| Topic | Quick Take |
|---|---|
| What a cap table is | A living spreadsheet that tracks who owns what in your company |
| Why it matters | It decides who gets rich, who stays, and how investors see you |
| Employee equity tools | Options, RSUs, ESOP pool, vesting schedules, cliffs |
| Biggest risk | Promising equity you do not properly model before the next round |
| Good practice | Keep one clean, current source of truth, and over-communicate with employees |
Most founders treat cap tables like boring paperwork. Investors do not. Senior hires do not. The truth is your cap table is the scoreboard that controls your freedom, your wealth, and your team’s long term motivation. Get it right early and hard conversations get easier. Get it wrong and every raise, every hire, every exit feels like a fight you did not plan for.
What a cap table actually is (not the textbook version)
A cap table is just a structured way to answer three questions at any point in time:
1. Who owns the company?
2. What kind of ownership do they have?
3. What happens to that ownership if the company raises money or exits?
That is it. All the complex models, scenarios, and dashboards are just layers on top of those three questions.
Technically, a cap table can live in a simple spreadsheet. Early days, most founders do that. You have rows for shareholders and columns for number of shares, security type, price per share, percentage ownership, maybe some notes on vesting.
Later you end up on software. Partly because investors prefer clean reports. Partly because your ESOP gets bigger, rounds add multiple classes of shares, and Excel starts to lie to you in tiny ways that compound over time.
Your cap table is not paperwork. It is the financial story of your company written in numbers and names.
The core building blocks of a cap table
To manage equity for employees, you first need to speak the basic language of a cap table. You do not need to become a securities lawyer, but you need to know what you are signing when you give someone a slice of the pie.
Common stock
This is what founders and most employees hold.
Common stock usually has:
– Voting rights
– The lowest preference in a liquidation
– The same base class across all employees, with differences in vesting and quantity
Founders often buy their common shares early at a very low price per share. Employees usually get options that can be exercised into common stock later.
Preferred stock
Investors usually buy preferred stock. It often has:
– Liquidation preferences
– Anti-dilution protections
– Sometimes dividends and special voting rights
On the cap table, you will see different series:
– Seed / Series Seed
– Series A
– Series B
– And so on
Each series comes with its own terms, conversion rules, and impact on what common stock is worth in a downside exit.
Options
Employee options sit in the background on your cap table. They are not fully issued shares yet, but they are promises that can convert into shares later.
Key points:
– Options have a strike price (the price to buy the share later)
– Options vest over time
– Options expire after a set period if not exercised
Most option mistakes come from one thing: people selling a dream without showing the math. The cap table is where that dream either holds up or falls apart.
Warrants
Warrants are options, but usually for investors or partners. You might give a bank or a key partner a warrant as part of a deal.
They:
– Also have a strike price
– Also convert into shares
– Often sit as a separate line item on your cap table, outside the ESOP
Many early companies ignore warrants mentally. That is risky. They still dilute you.
Convertible notes and SAFEs
These are not equity at the time of signing. They convert into equity later, usually at a round.
Your cap table should track:
– Amount raised in each note or SAFE
– Discount rate and/or valuation cap
– Any most favored nation clauses or other special rules
You do not feel these in day to day equity conversations with employees, but when they convert, they can change:
– The fully diluted share count
– Employee percentage ownership
– Founder ownership in ways that surprise people
Fully diluted view
If you are talking about equity with employees, you should think in one standard frame:
“Fully diluted” means:
– All issued shares
– All options granted but not exercised
– All options reserved but not yet granted
– All warrants
– All convertibles as if they converted
This number matters because:
Every equity promise you make sits inside a fixed pie measured on a fully diluted basis.
If you talk about “percent of the company” without a fully diluted frame, you are setting yourself up for future frustration.
Why cap table discipline is a growth skill, not just admin
Your cap table decisions shape:
– Who you can hire
– How long your team stays
– How your investors see your judgment
– How much control you actually keep
This sounds abstract. So let us ground it with a simple idea.
Cap tables are about trade-offs, not generosity
Giving generous equity to employees can feel like you are being fair. It can also:
– Make future hires harder if you run out of pool
– Force you to create a new pool in a later round where everyone gets diluted
– Trigger awkward renegotiations when you realize you cannot afford earlier grants
On the other side, being too stingy:
– Makes strong candidates walk
– Pushes existing employees to side projects
– Creates resentment when people see how much investors hold compared to them
Every share you give to someone is a share you are choosing not to give to someone else later.
