Equity 101 for Founders: Dilution, Cap Tables, and Control

Founders often obsess over fundraising — but ignore what matters just as much:

Equity.

If you don't understand dilution, cap tables, and control, you can:

Lose your company
Get boxed out of future rounds
Regret every term you signed

This is your no-BS crash course in founder equity, dilution, and cap table management — what to know, what to avoid, and how to stay in control.

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How to Get Government Grants and Funding for Startups in Ontario — Equity 101 for Founders: Dilution, Cap Tables, and Control

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1. What Is Equity, Really?

Equity = Ownership.

It represents a share of your company — usually in the form of:

Common shares (what founders/employees hold)
Preferred shares (what investors hold)
Options (grants that convert into shares)

2. The Cap Table: Your Startup’s DNA

Cap Table = Capitalization Table.

It shows:

Who owns how much
What they paid
What type of equity they hold
Fully diluted ownership

3. Understanding Dilution (and Why It’s Not Always Bad)

Dilution happens when you issue new shares — usually during fundraising.

If you owned 100% before raising, and now own 70% — that’s dilution.

But:
Dilution ≠ loss if your pie is growing.

📌 Better to own 20% of a $100M company than 100% of a $500K one.

4. How SAFE Notes and Convertible Notes Impact Equity

These early-stage instruments convert into equity later — typically at:

A valuation cap
A discount rate
Or both

They dilute you — but you don’t see it until the next priced round.

5. What’s a Standard Cap Table at Seed?

Here’s a common post-seed breakdown:

Founders: 60–70%
Option Pool: 10–15%
Investors: 15–25%

VCs may request you expand the option pool pre-money — watch out for that (it dilutes you more).

6. Option Pools: Why You Need One (and How They Dilute You)

An option pool sets aside equity for future hires.

Most seed-stage pools are 10–15% post-round.

💡 But if the pool is increased before the round closes (pre-money), it dilutes the founders not the investor.

7. Common vs Preferred Shares

Common Shares: Founders, employees
Preferred Shares: Investors — with added rights like:
- Liquidation preferences
- Anti-dilution
- Board seats

Understanding the difference helps you negotiate smart.

8. Liquidation Preferences 101

Say your company sells for $10M.
If an investor has a 2x liquidation preference on their $5M investment, they get $10M — before anyone else.

⚠️ That can leave founders with $0 in some scenarios.

9. Voting Rights and Control Clauses

Control ≠ ownership.

Even with 40% ownership, you can lose voting power if:

Investors control the board
Protective provisions block your decisions
Super-voting rights skew the table

⚠️ Read every clause.

10. How Founders Lose Control (Without Noticing)

Common ways:

Board seat giveaways
Overly generous option grants
Drag-along rights
Investor vetoes on hiring, spending, or pivots

Your lawyer matters more than your deck here.

11. The "Founder's Dilemma": Ownership vs Growth

At some point, you’ll face this question:

“Do I want to own more of a smaller company, or less of a much bigger one?”

Neither is wrong.
But clarity matters.

12. How to Stay in Control Through Multiple Rounds

Keep founder ownership above 30% through Series A
Maintain at least 1 board seat
Don’t give investors unilateral veto rights
Choose aligned, long-term backers

13. Cap Table Modeling Tools to Use

Carta
Pulley
Seedlegals (UK)
Capbase
Spreadsheet + Capitaly CRM (for early stages)

14. Founders Who Gave Up Too Much, Too Early

Yes, it happens.

Some raised $5M+ and ended up with:

<10% ownership at Series B
No board seats
No real control

💡 Avoid this by staying lean, negotiating well, and modeling future rounds.

15. Secondary Sales: How Founders Can Take Money Off the Table

At Series A/B, some investors allow founders to sell a small % of their equity.

This gives you:

Personal liquidity
Focus
Optionality

But it can also be a red flag if done too early or too large.

16. Equity Isn’t Just Numbers — It’s Leverage

Equity influences:

How much you raise
Who you hire
What terms you get
Your exit outcomes

You don’t just manage equity. You leverage it.

17. Avoiding Cap Table Chaos

Avoid:

Giving random advisors 1–2% without vesting
Having too many angel investors with misaligned incentives
Promising equity verbally without documentation

Always document. Always vest. Always model future rounds.

18. International Founders: Special Considerations

US investors often require Delaware C-Corps
Foreign structures may spook VCs unless cleaned up
Consider a flip only when a lead investor demands it

FAQs: Founder Equity, Dilution, and Control

1. How much equity should founders keep post-seed?
Ideally 60–70%. Aim to stay above 30% through Series A.

2. What’s a healthy option pool size?
10–15% post-money. Adjust based on hiring plans.

3. Do SAFEs dilute founders?
Yes — once they convert. Model that in.

4. How do I model dilution across rounds?
Use a cap table tool or spreadsheet with pre/post money math.

5. Should I ever give up board control?
Only if you retain balance. Avoid 2 investor seats vs 1 founder.

6. What’s a liquidation preference?
A clause that pays investors first in an exit. 1x non-participating is standard.

7. Can I get equity back from a fired cofounder?
Only if they had vesting + cliff agreements.

8. Should I give early employees equity?
Yes — but structure with vesting, cliffs, and clear terms.

9. What’s fully diluted ownership?
Ownership assuming all options, SAFEs, and convertibles are exercised.

10. What’s the best cap table structure at pre-seed?
Founders: 80–90%, Option Pool: 10%, Investors: 0–10% depending on raise.

Conclusion

Equity is power.
If you don’t manage it, you’ll lose it.

Understanding dilution, cap tables, and control isn’t optional — it’s how you keep your company yours.

Subscribe to Capitaly.vc Substack (https://capitaly.substack.com/) to raise capital at the speed of AI — and stay in control every step of the way.

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