Equity & Cap Tables

Founders often believe equity has been issued because it appears on a spreadsheet, or because it was agreed in a conversation. This is often not the case. Equity issuances are governed by state laws requiring, among other things, that the company have authorized shares available, the board approve the issuance and set the consideration, and the recipient provide that consideration, whether in cash, property, or services. The terms governing these issuances, such as vesting, the repurchase rights that enforce it, transfer restrictions, and rights of first refusal, should be documented at this time.

Equity issuances are also subject to state and federal securities laws, which require issued stock to be registered with the Securities and Exchange Commission unless an exemption from registration applies.

Failures of this kind often lie silent until an investor's or a buyer's counsel asks for the documents behind each line of the cap table in diligence. An issuance that cannot be substantiated has to be priced by the other side: a closing condition, an indemnity claim, or a holdback against the purchase price.

Equity is a key element of private company compensation that attracts and retains talent and aligns it with the interests of a company's stockholders. An equity incentive plan, adopted by a company's board and typically its stockholders, documents the types of awards a company may issue, the number of shares authorized to be issued (the pool), and who administers it. The equity plan contains important governance mechanics such as whether forfeited or expired award shares are recycled into the pool.

In a financing, investors often negotiate an equity pool refresh and factor the full share pool when calculating the financing's price per share so that dilution falls on existing holders rather than on the new money.

Dilution occurs whenever a company issues new shares of stock, reducing existing stockholders' ownership percentages. Its effect is cumulative across every issuance, grant, and conversion. For a growing startup achieving fresh valuation highs, dilution is an economically rational choice. After all, a smaller slice of a more valuable company can be worth more than a larger slice of a less valuable one. However, absent special voting rights, each issuance of voting stock dilutes the votes of the existing holders, including founders, eroding their control over time.

A post-money SAFE with a valuation cap fixes the investor's percentage when it is signed. A discount-only SAFE does not, and neither does a convertible note, because both price off the next financing. Several instruments outstanding at once interact in ways only modeling reveals.

A cap table is a report, not a record. It summarizes current ownership, tracks how much additional equity is issuable to the holders of options, SAFEs, convertible notes, and warrants, and provides a mechanism for projecting how future transactions will reshape ownership and control. The cap table is the summary; the underlying documentation is the ground truth.