Once you see it this way, your cap table becomes a tool for planning, not a record of past decisions.
Equity is how you buy long term behavior
You pay salaries to buy time. You give equity to buy:
– Commitment through tough quarters
– Patience with slow product cycles
– Focus on building enterprise value, not just short term revenue
Technically, not every person responds to equity. Some just want cash, and that is fine. But high impact employees who turn into leaders usually care a lot about the cap table. If they do not ask, they often leave when they later discover the gap between their belief and reality.
Designing an ESOP that actually works
Your employee stock ownership plan (ESOP) is just a reserved pool of shares set aside for team members.
How big should the ESOP be?
This will vary by stage and region, but some rough ranges:
– Pre-seed / Seed: 10 to 15 percent
– Series A: 10 to 15 percent refreshed
– Series B and later: 8 to 12 percent, tuned by hiring plan and size
The key is not just the percentage. The key is whether that pool:
– Covers the hires you plan for the next 18 to 24 months
– Accounts for promotions and retention top-ups
– Includes some margin for unplanned stars
Many teams set an ESOP size, then start giving grants without a model. It feels good at first. Then one strong VP hire forces everyone to cram numbers into a tight pool, and that is when you see how weak the planning was.
Top-down vs bottom-up grants
There are two mental models:
1. Top-down: You fix the total pool size, then define ranges by level and seniority. This is cleaner and easier to manage.
2. Bottom-up: You decide grants case by case based on negotiation, hire quality, and market. This can get messy fast.
A simple hybrid works better:
– Define band ranges by level (junior, mid, senior, manager, VP, C-level)
– Then adjust a bit for performance and scarcity of the role
For example (numbers just to illustrate a pattern, not advice):
– Senior engineer joining at Seed: 0.5 to 1.0 percent
– Engineering manager joining at Series A: 0.3 to 0.6 percent
– VP of Sales at Seed: 1.0 to 2.0 percent
– VP of Sales at Series B: 0.3 to 0.6 percent
Without ranges, you:
– Over-grant to good negotiators
– Under-grant to quieter high performers
– Start to create weird internal inequity patterns
Refresh grants and retention
Equity is not “one and done”. You should plan refresh cycles. Common patterns:
– Initial grant on hire
– Performance-based top-ups at 2 to 4 years
– Promotion-based grants
If you skip refresh, loyal people who stay longer than 4 years often end up with a shrinking percentage and rising frustration. The cap table then becomes a quiet reason for them to explore other options.
Vesting schedules that match how people really work
Vesting is how you decide when employees actually earn their equity.
Standard vesting
Typical startup vesting:
– 4 years total
– 1 year cliff
– Monthly or quarterly vesting after the cliff
So if someone gets 4,800 options:
– They earn 0 options in months 1 to 12, then 1,200 on month 12
– After that, they vest 100 per month for the remaining 36 months
This structure tries to balance:
– Protection for company against very short stays
– Fairness for people who give multiple years of their career
Shorter or longer vesting periods
Some companies try:
– 3-year vesting to feel more generous
– 5-year vesting to stretch retention
Shorter vesting:
– Attracts people who dislike long commitments
– May increase churn because the reward finishes sooner
Longer vesting:
– Makes grants look bigger on paper
– Can backfire if employees do not believe they will stay that long
If you change the standard, update all your materials, verbal scripts, and offer templates. Even small deviations create misunderstandings if the message is not consistent.
Cliffs and fairness
The cliff can feel harsh to some. Picture someone who joins, works hard for 11 months, then leaves or gets let go. Under a strict 1-year cliff, they earn nothing.
Some founders soften this with:
– Shorter cliffs (6 months)
– Partial vesting before the cliff for special cases
You can do this, but each exception increases administrative overhead and equity politics. If you create exceptions, track them in your cap table clearly so no one “forgets” in a future round or exit.
Communicating equity to employees without overpromising
This is where many founders and managers trip up. The tools are fine. The math is fine. The conversation is not.
The story you tell around equity
Think of every equity conversation as three layers:
1. What you are giving
2. What it might be worth in different outcomes
3. What trade-offs the employee is making to get that potential
For example, a clear script:
– “We are giving you 20,000 options.”
– “At the current strike price, that is X dollars if you exercise.”
– “If we reach Y valuation, these could be worth roughly Z dollars before tax. If we only reach W valuation, the number is lower, closer to Q.”
You do not need perfect projections. You just need ranges that anchor reality.
If you only sell upside without walking through downside and middle scenarios, your equity story turns into a future complaint.
