Cap table basics for founders abroad: shares, vesting, the option pool and dilution

A cap table is the record of who owns what share of a company, and it's the first thing an investor reads. For an LLC, it's the ownership split in the operating agreement. For a corporation, it's a ledger that changes with every grant, every SAFE and every round, and mistakes made at the start are expensive to fix later. Here's how a new company's table is set up and what changes it.

A corporation's certificate of incorporation authorises a number of shares, often ten million for a new startup, at a tiny par value such as $0.0001. Authorising shares doesn't give anyone ownership; issuing them does. The founders are issued shares, say eight million between them, and the rest stay unissued for later grants and rounds. Ownership percentages are based on issued shares, so two founders with four million each own 50% apiece, while two million remain authorised but unissued.

The authorised number drives Delaware's franchise tax, and the first bill can be a shock. Worked out on authorised shares alone, ten million shares come to $85,165 a year. Worked out on the assumed par value capital method, which also counts the company's assets and issued shares, a new startup with modest assets usually pays the $400 minimum. You choose the method when you file, so for most new startups the larger figure never applies.

Founders buy their shares at par value on day one, which for eight million shares at $0.0001 is $800 in total, so they own the stock outright and later growth counts as capital gain. The shares usually vest, meaning the company can buy back unvested shares at cost if a founder leaves. Four years with a one-year cliff is the norm: nothing vests in the first year, then a quarter vests at once, and the rest vests monthly. Vesting protects each founder from the other walking away with half the company, and investors expect it. Because the stock is issued now and vests later, each founder files an 83(b) election within 30 days.

Before the first priced round, the company sets aside part of its fully diluted equity, often 10% to 15%, as an option pool for future employees and advisers. Options give the holder the right to buy shares at a fixed price later. They're granted under a plan the board adopts, and they vest like founders' stock. Investors usually ask for the pool to be created before their money comes in, so it dilutes the founders rather than them. Knowing that helps you negotiate its size.

A SAFE isn't stock, and it doesn't show up as shares until it converts, but a post-money SAFE fixes its ownership when it's signed: $100,000 on a $5 million post-money cap is 2% of the company. Model each SAFE's conversion on the table as if the round had already happened. Otherwise founders can discover at the priced round that SAFEs signed one at a time add up to a quarter of the company.

The company sells new shares to investors at a price per share set by the valuation. The SAFEs convert at their cap or discount, and the option pool may be topped up. Everyone who held shares before owns a smaller percentage of a bigger company afterwards. That's dilution, and it's how the company gets funded. A round that values the company at $10 million before the money and raises $2.5 million issues new shares equal to 20% of the company afterwards, before counting the SAFEs and the pool.

• One source of truth: a cap table tool such as Carta or Pulley, or a spreadsheet your lawyer maintains, and never two versions.
• Every grant, SAFE and transfer recorded on the day it happens, with the board approval behind it.
• Fully diluted percentages, counting the pool and every SAFE or note, because that's what investors mean when they ask what you own.
• The stock ledger and share certificates, or electronic entries, matching the table.