brainbytes-dev cap-table-analysis
Cap table modeling — rounds, dilution, option pools, liquidation preferences.
When to Activate
- Building or updating a capitalization table for a startup or private company
- Modeling the impact of a new funding round on existing shareholders
- Calculating dilution from option pool creation or expansion
- Analyzing liquidation preferences and waterfall scenarios
- Evaluating conversion scenarios for convertible instruments (notes, SAFEs)
- Preparing for a liquidity event (M&A, IPO) and computing shareholder proceeds
- Advising founders on the true cost of a proposed term sheet
Core Concepts
Cap Table Construction
A capitalization table records every equity interest in the company — common shares, preferred shares, options, warrants, convertible instruments:
- Fully diluted share count: Includes all issued shares plus all shares issuable upon exercise of options, warrants, and conversion of convertible instruments. This is the denominator for ownership calculations
- As-converted basis: All preferred shares shown as if converted to common. Used for ownership percentage calculations
- Share classes: Common (founder, employee), Preferred (Series Seed, A, B, C — each with its own terms)
- Authorized vs. issued vs. outstanding: Authorized is the maximum; issued includes treasury shares; outstanding excludes treasury
- Ledger format: Each transaction (grant, exercise, transfer, repurchase, conversion) recorded chronologically
Share Class Economics
Each preferred series has distinct economic rights that affect payout at exit:
- Liquidation preference: Dollar amount preferred holders receive before common shareholders. Typically 1x the original investment
- Dividend rights: Cumulative (accrues whether declared or not) or non-cumulative. Participating or non-participating
- Conversion ratio: Initially 1:1 (one preferred share converts to one common share). Adjusted by anti-dilution provisions
- Voting rights: Preferred may vote on an as-converted basis or have specific class votes (protective provisions)
- Redemption rights: Rare in VC but some Series have a put right after 5-7 years
Dilution Math
Dilution is the reduction in ownership percentage when new shares are issued:
Dilution % = New Shares Issued / (Pre-Existing Shares + New Shares Issued)
Pre-round ownership: Shares Held / Pre-Money Fully Diluted Count
Post-round ownership: Shares Held / Post-Money Fully Diluted Count
- Primary dilution: New shares issued in a funding round
- Option pool dilution: Creating or expanding the ESOP. If done pre-money, existing shareholders (including the new investor in economic terms) bear the dilution
- Anti-dilution dilution: If anti-dilution protection triggers, additional shares are issued to prior investors — diluting common and unprotected shareholders further
- Cumulative dilution across rounds: Multiply retention ratios: (1 - dilution_round1) * (1 - dilution_round2) * ... = cumulative retention
Option Pool Creation and Shuffling
- Pre-money option pool: The term sheet states the option pool as a percentage of pre-money fully diluted shares. This means existing shareholders create the pool before the new investment, bearing all the dilution
- Post-money option pool: Pool created after the investment — dilution shared proportionally among all shareholders including the new investor. Less common but more founder-friendly
- Pool sizing: Typically 10-20% at Series A. Should cover 18-24 months of hiring. Undersizing requires expansion (more dilution) sooner; oversizing wastes founder equity
- Shuffle: Investors insist the pool is created pre-money, effectively lowering the real pre-money valuation of the operating company
Stated pre-money: $20M
Option pool (15%): $3M worth of shares created pre-money
Effective pre-money: $17M (value attributable to existing shareholders before pool)
Investment: $5M
Post-money: $25M
Investor ownership: $5M / $25M = 20%
Pool: 15%
Founders + existing: 65% (not 80%)
ESOP (Employee Stock Option Plan)
- Vesting: Typically 4-year vesting with 1-year cliff (25% vests at month 12, remainder monthly)
- Exercise price (strike price): Must be set at fair market value (409A valuation in the US). Determines the option holder's cost basis
- Diluted vs. vested: Cap table should show both — fully diluted (all granted options) and vested only. Unvested options may be forfeited upon departure
- Early exercise: Some plans allow early exercise (before vesting) subject to repurchase right. Creates 83(b) election opportunity for tax planning
- Cashless exercise: At liquidity event, exercise price is netted from proceeds — no out-of-pocket cost for the holder
Liquidation Preferences
Determine how proceeds are distributed in a liquidity event (sale, dissolution, deemed liquidation):
1x Non-Participating Preferred:
- Investor gets back 1x their investment OR converts to common and shares pro rata — whichever is greater
- At low exit values, the preference protects downside. At high exit values, conversion to common yields more
- Conversion threshold: The exit value at which converting to common yields more than the preference. = Liquidation Preference / Ownership %
Participating Preferred:
