Cap Table Basics for Employees
Your equity is worth whatever the cap table says it's worth. Learn how to read one.
- What it tracks
- Common, preferred, options, warrants, convertibles
- Dilution
- Your % shrinks as new shares are issued
- Liquidation preference
- Preferred gets paid first (usually 1x)
- Preference stack
- Later rounds often senior to earlier rounds
- Fully diluted
- Includes all outstanding + all exercisable options
- 409A vs preferred price
- Common FMV is usually far below preferred price
What a cap table is
A capitalization table is a ledger of every ownership stake in a company: common stock (founders and employees), preferred stock (investors), options (granted but unexercised), warrants, convertible notes, and SAFEs. It determines who owns what percentage of the company and, critically, who gets paid how much in every exit scenario. Your equity is not worth 'shares x latest preferred price.' It is worth whatever the cap table waterfall says after preferences are satisfied.
Dilution: your percentage shrinks
Every time the company raises a new funding round or expands the option pool, new shares are created. Your share count stays the same, but your percentage of the company decreases. If you own 10,000 shares out of 10 million fully diluted (0.10%), and the company issues another 2 million shares in a Series C, you now own 10,000 out of 12 million (0.083%). This dilution is normal and expected, but employees who evaluate equity based on share count without understanding the fully diluted denominator consistently overestimate their ownership.
Liquidation preferences: who gets paid first
Preferred shareholders (investors) almost always have liquidation preferences. A standard 1x non-participating preference means the investor gets their money back before common shareholders receive anything. If Series A invested $30M and Series B invested $70M, the first $100M of exit proceeds goes to preferred. Common shareholders (you) split whatever is left. In an $80M exit, preferred takes all $80M and common gets $0. In a $150M exit, common splits $50M. Your 0.10% of $50M is $50,000, not $150,000.
Participating vs non-participating preferred
Non-participating preferred must choose: take the liquidation preference OR convert to common and share pro-rata. Participating preferred gets both: the liquidation preference first, then a pro-rata share of the remaining proceeds alongside common. Participating preferred is more dilutive for employees because investors 'double dip.' In down rounds or moderate exits, participating preferred can dramatically reduce or eliminate common shareholder payouts. Always ask whether the preferred is participating or non-participating.
Why 409A price differs from preferred price
When your company raises a Series C at $50 per share, that is the preferred price. Your common stock 409A valuation might be $14 per share. This is not a mistake. The 409A accounts for the fact that common stock carries no liquidation preferences, no anti-dilution protections, no board seats, and no information rights. Common stock is structurally inferior to preferred stock. The gap between preferred price and 409A common price is called the 'common stock discount,' and it reflects real economic differences, not just accounting convention.
Common mistakes
Valuing your equity as 'shares x latest preferred price per share.' This ignores the preference stack, dilution, and the common stock discount. Negotiating based on share count without knowing the fully diluted total. Ignoring future dilution from option pool refreshes and upcoming funding rounds. Not asking about participation rights on the preferred. Treating a rising 409A as proof that your equity is 'going up' without understanding that the preference stack may have grown even faster.
Common questions
How do I find out my company's cap table?
Most private companies do not share the full cap table with rank-and-file employees. You can ask for the fully diluted share count, the current 409A valuation, and the total liquidation preference stack. Some companies share a basic summary in equity grant documentation. If you can't get the numbers, assume the preference stack is significant and model your payout using conservative exit multiples.
What does 'fully diluted' mean?
Fully diluted means all outstanding shares plus all options, warrants, convertible notes, and SAFEs as if they were all exercised or converted. This is the denominator you should use when calculating your ownership percentage. Anything else overstates your position.
Can my equity be worth $0 even if the company sells for a lot?
Yes. If the total liquidation preferences exceed the exit price, preferred shareholders absorb the entire payout and common gets nothing. This is common in companies that raised large amounts of capital at high valuations. A company that raised $200M with 1x preferences needs to exit above $200M before common shareholders see a dollar.
What is a 'down round' and why should I care?
A down round is a funding round at a lower valuation than the previous round. Down rounds can trigger anti-dilution provisions that protect preferred shareholders by issuing them additional shares, further diluting common. Your share count stays the same while the fully diluted total increases, reducing your percentage even more than a normal round would.
Sources
Use the scenario modeler to see how Cap Table Basics for Employees mechanics play out with your specific grant. The full app goes deeper: per-grant modeling, fund signals, and competing lender terms matched to your situation.