As a person who likes to be in the trenches, I was geeking out on captable economics in the past few weeks and wanted to share more about it in this blog.

A cap table is a document that lists all the securities issued by a company, including common stock, preferred stock, options, warrants, and convertible debt. It shows the ownership percentage of each investor and the number of shares they own. The cap table is important for startups and investors because it helps to determine the dilution of ownership as new investors come in. There are excellent tools like Carta and that enable founders to manage things better

Dilution refers to the reduction in ownership percentage of existing shareholders when new shares are issued. This happens when a startup raises capital from investors, which results in the issuance of new shares. As the number of shares increases, the ownership percentage of existing shareholders decreases.

Pro-rata rights give investors the option to maintain their ownership percentage in a company by investing in future funding rounds. For example, if an investor owns 10% of a company and the company issues new shares in a funding round, the investor has the right to purchase 10% of the new shares to maintain their ownership percentage. Pro-rata rights are important for investors because they help to protect their investment and maintain their ownership stake in the company.

Pro-rata rights can be negotiated and included in investment agreements. However, not all investors have pro-rata rights, and it’s important for startup founders to be aware of the pro-rata rights of their investors when raising capital.

In summary, a cap table is a document that shows the ownership percentage of each investor and the number of shares they own. Dilution occurs when new shares are issued, which reduces the ownership percentage of existing shareholders. Pro-rata rights give investors the option to maintain their ownership percentage by investing in future funding rounds. Understanding cap tables and pro-rata rights is important for both startups and investors in the venture capital industry.

A typical capable of an early stage company and after subsequent rounds look something like this;

Incorporation table

This is when the business is in nascent stage i.e you have a working MVP, with min 1$ of revenue i.e customer ready to pay for the problem you are trying to solve. 10M equity shares are a standard practice, they are always rounded. You will see the equity price is nothing as the company has not been valued by the investor aka Mr. Private market. All the expenses and a time($) of the founders should be accounted for here as the value of the company cannot be lower than what what it has taken for the founders to reach this stage.

Valuation being a fuzzy logic for early stage companies startups resort to simple agreement for future equity which is loan that can be converted to equity


Founders in agreement with Series A investor, Jason comes with a fuzzy logic of valuing the company at $5M before it accepts Jason’s money, termed as pre-money valuation. 10M shares times $x = $5M, hence each share is $0.5

Jason invests $1M @ $0.5/share pre-money valuation and gets 2M shares, note additional 2M shares to 10M, same pizza which was cut in to 10M slices is now cut into 12M slices, each one gets a smaller piece, each piece is diluted!


A new investor, Rohit wants to invest with a pre-money of $25M, note how price of outstanding 12M shares is now costing $2.08 each. Rohit with a $7M cheque is owning 21.88% ($7M / $2.08). Point is who decides $25M valuation and $7M infusion? valuation ideally should be decided by fundamentals, typically which is earning OR revenue OR sales multiples, in the increasing order shaky fundamentals and $7M fund raise decided by what % the investor wants to own (rooted into either portfolio sizing mandates of the fund OR conviction of the business OR voting power in the board)


Here we are going to focus on pro-rata. In series-B fund raise, the valuation is decided as $150M pre-money with a target fund raise of $57M. Due to valuation, share price is now $9.77 which results in dilution of Rohit’s share to 15.87%. Due to the reasons mentioned above Rohit decides to exercise his pro-rata right (not obligation) from the term sheet to hold ~20% and has to invest $7M more to acquire 3.38% more which sums to a total of 19.23%


Rohit opts not to exercise his pro-rata right due to which his total holding reduces to 15.39%, while Bill and Gary, series-B investors go for pro-rata to roughly level their shares.

Hopefully this explains the captable economics in a simplified manner.