Your cap table (capitalization table) is the DNA of your startup. It tells you who owns what. Mess it up in the early days, and you might find yourself owning 5% of your own company by Series B. Or worse, you might make your company "uninvestable" due to a messy structure. This is one of those hidden costs that can torpedo your startup.
The "Dead Equity" Trap
Dead equity is equity owned by people who are no longer contributing to the company. This usually happens when a co-founder leaves early but keeps their shares.
The Fix: Vesting. Every founder, including you, should be on a 4-year vesting schedule with a 1-year cliff. If someone leaves after 6 months, they walk away with nothing. This protects the company and the remaining founders.
Common Mistakes
- 50/50 split without vesting
- Giving 5% to an advisor
- Stacking SAFE notes
Best Practices
- Standard 4-year vesting
- 0.1% - 0.5% for advisors
- Model dilution scenarios
Understanding Dilution
Dilution isn't bad. It's the price of growth. Owning 10% of a $1B company is better than owning 100% of a $0 company. But you need to understand the math. Use financial projections to model different funding scenarios.
Pre-Money vs. Post-Money
If you raise $1M at a $4M pre-money valuation, the post-money is $5M. The investors own 20% ($1M / $5M). If you raise $1M at a $4M post-money valuation, the investors own 25%. One word changes everything.
The Option Pool Shuffle
Investors will ask you to create an option pool (shares reserved for future employees) *before* they invest. This means the dilution comes out of *your* pocket, not theirs. This is standard, but negotiable. Try to keep the pool size realistic (10% is usually enough for 18 months).
SAFE Note Stacking
Raising money on multiple SAFE notes with different valuation caps can lead to a nasty surprise when they all convert into equity during a priced round. You might find yourself diluted far more than you expected. Prepare for these conversations with our VC Interrogator to understand what investors will ask.
Tools of the Trade
Spreadsheets are fine for day one, but they break. Use tools like Carta, Pulley, or Cake Equity to manage your cap table. They handle the legal paperwork, compliance, and scenario modeling for you. Before you even get to this stage, make sure you've completed your legal launch checklist.
Equity is for Long-Term Alignment
Don't use equity to pay for short-term services (like a logo design or a legal fee). Use cash for that. Save equity for people who are in the trenches with you for the next 5-10 years. Check your founder-fit score to assess your co-founder relationships.