Cap Table Mechanics & Math
The fundamental arithmetic of startup capitalization, pre-money valuations, fully diluted shares, and the option pool shuffle.
The Capitalization Table
A Capitalization Table (Cap Table) is a ledger that outlines the ownership percentages, equity dilution, and value of equity in a company across its various funding rounds by founders, investors, and employees.
Pre-Money vs Post-Money Valuation
The most fundamental calculation in venture math dictates the share price.
- Pre-Money Valuation: The value of the company immediately before a new investment round.
- Post-Money Valuation: The value of the company immediately after the new investment.
The ownership percentage the new investors receive is calculated based on the post-money valuation:
Calculating Share Price
To execute the round, a specific price per share must be determined.
"Fully Diluted" Matters
The denominator above must be the fully diluted share count. This means it includes not just the common shares issued to founders, but also all outstanding options, warrants, and—crucially—any unissued shares remaining in the employee option pool. Ignoring the unissued option pool will incorrectly calculate the share price and screw up the cap table.
The Option Pool Shuffle
New investors usually require that an Employee Stock Option Pool (ESOP) be created or expanded (typically to 10-15% of the post-money cap table) to ensure the company has equity to hire new talent.
A common point of negotiation is whether this pool expansion happens pre-money or post-money.
- Pre-Money Expansion (Standard): The newly created options are added to the pre-money share count. This mathematically lowers the price per share. The founders take 100% of the dilution for creating the pool.
- Post-Money Expansion (Rare): The pool is created out of the post-money capitalization. Both the founders and the new investors share the dilution. Investors strongly resist this.