Cap Table Basics: What Founders Need to Get Right Early

A capitalisation table records who owns what proportion of a company. It sounds administrative and it is one of the few documents where early carelessness produces consequences that are genuinely difficult to reverse.

What It Actually Contains

Every shareholder, the number and class of shares each holds, the resulting percentages, and anything that could become shares later — options granted, convertible instruments outstanding, warrants. That last category is the part most often left out, and it is the part that changes the picture at the moment it matters.

Fully Diluted Is the Number That Counts

Current percentages describe today. Fully diluted percentages describe what everyone owns once every option is exercised and every convertible converts. Investors work in fully diluted terms, and founders who think in current terms are consistently surprised by the difference.

Founder Splits Deserve Real Thought

Equal splits agreed quickly to avoid an awkward conversation frequently become the source of a much harder one later, when contributions have diverged. Discuss it properly at the start, document it, and put vesting in place so that someone leaving early does not retain a large holding they no longer earn.

Vesting protects the founders who stay as much as it protects investors. It is easier to agree before anyone has a reason to object.

The Option Pool and Where Its Dilution Falls

Companies reserve shares for employees, and creating that pool dilutes existing holders. In priced rounds the pool is frequently included in the pre-money valuation, which means the dilution falls entirely on existing shareholders rather than being shared with the incoming investor. This is a standard negotiating point and it is covered in any well-drafted venture capital term sheet.

Model Dilution Before You Agree Anything

Build a simple projection showing ownership after each expected round, including the option pool and any convertible instruments. It takes an hour and it converts an abstract concern into a specific number. Founders who have done this negotiate differently, because they can see what a particular term actually costs them.

Boards Approve Share Issues

Issuing shares, granting options and approving transfers normally require board and sometimes shareholder approval under the company’s articles. Keep proper minutes and resolutions for each. Missing paperwork here is one of the more common problems discovered during diligence, and it is entirely avoidable at the time.

Every Round Reduces Your Percentage

Dilution compounds across the funding path rather than happening once. Model your position after the full sequence you expect to raise, not just the round in front of you. Owning a smaller share of a larger company is usually the right trade, but it should be a decision rather than a discovery.

Keep It Accurate From Day One

Update the table whenever anything changes, and keep it consistent with your statutory filings at Companies House. Reconstructing ownership years later from emails, bank transfers and recollection is genuinely difficult, and it is exactly the work that has to happen under time pressure during diligence.

Undocumented Promises Are the Classic Problem

Shares offered verbally to an early contributor, an adviser given a vague arrangement, a developer paid partly in equity that was never issued — these surface during diligence and stall deals, because resolving them requires agreement from people whose interests have changed since. Document everything at the time, even informal arrangements.

Beware the Very Long Register

Many small shareholders create administrative drag for years, since decisions requiring consent mean contacting all of them. Where small investments make sense, consider whether they can be pooled through a syndicate or nominee structure so the register stays manageable.

Share Classes Change the Picture

Not all shares are equal. Investors frequently hold preference shares carrying rights that ordinary shares do not — priority on a sale, veto rights, or anti-dilution protection. A cap table showing only percentages hides this entirely, which is why the rights attaching to each class matter as much as the numbers.

Options Are Not Shares Until They Are Exercised

Granted options dilute on a fully diluted basis but do not appear on the share register until exercised. Keep a clear record of what has been granted, to whom, at what price and on what vesting schedule. Companies that lose track of this discover the problem when an employee leaves and asks what they are entitled to.

Keep the Table and the Filings in Step

Your cap table is an internal record; the statutory register and confirmation statement are the public position. When they disagree, the public record is what an investor or lender sees first, and the discrepancy raises questions before anyone reaches the explanation. Update both together rather than intending to reconcile them later.

Secondary Sales

Existing shareholders sometimes sell to new ones rather than the company issuing fresh shares. This does not dilute anyone but it does change who sits on your register, and it usually requires board or shareholder approval under the articles. Check what consents apply before agreeing to anything.

Employee Share Schemes Need Planning

Granting equity to staff has tax consequences for both the company and the recipient, and the UK has specific schemes designed to make this efficient when set up correctly. Getting it wrong can leave employees with an unexpected tax bill on shares they cannot sell. Take advice before granting rather than after.

Use a Proper Record, Not a Forgotten Spreadsheet

Whether software or a spreadsheet, the requirement is the same: one authoritative version, updated at the time of each change, that reconciles to your statutory filings. Multiple versions circulating by email is the state most companies drift into and the one that causes trouble during diligence.

Get It Reviewed Before You Need To

Have a solicitor look at the structure before your first significant raise rather than during it. Problems found early are cheap to fix; the same problems found while a term sheet is live cost time, leverage and sometimes the deal. Whether you are bootstrapping or raising startup capital, a clean register keeps the options open.