest. Move it to a proper register before it breaks, not after, because reconstructing a cap table from email is a genuinely awful week.

You optimize for a headline valuation instead of a clean structure. A high cap feels like a win and costs nothing today. The bill arrives when the priced round has to reconcile every instrument you signed. Investors are not primarily buying your valuation history. They are buying whether the founders still own enough to stay motivated for another four years, which is the actual question behind every diligence request about the cap table.

You treat dilution as loss. It is not. Owning a smaller share of a company that exists beats owning all of one that does not. The failure is not dilution, it is unmodeled dilution, which is the same mistake as unmodeled cost and produces the same expression on the same face eighteen months later.

Every early act of generosity gets priced by the next investor, and they price it against you.

Tomorrow: the one-page product definition, and the question that decides whether you have a company or a feature.