How does a cap table evolve with multiple financing rounds?
In the case of startups, the cap table changes mainly over financing rounds. A simple cap table that starts with equity divided equally among all founders can evolve into a much more complex description of a startup’s ownership structure.
Over the course of its life, in order to raise funds and attract and retain employees, a startup will change its cap table by issuing various kinds of equity interests. Additionally, cap tables also change when investors are offered equity.
As a founder, you must understand how your cap table can evolve so you can prepare for various tasks like preparing to issue common stock, adding new investors, facilitating exits, and seeking board approval for various important decisions that could make or break your startup.
Hence, in this article, we will discuss how a startup’s cap table changes over multiple financing rounds. Read on to know more!

Changes in cap tables over multiple financing rounds
As startups progress through multiple financing rounds, their capitalization tables evolve significantly. This evolution reflects changes in ownership structure, investor dynamics, and financial instruments used in each round.
In the below sections, we will see how a startup’s cap table changes over multiple financing rounds through an example.
Addition of new investors and dilution of ownership
Startups add new investors through multiple financing rounds, careful cap table management is essential to maintain ownership dilution. This process impacts existing shareholders and influences the overall control and value within the company.
When a company issues new shares dilution occurs, decreasing the ownership percentage of existing shareholders. This is common during funding rounds when new investors are taken in.
Founders must manage dilution carefully to maintain control while attracting capital for growth. Investors analyze cap tables to assess their ownership percentage and potential returns.
Let us understand this with an example. Defense Matrix is a defense tech startup led by four founders. Heading into its Series A funding round, the startup’s pre-money valuation stands at $6 million. Its cap table is as follows:
Equity holder | Equity type | Number of units | Value of stake | Ownership |
---|---|---|---|---|
Founder #1 | Common stock | 250,000 | $1,500,000 | 25% |
Founder #2 | Common stock | 250,000 | $1,500,000 | 25% |
Founder #3 | Common stock | 250,000 | $1,500,000 | 25% |
Founder #4 | Common stock | 250,000 | $1,500,000 | 25% |
Total | 1,000,000 | $6,000,000 | 100% |
Defense Matrix issued 200,000 shares to 4 investors in its Series A funding round. Post-money, its cap table looks as follows:
Equity holder | Equity type | Number of units | Value of stake | Ownership |
---|---|---|---|---|
Founder #1 | Common stock | 250,000 | $1,500,000 | 21% |
Founder #2 | Common stock | 250,000 | $1,500,000 | 21% |
Founder #3 | Common stock | 250,000 | $1,500,000 | 21% |
Founder #4 | Common stock | 250,000 | $1,500,000 | 21% |
Investor #1 | Common stock | 50,000 | $300,000 | 4% |
Investor #2 | Common stock | 50,000 | $300,000 | 4% |
Investor #3 | Common stock | 50,000 | $300,000 | 4% |
Investor #4 | Common stock | 50,000 | $300,000 | 4% |
Total | 1,200,000 | $7,200,000 | 100% |
Issuance of complex securities
Since it is challenging to set the valuation of early-stage startups that do not have any financial history, startups typically issue SAFE notes. When certain conditions are met and the consent of relevant parties is received, SAFE notes are converted into common stock.
To deal with such challenges and meet investor needs, various complex securities may be added to a startup’s cap table over multiple financing rounds.
Some of the complex securities that may be seen in a startup’s cap table are:
- Convertible debt: Convertible debt is issued when an investor needs a steady return but would like to bask in the high growth potential of startup equity once the startup stabilizes or makes it out of a high-risk period.
- Convertible preferred stocks: Convertible preferred stocks also provide a fixed return to investors in the form of dividends. If an investor prefers stable returns but would like to have a say in company decisions in the future, they may request convertible preferred stocks.
- Warrants: Warrants work like call options and are used by investors who currently have limited available funds but want the opportunity to increase their stake at a later date.
To understand how complex securities change a cap table, we will see what happens: Defense Matrix must issue warrants, convertible preferred stocks, and convertible debt to existing investors a year after its Series A funding round to secure a high-profile defense contract.
Here, warrants were issued to the investors who were unsure about the startup’s present valuation. One of the investors expected the defense contract to generate steady revenue and opted for convertible debt. An investor that preferred fixed dividends over interest payments opted for preferred shares.
This is what their cap table looked like after this follow-on investment.
Equity holder | Description | Number of units | Value of stake | Ownership |
---|---|---|---|---|
Founder #1 | Common stock | 250,000 | $1,500,000 | 21% |
Founder #2 | Common stock | 250,000 | $1,500,000 | 21% |
Founder #3 | Common stock | 250,000 | $1,500,000 | 21% |
Founder #4 | Common stock | 250,000 | $1,500,000 | 21% |
Investor #1 | Common stock | 50,000 | $300,000 | 4% |
Warrant for 10,000 common stock units | 30,000 | $180,000 | ||
Investor #2 | Common stock | 50,000 | $300,000 | 4% |
Warrant for 10,000 common stock units | 30,000 | $180,000 | ||
Investor #3 | Common stock | 50,000 | $300,000 | 4% |
Convertible debt | N.A. | $180,000 | ||
Investor #4 | Common stock | 50,000 | $300,000 | 4% |
Preferred stock (1 preferred share is worth 1.20 common shares but holds no voting rights) | 25,000 | $180,000 | ||
Total | $7,740,000 | 100% |
Share transfers and investor exits
Private equity investors, especially startup investors, have the longest holding periods. According to a study by Preston, investments in early-stage startups can have a holding period ranging from four to seven years.
