Cap Table Equity Management

SKILL 74: Cap Table & Equity Management

Purpose

Track, manage, and protect equity from founding through exit. A clean cap table is a prerequisite for fundraising, acquisition, and IPO.

Cap Table Basics

• Tracks: who owns what percentage, what type of security, and on what terms
• Tools: Carta (industry standard), Pulley (cheaper alternative), AngelList
• Pre-seed: spreadsheet is acceptable, but migrate to Carta before any external investment
• Rule: every share issued must have a corresponding board resolution and stock certificate or digital equivalent

Authorized vs. Issued Shares

• Common stock: founders and employees (voting rights, lowest liquidation priority)
• Preferred stock: investors (special rights — liquidation preference, anti-dilution, board seats)

Option Pool

Structure

• Reserve 10–20% of fully diluted shares for future employees/advisors (create BEFORE fundraising)
• Standard option plan: 2022 Equity Incentive Plan (free template from NVCA or YC)
• The option pool gets created from EXISTING shareholders' dilution (founders dilute first before investors in a well-structured raise)

409A Valuation

• What it is: independent third-party valuation of the company's common stock
• When required: before issuing any stock options (or face catastrophic IRS penalties)
• Frequency: annually, or after any "material event" (new funding round, acquisition offer, significant revenue milestone)
• Cost: $5–15K per valuation
• Who does it: Carta (built in), Preferred Return, Andersen Tax, independent valuation firms
• Strike price: option exercise price MUST equal the 409A FMV at grant date. Options granted below FMV → Section 409A penalties (20% additional tax + interest on option holder)
• If you skip it: IRS can deem all options were granted below FMV → massive tax liability for every option holder

Stock Options

• ISOs (Incentive Stock Options): favorable tax treatment for employees; cannot be granted to non-employees; $100K per year limit on ISO value
• NSOs (Non-Qualified Stock Options): for contractors, advisors, anyone who can't receive ISOs; taxed as ordinary income at exercise
• 83(b) election: for restricted stock grants (not options). File within 30 DAYS of grant. NEVER MISSABLE.
  • What it does: elect to be taxed on current FMV (likely near zero at founding) rather than FMV at vesting
  • Without 83(b): pay income tax on the appreciated value when each tranche vests
  • With 83(b): pay income tax once on the low founding-day value; pay capital gains (lower rate) when shares are sold
  • Calendar reminder: set the day of every restricted stock grant. 30-day window is ABSOLUTE.

Dilution Math — How It Actually Works

Key principle: raise only what you need. Higher valuation = less dilution. Unnecessary capital = unnecessary dilution.

Token Allocation (Separate Track)

Token allocation is SEPARATE from the equity cap table. Track both.

Cap Table Hygiene

• Never grant equity informally — no handshakes, no emails saying "you'll get 5%"
• Document every grant: board resolution + stock purchase agreement/option grant agreement
• Update on every event: new grant, exercise, transfer, conversion, new round
• Fully diluted count: always model the cap table on a fully-diluted basis (all options and SAFEs converted)
• Quarterly review: verify Carta/Pulley matches actual agreements on file

This is legal research and intelligence, not legal advice. Consult qualified legal counsel before taking action.