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Understanding cap tables and dilution

Chapter IV · Valuation and analysis5 min read

What a cap table is, how dilution works, and why it's critical to understand before investing.

What is a cap table?

A cap table (capitalisation table) shows who owns what in a company — number of shares, ownership stakes, and share classes.

Why does it matter?

When new shares are issued in a funding round, existing owners' percentage decreases. This is called dilution.

Example

If you own 10% and the company issues 20% new shares, your stake drops to about 8.3%. Your stake has been diluted — but if the company is valued higher, your holding could still be worth more.

What to look for

  • Share classes — A-shares often carry more voting rights. B-shares are most common among investors.
  • Option pool — Shares reserved for employees. A large pool may mean future dilution.
  • Liquidation preference — Certain share classes have the right to be paid first in a sale.

Summary

Understand the cap table before investing. It determines your actual stake and how it can change in the future.

FAQs

Not necessarily. If dilution occurs at a higher valuation (an 'up-round'), your stake can be worth more despite lower percentage ownership.

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