The one spreadsheet that decides who owns your company — and most founders learn to read it too late
Ask a first-time founder how much of their company they own and they will say "all of it" or "half, split with my co-founder". Ask them after two funding rounds and an option pool, and the honest answer is often "I'm not actually sure". That uncertainty is expensive. The cap table — the record of who owns how many shares — is the single document that decides who controls the company, who gets what when it sells, and how much of your own creation you still hold after each round. Founders who understand it going into a raise negotiate from strength; founders who learn it afterwards discover they gave away more than they meant to. Here is how the cap table works, how each round dilutes you, the option-pool trick that quietly comes out of your stake, and the filings that sit behind every change.
What a cap table actually is
A cap table (capitalisation table) is simply the list of every shareholder and how many shares each holds, which turns into a percentage of ownership. In its simplest form, at incorporation, it might be two founders holding 50% each. Every time the company issues new shares — to an investor, to employees through options, or on conversion of an instrument — the cap table changes, and so does everyone's percentage. The number that matters in a negotiation is almost never the "issued" shares alone; it is the fully-diluted figure, which counts not just shares already issued but everything that could become shares: the employee option pool and every convertible instrument outstanding. Investors price and negotiate on a fully-diluted basis, and a founder who only looks at issued shares is reading a different, friendlier number than the one across the table.
Three layers: authorised, issued, and fully-diluted
It helps to keep three ideas separate, because they get muddled constantly:
- Authorised capital is the ceiling — the maximum share capital the company is allowed to issue, set in its capital clause. You cannot issue past it without increasing authorised capital (Form SH-7) first. It is a limit, not ownership.
- Issued and paid-up capital is what has actually been allotted and paid for — the real shares in real hands today.
- Fully-diluted capital is issued shares plus the whole option pool (granted and ungranted) plus all convertibles on an as-converted basis. This is the denominator investors use, and the one you should use too.
Confusing authorised with issued is how founders end up thinking they own less than they do; ignoring the fully-diluted layer is how they end up owning less than they thought.
How a round dilutes you — with the actual arithmetic
Dilution is not your shares being taken away. Your number of shares usually stays exactly the same; what changes is that the company issues new shares to the investor, so the total grows and your slice of it shrinks. A simple example makes it concrete.
Say the two founders together hold 10,00,000 shares — 100% of the company. An investor agrees to take 20% for their money, on a post-money basis. To end up at 20%, the company issues 2,50,000 new shares to the investor: the total becomes 12,50,000, the investor's 2,50,000 is exactly 20%, and the founders' unchanged 10,00,000 is now 80%. The founders did not lose a single share. They lost twenty percentage points of a company that is now, on paper, worth more. That is the deal — you accept a smaller slice of a bigger pie, and whether it is a good deal depends entirely on how much bigger the pie got, which is what the valuation decides. Pre-money valuation plus the investment equals post-money valuation; the investment divided by post-money is the investor's percentage. Get comfortable with that one line of maths and no term sheet can surprise you on the headline number.
The option-pool shuffle — the most expensive term founders miss
Here is where founders lose equity without noticing. Investors almost always want the company to have an employee stock option pool — typically 10% or so — to hire the team the round is supposed to fund. Fair enough. The trick is when the pool is created. If the pool is carved out before the investment (a "pre-money" pool), the dilution for creating it falls entirely on the existing shareholders — the founders. If it were created after, everyone would share that dilution proportionally.
Run the numbers. Suppose the investor wants their 20% and a 10% option pool to exist post-money. If the 10% pool is established pre-money, it comes out of the founders' stake first, so the founders drop to roughly 70%, the pool is 10%, and the investor still gets its full 20% — the investor's percentage is protected, and the founders quietly absorbed the entire cost of the pool. Founders who understand this negotiate the pool size down to what hiring actually needs, or push for it to sit post-money, and save themselves several points of ownership on a single line of the term sheet. It is the clearest example of why reading the cap table before the round, not after, pays for itself.
