Handbook
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Business Fundamentals
Setting Up Your Cap Table Correctly from Day One
A clean cap table makes fundraising smoother and avoids painful restructuring. Here's how to set it up right.
Your cap table (capitalization table) is the record of who owns what percentage of your company. It sounds simple, but cap table mistakes are among the most common and expensive errors founders make.
A messy cap table can delay funding rounds, create tax problems, and cause co-founder conflicts. Here’s how to get it right from the start.
What a Cap Table Includes
Basic Components
Authorized shares: Maximum shares the company can issue (typically 10,000,000)
Issued shares: Shares that have been given out
Outstanding shares: Issued shares minus any repurchased
Option pool: Shares reserved for employee equity
Fully diluted shares: Outstanding + all options, warrants, and convertibles if exercised
Typical Cap Table Structure
Shareholder
Shares
% Ownership
Founder A
4,000,000
40%
Founder B
4,000,000
40%
Option Pool
2,000,000
20%
Total
10,000,000
100%
After a funding round:
Shareholder
Shares
% Ownership
Founder A
4,000,000
32%
Founder B
4,000,000
32%
Option Pool
2,000,000
16%
Series A Investor
2,500,000
20%
Total
12,500,000
100%
Setting Up Your Cap Table
Step 1: Authorize Shares
Your Certificate of Incorporation specifies how many shares you can issue. Standard is 10,000,000. This is the ceiling, not what you’re issuing immediately.
Step 2: Issue Founder Shares
Issue shares to founders immediately after incorporation:
•
Price: Par value ($0.00001 per share is typical)
•
Total cost: A few cents for millions of shares
•
Documentation: Stock purchase agreement
Important: File 83(b) elections within 30 days. This is a tax filing that can save you thousands later.
Step 3: Vest Founder Shares
Even founders should have vesting. Standard:
•
4-year vesting
•
1-year cliff
•
Monthly vesting thereafter
If a founder leaves after 6 months, they shouldn’t keep half the company. Vesting protects everyone.
Step 4: Create Option Pool
Reserve shares for future employees. Typical pre-funding:
•
10-20% of fully diluted shares
•
More for early-stage, less for later
These shares aren’t issued yet—just reserved.
Step 5: Document Everything
Every share issuance needs:
•
Board approval
•
Stock purchase agreement
•
Updated cap table
•
83(b) election (if applicable)
Use software from the start (see tools below).
Cap Table Math
Understanding Dilution
When you issue new shares, existing shareholders own a smaller percentage:
Before:
•
You own 5,000,000 of 10,000,000 shares = 50%
After issuing 2,500,000 new shares:
•
You own 5,000,000 of 12,500,000 shares = 40%
Your absolute number of shares didn’t change. Your percentage decreased. This is dilution.
Fully Diluted vs. Outstanding
Outstanding: Shares actually issued
Fully diluted: Outstanding + everything that could become shares (options, convertibles)
Investors think in fully diluted terms. You should too.
Option Pool Shuffle
Investors often require the option pool to be increased before their investment, diluting only existing shareholders:
Before investment:
•
Founders: 80%
•
Pool: 20%
After expanding pool to 25% then investment:
•
Founders: 60% (diluted by pool expansion AND investment)
•
Pool: 20% (expanded then diluted)
•
Investor: 20%
Understand this mechanism—it significantly affects your ownership.
Common Cap Table Mistakes
Handshake Agreements
“We agreed to split it 50/50” without paperwork. Then disputes arise. Document everything with proper agreements.
No Vesting
Giving founders or employees shares without vesting. If they leave, they take everything. Always vest.
Missing 83(b) Elections
If you receive shares subject to vesting, you might owe taxes as shares vest (at potentially higher valuations). 83(b) election lets you pay taxes upfront at low valuation.
Critical: Must be filed within 30 days. No exceptions. Miss it and you can’t fix it.
Too Many Early Investors
Giving 5% to this friend, 10% to that advisor. You look up and 30% is gone before you’ve raised institutional money. Be stingy early.
Complicated Structures
Multiple classes of common stock, unusual terms, special rights to early investors. These complicate future rounds. Keep it simple.
Unpriced Advisor Shares
Giving advisors equity without clear terms. What happens if they don’t help? Define expectations and vesting.
Lost Track of Cap Table
Using spreadsheets that get out of sync, forgetting to update after issuances. Use proper software.
Cap Table Tools
Carta
Industry standard. Handles:
•
Cap table management
•
409A valuations
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Equity plan administration
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Investor communications
Cost: Free for early stage, $3,000+/year later
Pulley
YC-backed Carta alternative. Popular with startups.
Cost: Free tier, $200+/month for more
AngelList Stack
Free cap table management with fundraising tools.
Spreadsheets
Not recommended, but if you must:
•
Use established templates
•
Version control
•
Single source of truth
•
Update immediately after any issuance
What Investors Look At
When VCs review your cap table:
Clean structure: Standard terms, no unusual provisions
Reasonable founder split: 50/50 or close, with vesting
Option pool: Enough for future hires (15-20%)
Not over-diluted: Founders should own meaningful stake
Organized records: Quick answers to any cap table question
A messy cap table is a red flag. It suggests other parts of the business might be messy too.
After You Raise
Keep It Updated
Update cap table immediately after:
•
Any stock issuance
•
Option grants
•
Exercises
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Transfers
•
Funding rounds
Share with Stakeholders
•
Investors get cap table access
•
Employees should know their percentage
•
Board reviews cap table at meetings
Plan for Future Rounds
Before your next round, understand:
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Current dilution
•
How much more you can raise
•
When option pool needs expanding
•
Impact on founder ownership
Key Takeaways
•
Set up cap table properly from day one—mistakes are expensive to fix
•
Issue founder shares immediately at par value with vesting
•
File 83(b) elections within 30 days—no exceptions
•
Create option pool before raising (10-20%)
•
Use cap table software (Carta, Pulley)—not spreadsheets
•
Document every issuance with board approval and agreements
•
Keep cap table simple—complicated structures cause problems
•
Update immediately after any change
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