- Investor gets 1x preference PLUS pro rata share of remaining proceeds as if converted to common
- Double-dips: gets the money back and shares in the upside
- Significantly more investor-favorable than non-participating
Participating with Cap:
- Participating up to a total return cap (e.g., 3x). After the cap, treated as converted to common
- Compromise between non-participating and fully participating
Multiple liquidation preferences:
- 2x or 3x preference: Investor gets 2x or 3x their investment before common shareholders receive anything
- Increasingly rare but appears in later-stage rounds, especially bridge or down rounds
Conversion Scenarios
- Voluntary conversion: Preferred holder converts to common when the pro rata common share exceeds the liquidation preference
- Automatic conversion: Triggers upon IPO (typically at a minimum offering price and size) or upon vote of the preferred class
- Shadow preferred / Series stacking: Each series may convert independently. In a waterfall, Series C gets paid first, then B, then A, then common. Earlier series may be "underwater" — their preference exceeds their pro rata value but conversion also yields less
Pay-to-Play
Compels existing investors to participate in subsequent rounds to maintain their preferential rights:
- Full ratchet conversion: Non-participating investor's preferred converts to common (losing liquidation preference, anti-dilution, and other preferred rights)
- Shadow preferred: Non-participating investor converts to a lesser class of preferred with reduced rights
- Purpose: Prevents free-rider problem where existing investors refuse to participate in a down round while retaining their liquidation preference that subordinates new investors
Methodology
- Gather all equity instruments: Collect articles of incorporation, stock purchase agreements, option grants, convertible note and SAFE agreements, warrant agreements
- Build the share ledger: Record every issuance, transfer, exercise, and cancellation chronologically
- Model each round: For each funding round, compute pre-money shares, new shares issued, post-money cap table, and per-share price
- Layer in convertibles: Model conversion of notes and SAFEs at the applicable discount, cap, or both — computing the effective price and resulting shares
- Option pool analysis: Show the pool creation, allocated vs. unallocated, vested vs. unvested
- Waterfall analysis: Model the distribution of proceeds at various exit values, applying liquidation preferences in priority order
- Sensitivity table: Show each stakeholder's proceeds at different exit values ($10M, $25M, $50M, $100M, $250M, $500M+)
Templates
Cap Table Summary (Post-Series B)
Shares % (FD) Investment Price/Share
Founder 1 3,000,000 24.0% — —
Founder 2 2,500,000 20.0% — —
Angel Investors 500,000 4.0% $500K $1.00
Series A (1x NP pref) 2,000,000 16.0% $4.0M $2.00
Series B (1x NP pref) 2,000,000 16.0% $10.0M $5.00
ESOP (allocated) 1,500,000 12.0% — various
ESOP (unallocated) 1,000,000 8.0% — —
Total Fully Diluted 12,500,000 100.0% $14.5M
Post-money valuation: $62.5M ($5.00 * 12.5M shares)
Pre-money valuation: $52.5M
Liquidation Waterfall (1x Non-Participating)
Exit Value ($M): 10 25 50 100 250 500
Series B (1x NP):
Preference claim 10.0 10.0 10.0 — — —
As-converted value 1.6 4.0 8.0 16.0 40.0 80.0
Receives 10.0 10.0 10.0 16.0 40.0 80.0
Series A (1x NP):
Preference claim — 4.0 4.0 — — —
As-converted value — 4.0 8.0 16.0 40.0 80.0
Receives — 4.0 8.0 16.0 40.0 80.0
Common + Options:
Receives — 11.0 32.0 68.0 170.0 340.0
Check: Total 10.0 25.0 50.0 100.0 250.0 500.0
Breakeven for common: ~$14.5M (total liquidation preferences)
Conversion threshold:
Series B converts at: $62.5M ($10M / 16.0%)
Series A converts at: $25.0M ($4M / 16.0%)
Dilution Tracker Across Rounds
Seed Post-A Post-B Post-C (est.)
Founders 80.0% 56.0% 44.0% 35.2%
Seed Investors 10.0% 7.0% 5.6% 4.5%
Series A — 20.0% 16.0% 12.8%
Series B — — 16.0% 12.8%
Series C — — — 20.0%
ESOP 10.0% 17.0% 18.4% 14.7%
Total 100.0% 100.0% 100.0% 100.0%
Founder dilution: — 30.0% 21.4% 20.0%
Cumulative retention: — 70.0% 55.0% 44.0%
Quality Gate
- All equity instruments captured: common, preferred (each series), options, warrants, convertibles
- Share ledger reconciles to articles of incorporation and stock transfer records
- Fully diluted share count includes all outstanding and issuable shares (exercisable options, convertible instruments)
- Option pool shown as allocated (vested/unvested) and unallocated; strike prices recorded
- Pre-money vs. post-money arithmetic verified, including option pool shuffle impact
- Each preferred series' liquidation preference, participation, and conversion terms accurately modeled
- Anti-dilution provisions modeled for the relevant scenario (broad-based weighted average, full ratchet)
- Waterfall analysis computed at multiple exit values spanning downside through strong upside
- Conversion thresholds calculated for each preferred series
- Convertible notes and SAFEs modeled with correct discount, cap, and conversion mechanics
- Dilution tracker shows cumulative impact on each shareholder class across all rounds
- Pay-to-play implications modeled for non-participating investors