How to Build a Cap Table with Dilution Modeling
Take control of your startup's equity with a comprehensive cap table model. Learn to track ownership, model funding rounds, manage option pools, and forecast dilution through multiple scenarios.
A capitalization table (cap table) is the single most important document for tracking who owns what in your startup. It shows the ownership stakes of founders, investors, and employees at any point in time — and more importantly, how those stakes will change through funding rounds, option grants, and exits. Getting your cap table right from day one prevents costly mistakes: founders who give away too much equity early, poorly structured option pools that dilute the wrong people, or "dead equity" from departed team members. Research shows that founders using systematic dilution modeling retain 28% more ownership through exit compared to those who negotiate reactively. This guide walks you through building a comprehensive cap table model that tracks current ownership, forecasts dilution through multiple funding scenarios, manages your employee option pool strategically, and helps you make informed decisions before signing any term sheet. Whether you're just incorporating or preparing for Series A, a well-structured cap table is essential for maintaining control while raising the capital you need to grow.
What You'll Need
- Basic understanding of startup equity and fundraising concepts
- Familiarity with financial calculations and percentages
- Google Sheets or Excel proficiency
- Knowledge of your company's current ownership structure
- Understanding of funding terms (pre-money, post-money valuation)
- Optional: AI assistant like ModelMonkey for formula creation and scenario modeling
Step-by-Step Guide
Set Up Your Cap Table Structure
Create a clean, organized foundation for tracking equity ownership across multiple rounds.
- Create separate tabs for: (1) Current Cap Table, (2) Funding Round Scenarios, (3) Option Pool Management, (4) Dilution Analysis, (5) Exit Waterfall
- In your Current Cap Table tab, set up columns: Shareholder Name, Shareholder Type (Founder/Investor/Employee/Option Pool), Share Class (Common/Preferred), Shares Owned, Ownership %, Fully Diluted Ownership %
- Add calculation columns: Total Shares Outstanding, Total Fully Diluted Shares (including all options), Preferred Share Count, Common Share Count
- Use consistent formatting: freeze top row for headers, use bold for section headers, use data validation for dropdown fields
- Create a summary section at the top showing: Total Shares, Total Fully Diluted Shares, Number of Shareholders by Type, Unallocated Option Pool
- Set up a "Last Updated" date field and version number to track changes over time
- If using AI: Ask it to "create a cap table template with sections for shareholders, ownership percentages, fully diluted calculations, and an option pool tracker"
Pro Tip
Always calculate ownership on a fully diluted basis (including all outstanding options and convertibles). This gives you the true picture of economic ownership and prevents nasty surprises.
Input Founder Equity and Vesting Schedules
Document initial founder ownership with proper vesting to protect the company.
- List each founder with their initial share allocation. Common split for 2 co-founders: 50/50 if equal contribution, or weighted by role/experience/time commitment
- Implement founder vesting: Standard is 4-year vesting with 1-year cliff. This means 25% vests after year 1, then monthly vesting for remaining 36 months
- Add columns: Grant Date, Vesting Start Date, Cliff Date, Vesting End Date, Vested Shares, Unvested Shares
- Create a vesting calculator: Vested % = MIN(1, (Months Since Start - Cliff Months) / Total Vesting Months). For a 4-year vest with 1-year cliff: Vested % = MIN(1, (Months - 12) / 48) if Months ≥ 12, else 0
- Calculate current vested shares: Vested Shares = Total Shares × Vested %
- Important: Use a date parameter (e.g., "As of [Date]") so you can calculate vesting at different points in time
- If using AI: Ask it to "create a founder vesting calculator that shows how many shares are vested as of today for each founder with a 4-year vesting schedule with 1-year cliff"
Pro Tip
ALWAYS include vesting for founders, even if you're best friends. Investors will require it anyway, and it protects the company if a founder leaves early. Without vesting, a co-founder who leaves after 6 months could walk away with 30% of the company.
Create and Size Your Employee Option Pool
Reserve equity for future hires and decide whether to create it pre-money or post-money.
- Determine pool size: Standard is 10-20% of fully diluted shares. Seed stage: 10-15%. Series A: 15-20%. Base it on hiring plan: estimate equity needs for next 12-24 months of hires
- Understand pre-money vs post-money: Pre-money pool = created BEFORE investor investment, dilutes only founders. Post-money pool = created AFTER, dilutes founders AND investors proportionally
- Critical negotiation point: Investors almost always push for pre-money option pool. This means YOU get diluted to create it, not them
- Calculate the impact: If creating a 15% pool pre-money before a $10M investment at $30M pre-money valuation, the investor gets $10M / $30M = 33.3%, but the pool dilutes from founders' ownership first
- Create pool tracking: List "Option Pool - Unallocated" as a separate shareholder type with share count and % ownership
- Add columns: Total Pool Size, Allocated Options (granted to employees), Unallocated Options (available for future grants)
- Formula: Unallocated Pool % = (Desired Pool Size) - (Already Granted Options) / (Total Fully Diluted Shares)
- If using AI: Ask it to "calculate how much a 15% option pool created pre-money will dilute founders if I currently have 10M shares outstanding and need to create room for the pool before a new investment"
Pro Tip
Fight for a post-money option pool or a smaller pre-money pool. A 20% pre-money option pool can cost founders an extra 5-7% dilution compared to post-money. The difference is worth negotiating hard.