Talking in percentages vs shares vs value
You can frame grants in three ways:
– Number of options (20,000)
– Percent of fully diluted cap table (0.2 percent)
– Hypothetical dollar outcomes at different valuations
Most candidates care about dollar outcomes, but they also want to know they are not being treated as an afterthought. So a good pattern:
– Share the count
– Share the approximate percentage
– Walk through a few valuation cases
This also forces you to know your own cap table well enough to answer without guessing.
Avoiding vague phrases
Vague phrases that cause problems:
– “Meaningful equity”
– “A real stake”
– “You will be taken care of”
People interpret those through their own lens. Instead, use plain numbers and let them ask questions. If they push for more, you can:
– Increase the grant
– Adjust salary vs equity mix
– Or say no with a clear reason
Clarity beats comfort in these talks.
How fundraising changes your cap table and your employees equity
Every round affects employees. Sometimes in obvious ways. Sometimes subtly.
Dilution basics
When you raise, new shares get created. Everyone’s percentage ownership shrinks, even if their absolute share count does not change.
Example:
– Before round: 1,000,000 shares total
– After issuing 250,000 new shares to investors: 1,250,000 total
An employee with 10,000 shares:
– Before: 1.0 percent
– After: 0.8 percent
So, did they lose value? Not necessarily. If the round increases the company value enough, their smaller slice of a bigger pie can be worth more. That nuance matters when explaining dilution.
Expanding the ESOP during rounds
Investors often ask you to “top up” or expand the ESOP pool as part of a round. This:
– Creates new unallocated shares
– Dilutes everyone, not just future hires
– Often feels like you are paying for future employees by giving more of yourself
Two common approaches:
1. Increase ESOP pre-money, which dilutes founders and existing shareholders more.
2. Increase ESOP post-money, sharing dilution with new investors.
This becomes a negotiation topic. From an employee perspective, what matters is:
– Will there be space for promotions and new grants?
– Are existing employees being unfairly squeezed?
You do not need to involve employees in that negotiation, but you do need to explain impacts afterward.
Explaining dilution to the team
After a round, teams ask:
– “What did this do to my equity?”
– “Am I worse off now?”
A simple way to frame it:
– “Your number of options did not change.”
– “Your percent ownership went from A to B.”
– “We raised at valuation V, which means your stake at grant time was worth roughly X, and today it is roughly Y on paper.”
Avoid quick reassurances like “You are better off now” without numbers. Trust builds when you respect people enough to show the math.
Using software vs spreadsheets for cap tables
Early, you can get by with spreadsheets. Past a certain point, that becomes risky.
Spreadsheets: pros and limits
Pros:
– Free or cheap
– Flexible for weird cases
– Easy to start
Limits:
– Human error in formulas
– Hard to maintain versions
– No automatic legal documents or reports
– No self-serve view for employees
At seed stage with two founders and three employees, a spreadsheet might be enough. By the time you have 10+ employees and external investors, the failure modes start to show up.
Cap table platforms
Platforms give you:
– A single source of truth
– Document storage and e-signing
– Automated pro forma modeling
– Employee portals to see their own equity
But software does not fix bad policy. It just keeps the numbers consistent. You still need:
– Clear grant bands
– Vesting rules
– Communication templates
The best pattern is: use software to reduce admin and error, then invest that saved time into better conversations with your team.
Common cap table mistakes that punish employee trust
You can have the nicest software in the world and still break trust with small choices.
Backdating or “cleaning up later”
Sometimes founders promise equity, start the person, and push the paperwork off for months. When they finally formalize it:
– Valuation is higher
– Strike price is higher
– Terms are slightly different than what the person imagined
On the cap table this might look minor. To the employee, it feels like a bait and switch.
Simple habit: do not promise specific numbers without written terms. If you make a verbal promise, treat it as binding when you later put it into the system.
Ghost options
Ghost options are equity promises that never reach the cap table. They live in inboxes, chats, or memory.
Examples:
– “We will get you to X percent after the next round.”
– “We will top you up for the time you already spent.”
– “We will give you more once we raise.”
If you are serious, add them to:
– Your hiring plan
– Your ESOP forecast
– Your board agenda if needed
If you do not, they grow into quiet resentment that you cannot always see until it is too late.
