If your business raises capital in several rounds, it's essential to keep track of who actually owns what — and how that changes every time new investors come in. That's exactly what a cap table does.
Short answer: A cap table (capitalization table) is a spreadsheet or document showing all owners of the business — founders, investors, employees with stock options — and their respective ownership stakes. Dilution is when your percentage ownership shrinks because new shares are issued to a new investor.
Why do you get diluted even if you don't sell anything?
Imagine you own 100% of 100 shares. If the business raises capital by issuing 25 new shares to an investor, you still own your 100 shares — but they now make up only 80% of the total 125 shares. You haven't sold anything, but your percentage stake has dropped. That's dilution.
Is dilution always bad?
Not necessarily. If the capital is used to create real growth, a smaller share of a significantly bigger business can be worth far more than a bigger share of a business that never got the capital it needed. The key question is whether the investment actually increases the business's total value by more than your stake is diluted.
What can you do to limit dilution?
- Negotiate a higher valuation (see term sheets explained)
- Be mindful of the size of any employee stock option pool — it dilutes all existing owners
- Track your ownership stake through the whole process — not just at each individual round in isolation
How do you keep the cap table up to date?
For small, early-stage businesses, a simple spreadsheet is often enough. As the number of owners, funding rounds and stock options grows, most businesses use dedicated tools to keep track — errors in a cap table can create serious disagreements later, particularly at a future exit or business sale.
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