Cap Tables and Dilution: The Math Founders Get Wrong

Most founders can recite their ownership percentage. Far fewer can explain why the number moved by more than the round size implied. The gap almost always comes down to three things: where the option pool sits relative to the pre-money valuation, who actually exercises pro rata rights, and what the liquidation preference does to the payout at a mediocre exit.

Dilution is not the round size

Selling 25% of your company in a Series A does not cost you 25% of your ownership. It costs you 25% of whatever you held, plus whatever the new option pool takes. Carta’s Founder Ownership Report 2026, published in March 2026 and covering rounds raised from 2021 to 2025, puts median founder ownership at 56% fully diluted after a seed round and 36% after a Series A, falling to 16.1% by Series C. Carta’s earlier dilution analysis found median dilution of 20.1% at seed and 20.5% at Series A as of Q1 2024, down from 23% and 24.1% respectively five years earlier.

Those medians are worth internalising because they are the baseline against which any specific term sheet should be judged. A round that dilutes existing holders by 30% is not automatically bad, but it is above market and should be buying something.

The option pool shuffle, quantified

Here is the single most consequential piece of cap table mechanics, and it is almost never called out on a term sheet in plain language.

A term sheet quotes a pre-money valuation. It then, separately, requires that the company have an option pool of a given size immediately after closing. If that pool is created before the money comes in, it is inside the pre-money valuation, which means existing shareholders pay for all of it. Carta’s own option pool guide states the distinction directly: a pre-money pool “dilutes existing shareholders (primarily founders) before the new investor’s money comes in,” while a post-money pool spreads the dilution across everyone including the new investor.

Work it through. Two founders hold 8,000,000 shares and nothing else. A seed investor offers $3,000,000 at a $9,000,000 pre-money valuation, so a $12,000,000 post-money valuation and 25% of the company, and requires a 10% option pool at closing.

1. Post-closing ownership must be 25% investor, 10% pool, 65% founders.
2. Founders’ 8,000,000 shares are therefore 65% of the total, so total shares = 8,000,000 / 0.65 = 12,307,692.
3. The investor gets 3,076,923 shares (25%) and the pool is 1,230,769 shares (10%).
4. Price per share = $3,000,000 / 3,076,923 = $0.975.
5. Pre-money share count = 8,000,000 + 1,230,769 = 9,230,769, which at $0.975 is exactly the $9,000,000 pre-money valuation quoted.

The pool is inside the pre-money number. The founders’ 8,000,000 shares are worth 8,000,000 × $0.975 = $7,800,000. The real pre-money valuation of what the founders own is $7.8m, not $9m.

Had the same 10% pool been created post-money, diluting everyone, the founders would hold 67.5% and the investor 22.5%. The pre-money pool moves 2.5 percentage points from founders to the investor. At a $12,000,000 post-money valuation that is $300,000 of value, transferred by a line in the term sheet that reads like an administrative detail.

The defensible negotiation is not “no pool.” It is to size the pool from an actual hiring plan for the next 12 to 18 months, role by role, rather than accepting a benchmark number. Carta reports 10% to 15% as the common range with 10% the most frequent choice; Carta’s Founder Ownership Report puts the median employee equity pool at 12.1% at seed and 16.8% at Series C. Any pool larger than the hiring plan supports is a discount on the round dressed up as employee equity.

A cap table from seed to Series A

Continue the same company. Post-seed it has 12,307,692 shares. Eighteen months later it raises $10,000,000 at a $40,000,000 post-money valuation, and the lead requires a further 5% pool at closing.

New investors take 25% and the new pool takes 5%, so existing holders retain 70%. Multiply every pre-round percentage by 0.70.

Total post-round shares are 12,307,692 / 0.70 = 17,582,417, so the Series A buys 4,395,604 shares at $2.275 each, a 2.33x step up from the seed price of $0.975.

What pro rata actually costs

The seed investor holds 25% and has a pro rata right. To stay at 25% of 17,582,417 shares she needs 4,395,604 shares in total and already holds 3,076,923, so she must buy 1,318,681 more at $2.275, or $3,000,000. That is 30% of a $10,000,000 round.

Two consequences follow. First, seed funds that write $3m of pro rata cheques into their winners need reserves roughly equal to their initial cheque size, which is why “we reserve one to two dollars of follow-on for every dollar of first cheque” is a standard fund model. Second, if several holders exercise pro rata, the lead’s allocation shrinks and the round can become unfundable at the size you announced. The post-money safe removed the default pro rata right for exactly this reason and pushed it into an optional side letter.

Liquidation preference: the term that decides mediocre exits

Preferred stock gets paid before common. A 1x non-participating preference means the investor chooses, at exit, between taking its money back or converting to common and taking its percentage. Cooley’s Q4 2025 venture financing report, covering 221 reported financings and $8.9 billion of invested capital, found 98% of deals with a 1x preference and 96% with non-participating preferred. This is genuinely market standard, and it is also what the NVCA’s model financing documents are drafted around, so a deviation from it is the term to fight.

Using the Series A above, $10,000,000 invested for 25% with a 1x non-participating preference:

The breakpoint is the investment divided by the ownership percentage: $10m / 0.25 = $40m. Below it the investor takes the preference; above it it converts.

Now make it participating. At the $60m exit, participating preferred takes its $10m back and 25% of the remaining $50m, so $22.5m instead of $15m. The extra $7.5m comes straight out of common. That is why the 4% of deals with participating preferred, and any deal with a 2x or 3x multiple, deserve a hard look: the preference stack determines whether an $80m outcome is life-changing for the team or merely fine for the investors.

Preferences stack

Each round adds its own preference. Three rounds of $10m, $25m and $60m create a $95m stack that must be cleared before common sees anything, assuming 1x non-participating throughout and no senior structure. Founders who have raised $100m and are contemplating a $120m sale should model this before, not after, signing the LOI.

Build the model before the term sheet, not after

The practical discipline is a single spreadsheet with three tabs you maintain from incorporation: a fully diluted share ledger, a scenario tab that takes round size, pre-money valuation and pool size as inputs and outputs every holder’s percentage, and an exit waterfall that applies the preference stack. Carta and its competitors will do the first tab. The second and third are the ones that change your negotiating position, and they take an afternoon.

One Canadian note worth flagging: CCPC status, which lets your employees defer the tax on an option exercise until they sell the shares, requires among other things that the company not be controlled directly or indirectly by one or more non-resident persons, and that no class of its shares be listed on a designated stock exchange. A cross-border round that shifts control offshore can therefore change the tax position of every option holder on the cap table. That belongs in the same model as the dilution maths, not in a tax-season surprise.

Sources

• Carta — Founder Ownership Report 2026
• Carta — Dilution is on the decline (Q1 2024 data)
• Carta — Option Pools Guide: How to Size Your Employee Option Pool
• Cooley — Q4 2025 Venture Financing Report
• National Venture Capital Association — Model Legal Documents
• Y Combinator — Primer for the post-money safe, v1.1 (PDF)
• Canada Revenue Agency — Employee security (stock) options
• Canada Revenue Agency — Type of corporation (CCPC definition)