If an investor needs an exit before the next funding round, they may approach the lead investor from the previous round or ask the founders to arrange a buyback. Such investors can also look for exits through other people in their network or institutional investors.
Investors often seek liquidation rights in future rounds, acquisitions, mergers, or initial public offerings (IPOs). When liquidation rights are granted to investors, the startup must arrange a share sale for the existing investor’s stake with the incoming investor.
Let us see how this would play out by continuing our example. In its Series C funding round, Dove Hill Ventures, the new investor, offered to buy out all investors. Only Investor #3 chose to take up this offer. In exchange for retiring the convertible debt, Dove Hill Ventures received a $1.2 million stake at a discounted rate.
Dove Hill Ventures was also issued 100,000 shares. This is what Defense Matrix’s cap table looks like now.
Equity holder | Description | Number of units | Value of stake | Ownership |
---|---|---|---|---|
Founder #1 | Common stock | 250,000 | $2,000,000 | 18% |
Founder #2 | Common stock | 250,000 | $2,000,000 | 18% |
Founder #3 | Common stock | 250,000 | $2,000,000 | 18% |
Founder #4 | Common stock | 250,000 | $2,000,000 | 18% |
Investor #1 | Common stock (Warrants were converted) | 80,000 | $640,000 | 6% |
Investor #2 | Common stock (Warrants were converted) | 80,000 | $640,000 | 6% |
Investor #4 | Common stock | 50,000 | $400,000 | 4% |
Preferred stock (1 preferred share is worth 1.20 common shares but holds no voting rights) | 25,000 | $240,000 | ||
Dove Hill Ventures | Common stock | 150,000 | $1,200,000 | 11% |
Total | $11,120,000 | 100% |
Tapering of employee stock options
At the early stage, startups must issue equity compensation to preserve cash while attracting and retaining employees. They may issue equity compensation more readily than later-stage companies. Depending on the job market conditions, it is not uncommon for early-stage startups to offer equity in most full-time roles.
However, as the startup matures, the need to compensate for the lack of job security diminishes. Mature startups can afford to use equity compensation strategically. They can offer equity to attract key employees or offer performance-based compensation to top executives. On the other hand, junior-level employees can be offered better cash compensation.
Thus, over multiple financing rounds, the ratio of the size of the equity option pool to all the shares of the startup may be reduced. This may not be true if the top-level employees receive significant hikes in equity compensation. However, over multiple financing rounds, you are likely to see fewer junior-level employees in your startup’s cap table.
In the following cap table, you can see how the gap between equity compensation issued to key executives and junior employees increases. We can also see how the employee stock option pool increases at a slow pace compared to the growth in compensation to key executives.
Equity holder | Description | Current year units | Year 2 units | Year 3 units | Year 4 units |
---|---|---|---|---|---|
Founder #1 | Common stock | 250,000 | 250,000 | 250,000 | 250,000 |
Founder #2 | Common stock | 250,000 | 250,000 | 250,000 | 250,000 |
Founder #3 | Common stock | 250,000 | 250,000 | 250,000 | 250,000 |
Founder #4 | Common stock | 250,000 | 250,000 | 250,000 | 250,000 |
Investor #1 | Common stock | 80,000 | 80,000 | 80,000 | 80,000 |
Investor #2 | Common stock | 80,000 | 80,000 | 80,000 | 80,000 |
Investor #4 | Common stock | 50,000 | 50,000 | 50,000 | 50,000 |
Preferred stock | 25,000 | 25,000 | 25,000 | 25,000 | |
Dove Hill Ventures | Common stock | 150,000 | 150,000 | 150,000 | 150,000 |
Employee stock option pool | Stock options | 85,000 | 85,400 | 85,800 | 86,200 |
Key executives | Performance-based equity grants | 30,000 | 36,000 | 43,200 | 51,840 |
Junior employees | Base salary paid in equity compensation | 20,000 | 22,500.00 | 25,411.76 | 28,800.00 |
Total common stocks | 1,410,000 | 1,418,500 | 1,428,612 | 1,440,640 |
Eqvista- Effective cap table management for agile startups!
As startups grow and go through multiple financing rounds, their cap tables evolve with the addition of new investors. This evolution is not a simple expansion of outstanding shares since startups also issue complex securities like SAFE notes and various forms of convertible securities.
Over multiple financing rounds, when observing startup cap tables, you may notice that the equity option pools get smaller in size in relation to the overall outstanding shares. This happens because startups stop offering equity or offer less equity to junior-level employees. This phenomenon can also manifest as fewer junior-level employees entering your cap table.
When you understand how cap tables evolve over time and how these changes affect ownership structures, cap table management can be a breeze. This can be simplified further through Eqvista’s cap table management software that provides support for adding investors and issuing shares in a few clicks as well as scenario modelling and waterfall analysis reports.