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If you hold stock options or shares at a venture-backed company, the single most important document you have probably never seen is the capitalization table. In this guide we want the cap table explained in plain language: what it is, how to read a cap table line by line, and why the numbers on it ultimately determine how much your equity is worth. Whether you are a founder, an early employee, or a late-stage hire weighing an offer, understanding your startup capitalization table is the difference between guessing at your equity's value and actually knowing it.
A cap table, short for capitalization table, is a ledger that records who owns what in a company. At its simplest, it lists every shareholder, the type and number of securities they hold, and the percentage of the company each stake represents. For a startup, the capitalization table tracks common stock held by founders and employees, preferred stock held by investors, and the option pools, warrants, SAFEs, and convertible notes that will eventually convert into equity. As the U.S. Securities and Exchange Commission makes clear in its investor education materials on private securities, accurate ownership records are the legal backbone of who is entitled to proceeds in an acquisition or IPO. When people ask to have the cap table explained, what they really want to know is simple: when there is a payout, where do I stand in line, and how big is my slice?
Learning how to read a cap table starts with recognizing its columns. A spreadsheet of names and numbers can look intimidating, but nearly every startup capitalization table is built from the same handful of building blocks. Once you can name them, the document stops being a wall of figures and starts telling a story about ownership, risk, and reward.
Security type. The first thing to check is whether a holder owns common stock or preferred stock. Founders and employees almost always hold common, while venture investors hold preferred shares that carry special rights. This single distinction drives most of the surprises employees encounter at exit.
Share count and fully diluted ownership. Each row shows the number of shares held, but the figure that matters is the fully diluted percentage. Fully diluted ownership counts every share that could exist if all options, warrants, and convertible instruments were exercised. Your headline percentage on a startup capitalization table will almost always shrink once it is measured on a fully diluted basis.
Price per share and invested capital. Investor rows list how much capital went in and at what price per share. Comparing your option strike price to the latest preferred price per share gives you a rough sense of the paper spread, the gap between what you would pay to exercise and the current 409A or round price.
Liquidation preferences. Preferred shareholders typically have a liquidation preference, meaning they are paid back first, often 1x their investment, before common shareholders see a dollar. A cap table that lists three rounds of preferred with a combined preference stack can quietly absorb most of the proceeds in a modest exit.
The option pool. Most startups reserve 10 to 20 percent of equity in an option pool for current and future employees. On the capitalization table this appears as allocated options, exercised shares, and unallocated reserve. If you are negotiating an offer, the size of the remaining pool tells you how much room there is for future grants and refreshes.
When you know how to read a cap table at this level, you can answer real questions: what is my fully diluted stake, how much sits ahead of me in the preference stack, and what would I net in a sale at a given valuation. Those are exactly the questions our guide on whether to buy your equity walks through for venture-backed employees.
Imagine a company with 10,000,000 fully diluted shares. The two founders hold 6,000,000 shares of common (60 percent). A seed and a Series A investor together hold 2,500,000 shares of preferred (25 percent), having invested a combined $12 million with standard 1x non-participating liquidation preferences. The option pool accounts for the remaining 1,500,000 shares (15 percent), of which you have been granted 50,000 options at a $1.00 strike.
Your 50,000 options represent 0.5 percent on a fully diluted basis. Suppose the company sells for $100 million. The $12 million in preferences comes off the top, leaving $88 million for common and as-converted preferred. Your 0.5 percent of the residual value is roughly $440,000 before your exercise cost and taxes. But run the same math on a $20 million sale: after the $12 million preference, only $8 million is left for everyone else, and your slice falls to about $40,000. Same ownership percentage, dramatically different outcomes, and you would only see that by reading the capitalization table carefully rather than trusting the headline percentage in your offer letter.
A cap table is not static. Every new financing round issues fresh shares, which dilutes existing holders. When a startup raises a Series B by selling 20 percent of the company to a new investor, everyone who came before, founders, employees, and earlier investors, sees their percentage drop proportionally. Dilution is not inherently bad: a smaller slice of a much larger pie can be worth far more. The danger is misreading what each round does to your position. Our deeper look at managing startup equity explains how to track this across rounds so you are never surprised by a new capitalization table.
In my years covering equity research, I have seen too many talented employees treat their grant as a fixed number, only to be blindsided when a down round or a heavy preference stack reshuffled the entire capitalization table. The people who came out ahead were rarely the ones with the biggest grants. They were the ones who actually opened the document, asked their company for fully diluted numbers, and understood where they sat before, not after, a liquidity event.
For founders, the capitalization table is a governance and fundraising tool. For employees, it is the closest thing to a truth serum about the value of an equity package. As resources like Investopedia note, the same headline equity grant can produce wildly different payouts depending on the preference stack and the exit price. Reading the cap table is how you convert a vague promise into an estimated range of outcomes, including the very real possibility that common stock is worth little in a disappointing exit.
If your company will not share the full cap table, that is common with private startups, you can still model scenarios using your grant size, the latest 409A valuation, and disclosed round sizes. Tools such as Aption's Equity Simulator let you stress-test what your options might be worth across a range of exit values, which is far more useful than a single optimistic number.
Once the cap table is explained and you understand your true position, a harder truth often emerges: a large share of your net worth may be concentrated in a single private company you do not control. That concentration is the core risk facing most startup employees. One approach to addressing it is equity pooling, where holders across multiple startups pool their shares to gain diversified exposure rather than betting everything on one outcome. Our Introduction to Equity Pooling explains how this works in practice and why diversification has long been a cornerstone of sound portfolio construction.
Understanding your capitalization table is step one; deciding what to do about concentration risk is step two. If you would like to see what diversifying a concentrated startup position could look like for your specific holdings, you can get an offer from Aption and explore equity pooling as one option among several. As always, weigh it against your own goals and timeline.
With the cap table explained, the path forward is straightforward. Ask your company for your fully diluted ownership and the current preference stack, learn how to read a cap table well enough to model a few exit scenarios, and revisit those numbers after every financing round. The capitalization table is not just a founder's spreadsheet; it is the document that tells you what your years of work might actually be worth, and whether your equity is concentrated enough to merit a diversification plan.
The author name used in this article may be a pen name or pseudonym and is used for illustrative and editorial purposes only. This article is for informational purposes only and does not constitute investment, tax, or legal advice. Consult qualified professionals before making financial decisions.
Michael is a financial analyst and equity markets researcher who covers startup valuations, secondary markets, and alternative investment vehicles. He previously led equity research at a top-tier investment bank.