Convertibles dilute later, not now
Not everything on the cap table is visible today. Convertible notes, CCPS and SAFE-style instruments do not sit as ordinary equity when the money comes in — they convert into shares at a later event, usually the next priced round, often at a discount or a capped valuation. Until they convert they are easy to forget, and then they land on the cap table all at once and dilute everyone. The discipline is to model your cap table on a fully-diluted, as-converted basis from the day you take any convertible, so a note you raised eighteen months ago does not ambush your ownership when it finally turns into shares. Founders who "postpone the valuation" with a convertible sometimes also postpone thinking about the dilution — and both arrive together at conversion.
Anti-dilution and liquidation preference — the terms that bite on a bad day
Two contractual terms, both living in the shareholders' agreement rather than in any statute, change what the cap table means when things do not go up and to the right.
Anti-dilution protects an investor if you later raise at a lower price than they paid (a "down round"). The common, founder-fairer version is broad-based weighted average, which adjusts the investor's conversion modestly to reflect the down round. The punishing version is full ratchet, which re-prices the earlier investor's shares as if they had paid the new, lower price — transferring a large chunk of ownership from founders to that investor in one move. Which formula you agreed to, buried in the SHA, decides how much a single down round costs you.
Liquidation preference does not change percentages at all; it changes who gets paid first, and how much, when the company is sold. A "1x non-participating" preference is standard and means the investor takes the larger of their money back or their percentage. "Participating" preferences and multiples above 1x let investors take their money back and a share of the rest, which can mean founders walk away with far less than their cap-table percentage suggests on a modest exit. The percentage tells you who owns the company; the preference stack tells you who actually gets the cash.
The filings behind every cap-table change
Every movement on the cap table is also a set of corporate filings, and they have to line up or the numbers become unenforceable. Issuing shares to an investor runs through a rights issue, preferential allotment or private placement under the Companies Act, with the return of allotment filed in Form PAS-3. Creating or enlarging the option pool needs a special resolution under Section 62(1)(b). Going past the authorised-capital ceiling needs an SH-7 first. And the price per share for any of it rests on a valuation that satisfies the tax and FEMA pricing rules. A cap table that does not match the filings at the Registrar is a due-diligence problem waiting to surface at your next raise.
Where this sits in the startup journey
The cap table is the ledger that every other funding decision writes into. Your valuation sets the price per share; your convertibles land on it at conversion; your ESOP pool is a slice of it; the term sheet and shareholders' agreement set the anti-dilution and preference terms that decide what it means on a bad day; and the allotment filings and capital increases are how it becomes legally real. Reading it fluently is part of the same founder's toolkit as everything else in the Startup India journey — the difference between negotiating a round and being negotiated at.
How we handle it at RDA, Baner
At RDA Advisory, Baner, we build and maintain the cap table so you always know exactly where you stand before you walk into a raise. We model each round on a fully-diluted basis, show you what a proposed term sheet does to your ownership — including the option-pool timing and the anti-dilution and preference terms — and flag the points worth negotiating before you sign. Then we complete the allotment (Form PAS-3), the option-pool resolutions under Section 62(1)(b), any authorised-capital increase (SH-7) and the valuation, so the cap table and the Registrar's records always agree and your next diligence is clean. Office No. 102, Snehraj Apartment, Baner, Pune 411045 · call +91 77570 45059.
Raising a round? Know your cap table before you sign
About to take investment, or already lost track of who owns what? RDA builds your cap table, models the round and the term sheet against your ownership, and keeps the MCA filings aligned so nothing surprises you later. Book a consult at rdatax.in or call +91 77570 45059, or see our company registration and startup service. RDA Advisory, Baner, Pune.
Verification note: The concepts described here relate to share capital and its issue under the Companies Act, 2013 — the distinction between authorised, issued and paid-up capital; the further issue of capital under Section 62, including rights issues and the issue of employee stock options under Section 62(1)(b) (which requires a special resolution); private placement under Section 42; the return of allotment in Form PAS-3; and the increase of authorised capital effected through Form SH-7. Pricing of shares must satisfy the fair-market-value rules under the Income-tax Act and, for non-resident investors, the pricing guidelines under the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019. Anti-dilution protection and liquidation preference are contractual terms set in the shareholders' agreement, not statutory rights, and their effect depends on the specific formula agreed. The worked examples are illustrative and simplified. Provisions, forms and pricing rules are periodically revised; confirm the current position for your transaction with your CA or company secretary before relying on it. This is general information, not legal or professional advice.