Model Your First Funding Round (Seed/Angel)
Track your first outside investment and calculate resulting ownership percentages.
- Input the investment terms: Investment Amount (e.g., $1M), Pre-Money Valuation (e.g., $5M), Post-Money Valuation = Pre-Money + Investment
- Calculate investor ownership: Investor % = Investment Amount / Post-Money Valuation. Example: $1M / $6M = 16.67%
- Calculate new shares issued: New Shares = (Investment Amount / Price Per Share). First, calculate Price Per Share = Pre-Money Valuation / Shares Outstanding Before Round
- Alternative calculation: New Shares = Existing Shares × (Investor % / (1 - Investor %)). Example: If investor gets 16.67%, and you have 10M shares: 10M × (0.1667 / 0.8333) = 2M new shares
- Update all ownership percentages: Each existing shareholder's new % = (Their Shares / Total Shares After Round)
- Create a "before and after" view showing ownership pre-round and post-round for transparency
- Track liquidation preferences: Seed investors typically get 1x non-participating preference (they get their money back first in an exit)
- If using AI: Ask it to "model a $1M seed round at $5M pre-money valuation, calculate the shares issued to the investor, and show the dilution impact on each existing shareholder"
Pro Tip
SAFEs (Simple Agreement for Future Equity) and convertible notes complicate cap tables because they don't convert until the next priced round. Create a separate section for "Convertible Securities" and model different conversion scenarios.
Model Series A with Option Pool Expansion
Add a priced equity round and expand the option pool to support company growth.
- Input Series A terms: Investment Amount (e.g., $8M), Pre-Money Valuation (e.g., $20M), Option Pool Target (e.g., 20% post-round fully diluted)
- Handle option pool expansion: Calculate how much the pool needs to grow from current size to target size. New pool shares = (Target % × Post-Round Shares) - Currently Allocated Options
- Order of operations matters: (1) Add option pool shares first (pre-money, dilutes founders), (2) Then issue new shares to Series A investor
- Calculate Series A shares: Price Per Share = Pre-Money Valuation / (Shares Outstanding + New Option Pool Shares). Series A Shares = Investment Amount / Price Per Share
- Verify investor ownership: Check that investor % = Investment / (Pre-Money + Investment). If it doesn't match, your option pool math is wrong
- Update liquidation preferences: Series A investors typically also get 1x non-participating or participating preference
- Create a waterfall: Show different exit scenarios ($20M, $40M, $60M) and how proceeds are distributed based on preferences
- If using AI: Ask it to "model a $8M Series A at $20M pre-money with a 20% option pool (post-money), expanding the pool from 15% to 20%, and show me how this dilutes each shareholder"
Pro Tip
The option pool expansion is where founders lose ownership they didn't expect. If you have 10% of the pool allocated and investors want 20% post-money, that 10% expansion comes entirely from founder dilution, not investor dilution.
Build Multi-Round Dilution Scenarios
Project ownership through Series B, C, and beyond to understand long-term dilution.
- Create a scenario planning section with columns for each funding round: Series B, Series C, Series D
- Use standard assumptions for future rounds: Typical Series B: $15-25M at $50-80M pre-money, 20-25% dilution. Series C: $30-50M at $150-250M pre-money, 15-20% dilution
- Build a dilution cascade: Show founder ownership % after each round in a single table
- Create scenarios: Conservative (more rounds, higher dilution), Base Case (expected path), Optimistic (fewer rounds, lower dilution)
- Calculate fully diluted ownership through exit: Founders should aim to own 15-25% by exit if raising through Series C/D
- Add sensitivity analysis: How does founder ownership change if you raise $2M more or less per round? What if valuations are 30% higher or lower?
- Important benchmark: If founders own less than 10% at any point, that's a red flag — you may have over-diluted and lost control/motivation
- If using AI: Ask it to "create a dilution scenario model showing founder ownership through 4 funding rounds (Seed, A, B, C) assuming 15-25% dilution per round, and calculate final founder ownership at exit"
Pro Tip
Founders retaining 20%+ through exit is healthy. Less than 15% and you're working mostly for investors. Model out multiple scenarios BEFORE accepting any term sheet so you understand the long-term implications.
Create an Exit Waterfall Analysis
Model how exit proceeds are distributed based on liquidation preferences and ownership.
