Here is an example of how a cap table might be built up over time for a company which eventually takes on VC funding.

In each funding round, new shares will be created by the company and given to the new investors in the business in exchange for the money invested, reducing the ownership percentage represented by the existing shares held by the existing shareholders in the company.

This is referred to as dilution for the existing shareholders.

The hope is that this new investment will increase the overall value of the business, meaning that although they own a smaller percentage of the company, the increase in the value of the company as a whole resulting from the injection of capital will result in their smaller percentage being worth more to them.

Another way of saying this is that owning 50% of a company worth 10 million worth 5 to that shareholder is more valuable than owning a hundred percent of a company worth 3 million as can be seen here with each additional round of equity capital raising the founders and all other previous providers of capital will see their percentage ownership fall, or in other words, become more diluted at a high level.

Here are some of the industry norms or guidelines for early stage VC company cap tables.

Firstly, after a series A closing, the founder or founders should collectively be not only the largest individual category of shareholders, but also ideally hold the majority of the shares at over 50%.

In this example, they have 58.3%.

The founders will generally want to retain majority ownership in their company at this point, as they will look to retain control of the company guiding its direction and implementing their vision for the future growth of the company.

Next, the Employee Stock Option Plan, otherwise known as an ESOP, used to align the interests of and motivate key employees should target approximately 10 to 20% of the overall ownership of the company.

After each round of financing, the percentage ownership from earlier institutional financiers should not be greater than 30% of the share capital.

This could be a deal breaker for some VC investors, as VC investors prefer to make a sizable investment, which provides them with the ability to have influence over the operations of the business.

Ideally, any shareholder should not be publicly known to have a negative reputation or will not give rise to a conflict of interest between them and any new financiers.

The cap table will show all of their shareholders and should also detail those who have previously been part of the company and then left.

And finally, there should be no shareholders that receive a significant ownership stake that was disproportionate to their role in the company.

For example, giving double digit levels of ownership to someone that really made an introduction for the company would be something to concern current shareholders and new investors.