Building and Maintaining a Startup Cap Table: Fully Diluted Ownership, Dilution and Common Errors

The cap table is the record of who owns what in your company. Every investor, acquirer and lawyer who looks at your startup will rebuild it from your filings and documents, and if their version doesn't match yours, the deal slows down. A clean, accurate cap table is one of the simplest ways to make fundraising easier. This guide explains what goes in it, how to model dilution, and how to keep it right.

What a Cap Table Shows

At its simplest, a cap table lists every shareholder and the number and class of shares they hold. A useful one also shows:

• Each class of shares, such as equity shares and compulsorily convertible preference shares (CCPS).
• Convertible instruments that haven't converted yet, such as convertible notes or debentures.
• The ESOP pool, split into options granted, options vested and options still available.
• Each holder's percentage on an issued basis and on a fully diluted basis.

Issued vs Fully Diluted

The issued basis counts only shares that exist today. The fully diluted basis assumes every convertible instrument has converted and every option in the ESOP pool has been granted and exercised. Investors almost always look at the fully diluted number, because it shows what they'll really own. Founders should too, since it shows how much of the company they'll actually keep.

Modelling Dilution

Each round, and each increase in the ESOP pool, dilutes existing shareholders. Before a round, model:

• The pre-money valuation and the amount being raised, which together set the post-money valuation and the investors' stake.
• Whether the ESOP pool is created or topped up before the round, which dilutes only existing shareholders, or after it, which dilutes everyone.
• How convertible notes or CCPS will convert, including any valuation cap or discount.
• The effect of the round on founders' ownership, and on their control over key decisions.

A simple pro forma cap table, showing ownership before and after the round, makes negotiations much clearer.

Keeping It Matched to the Records

Your cap table must agree with the company's legal records:

• The register of members and the share certificates or demat holdings.
• Allotments filed with the ROC in PAS-3, and transfers recorded with board approval.
• The shareholding in the annual return filed in MGT-7.
• Foreign investment reported to the RBI in FC-GPR or FC-TRS.
• The ESOP scheme approved by the shareholders, and the grant letters issued under it.

Investors check these against each other, and mismatches are one of the most common reasons due diligence drags on.

Common Errors

• Promising equity to advisers or early employees without an actual allotment or option grant.
• Informal share transfers between founders that were never recorded.
• Allotments without PAS-3, or foreign investment without FC-GPR.
• ESOP grants beyond the approved pool, or grants never documented.
• Using a different number of shares in the cap table than in the register of members.
• Forgetting convertible instruments when calculating fully diluted ownership.

Keeping It Current

• Update the cap table after every allotment, transfer, conversion and ESOP grant or exercise.
• Keep one master version, with a log of every change and the document that supports it.
• Reconcile it with the register of members and MCA filings at least once a year.
• Before each round, have it reviewed so it's ready for due diligence.

Getting Help

Think Filing builds and maintains cap tables for startups, models dilution before rounds, and keeps them matched to the company's registers and filings.

Sources

• Companies Act, 2013, and the Companies (Share Capital and Debentures) Rules, 2014.
• FEMA (Non-debt Instruments) Rules, 2019.