Hidden preferences and employee confusion
Preferred stock terms can change what common stock is worth in weaker exits. A stack of liquidation preferences, participation rights, and other terms can:
– Put investors ahead of employees by a wide margin
– Make a mid-range exit almost worthless for common
You do not need to walk every employee through legal language. But you should have a clear sense of:
– At what exit values employees roughly start to see real money
– How much must be paid to investors first
If your company sells for what sounds like a large number and your team gets almost nothing, they will not remember the complex rights. They will remember what you implied with your words over the years.
Building an equity culture from day one
Managing the cap table is only half the work. The other half is building a culture where equity actually means something.
Teach equity early
New hires often do not understand options. Some are embarrassed to ask. Others assume they understand but mix up key concepts.
Simple steps:
– Include a plain language equity explainer in onboarding
– Offer a group Q&A session about equity twice a year
– Share anonymized examples of how long-term employees might benefit at different exit levels
This makes people feel like partners, not bystanders.
Share the cap table at the right level
You do not have to publish every line of your cap table to the whole company. But consider sharing:
– Overall fully diluted breakdown (founders, team, investors, ESOP remaining)
– Changes after each round in aggregate
This helps the team see that:
– They are part of the real distribution
– Their equity is tracked with care, not as an afterthought
Be ready for questions like:
– “Why do investors own so much?”
– “Why does this person have more than that person?”
Those questions can feel uncomfortable. They are also signals that people care.
Connect performance to ownership
Equity hits harder when people see line of sight from their work to value. Some ideas:
– When a team hits a major product milestone, talk about how it could affect the company’s value over time
– When you close a big customer, show what that might do to revenue multiples later
You do not need complex financial models. Just a simple habit:
“Here is what we did. Here is how that can make all of our equity more meaningful if we keep it up.”
Scenario planning: firing, quitting, and exits
A cap table is not just for good times. It sets rules for rough moments.
When someone leaves: vested vs unvested
Common structure:
– Unvested options get cancelled
– Vested options stay for a post-termination window
Typical post-termination exercise windows:
– 90 days (standard older model)
– Up to 12 or 10 years in more progressive setups
Short windows:
– Force people to find cash quickly
– Often cause them to walk away from vested equity
Long windows:
– Are kinder to employees
– Can create admin work and tax questions
You choose. Just choose consciously. Then write it, share it, and keep it consistent.
Good leaver vs bad leaver
Some contracts define:
– Good leaver: resignation with notice, layoff, illness, etc.
– Bad leaver: serious misconduct, breach, etc.
Bad leaver clauses can:
– Cancel even vested stock
– Send a strong signal to the rest of the team about acceptable behavior
Use them carefully. Overly aggressive bad leaver clauses can scare strong talent.
Exits: what actually happens to employee equity
During an exit:
– Preferred shareholders get their preference first
– Then remaining proceeds split among holders based on ownership
For employees, scenarios:
– Acquisition where buyer cashes out options
– Acquisition where buyer converts options into new company options
– Partial cash-out plus rollover
The cap table is the starting point, but deal terms decide final outcomes. Good practice:
– Share rough expected ranges with key employees before signing
– Once the deal is signed, share clear, written breakdowns of how vesting and payouts will work
If you cannot share numbers because of confidentiality, at least share the structure so no one feels blindsided on closing day.
Bringing it all together in your own business
Cap tables are less about spreadsheets and more about choices you live with for years.
If you want a simple path to handle equity for employees without getting lost, you can think in this sequence:
1. Get your current snapshot right
– One single source of truth for all shares, options, convertibles
– Fully diluted count updated after every grant or round
– Clear mapping from promises made to actual entries
2. Define your philosophy in writing
Write down:
– Standard grant ranges by role and level
– Vesting rules and exceptions policy
– Approach to refresh grants and promotions
This does not need to be fancy. A simple 2 to 3 page internal memo already puts you ahead of many founders.
3. Connect hiring plans to ESOP math
For the next 18 to 24 months:
– List planned roles
– Set target grants using your ranges
– Add 10 to 20 percent buffer
Check if your current ESOP covers this. If not, plan how to expand, and when.
4. Create an equity communication script
For managers and founders, prepare:
– A standard way to explain options, vesting, and dilution
– A one-page gist with examples at different exit values
– A set of FAQ answers you all stick to
Repeating the same clear message beats improvising every time.
5. Review after each major event
Events like:
– Funding rounds
– Big hiring waves
– Layoffs
– Secondary sales
Use each one as a trigger to:
– Update the cap table
– Update your equity education material
– Re-align your grant strategy to reality
Over time, your cap table stops being a thing you look at only before funding. It becomes the quiet system behind how you grow, who you attract, and who stays long enough to build something real with you.