- Understand liquidation preferences: 1x non-participating = investor gets 1x money back OR their % ownership, whichever is higher. 1x participating = investor gets 1x money back PLUS their % of remaining proceeds
- Set up exit scenarios: Create columns for different exit values: $25M, $50M, $75M, $100M, $150M, $200M
- Build the waterfall: (1) Preferred shareholders get liquidation preferences first, (2) Remaining proceeds go to common shareholders pro-rata, (3) For participating preferred, they get proceeds in both buckets
- Calculate founder payout: For each exit scenario, calculate what founders receive in absolute dollars, not just percentage
- Identify the "preference overhang": At what exit value do common shareholders start seeing meaningful returns? If you've raised $50M with 1x preferences, common gets $0 until exit > $50M
- Model the conversion decision: Preferred can choose to convert to common if that gives them more. Calculate the breakpoint where conversion makes sense
- Create a visualization: Chart founder proceeds across different exit values to see the hockey stick where you start making real money
- If using AI: Ask it to "create an exit waterfall showing how a $100M exit is distributed among founders, Series A investors with 1x non-participating preference, and Series B investors with 1x participating preference"
Pro Tip
Participating preferred can be brutal for founders. In a $50M exit with $30M raised on participating preferred, investors might get $40M+ while founders get scraps. Avoid participating preferences or negotiate caps on the participation.
Track Employee Option Grants and Vesting
Manage individual option grants, exercise prices, and vesting schedules for your team.
- Create an option grant ledger: Employee Name, Grant Date, Number of Options, Strike Price (409A valuation at grant), Vesting Schedule, Cliff Date
- Calculate options granted as % of company: Options % = Number of Options / Fully Diluted Shares. Be transparent with employees — tell them their % ownership, not just share count
- Track vesting on a per-employee basis: Use same vesting logic as founders (typically 4-year vest, 1-year cliff)
- Update 409A valuation regularly: You're required to get a 409A appraisal at least annually and after major events (funding rounds). Strike price = current 409A value
- Show vested vs unvested: Fully Diluted includes all granted options (vested + unvested). Some calculations only include vested shares
- Calculate option pool burn rate: How fast are you granting options? If you have 1,000,000 options unallocated and are granting 100,000/year, you have 10 years of runway
- Plan for refresh grants: High performers may get additional grants every 1-2 years to maintain motivation
- If using AI: Ask it to "create an employee option tracker that calculates vested vs unvested options for each employee, shows their % ownership, and calculates remaining unallocated pool"
Pro Tip
Always communicate equity grants in % terms, not just share counts. 100,000 shares sounds like a lot, but if it's 0.1% of the company, that's the meaningful number. Transparency builds trust with your team.
Set Up Scenario Planning and What-If Analysis
Create flexible models to test different fundraising strategies and their dilution impact.
- Build a scenario comparison tool: Side-by-side view of 3-5 different fundraising paths
- Scenario 1 - Bootstrap Longer: Raise less money, higher valuation, lower dilution but slower growth
- Scenario 2 - Aggressive Growth: Raise more money, lower valuation, higher dilution but faster scaling
- Scenario 3 - Strategic vs Financial Investors: Same terms but different value-add (model as qualitative note)
- Scenario 4 - Bridge Round: Small extension round vs full Series [X+1]
- Create input variables: For each scenario, vary: Amount Raised, Pre-Money Valuation, Option Pool Size, Investor Terms (preferences, board seats)
- Calculate key outputs: Founder Ownership %, Absolute $ Value at Exit, Control Metrics (board seats, voting rights)
- Add decision criteria: Which scenario maximizes founder value at different exit outcomes? Which preserves most control?
- If using AI: Ask it to "compare three fundraising scenarios side-by-side: (1) $5M at $15M pre, (2) $8M at $20M pre, (3) $10M at $22M pre, and show me founder dilution and ownership in each case"
Pro Tip
The best term sheet isn't always the highest valuation. A $30M valuation with a 25% option pool (pre-money), participating preferred, and 3 board seats might be worse than $25M with a 15% option pool (post-money), non-participating preferred, and 2 board seats.
Validate, Maintain, and Audit Your Cap Table
Ensure accuracy, keep it updated, and avoid common mistakes that create problems later.
- Validation checks: (1) Sum of all ownership % = 100%, (2) Fully diluted shares = Outstanding shares + Unallocated option pool + Allocated unvested options, (3) Each round's investor % = Investment / Post-Money
- Common mistakes to avoid: Dead equity (departed founders/employees still owning shares without vesting), Missing documentation (verbal promises not recorded), Math errors (almost every cap table has one), Forgetting to update after option grants
- Keep it current: Update after every equity event: new funding round, option grant, exercise, departure/forfeiture, amendment to terms
- Reconcile with legal docs: Your cap table should match your articles of incorporation, stock purchase agreements, and option grant notices exactly
- Use cap table management software for growth stage: Carta, Pulley, or AngelList for companies with 20+ shareholders. Spreadsheets work great for early stage but get unwieldy
- Annual audit: At least once per year (and before each funding round), have your lawyer review the cap table for accuracy
- Share strategically: Founders and investors should have full access. Employees should see their own grants. Don't share full cap table publicly
- If using AI: Ask it to "audit my cap table and identify: (1) whether ownership percentages sum to 100%, (2) any shareholders with >20% who might have left, (3) whether option pool % matches what we planned"
Pro Tip
Cap table mistakes compound over time. A small error in your seed round becomes a major headache at Series B. When in doubt, pay a lawyer to review — it's worth the $1-2K to get it right.
