Cap Table topic of the week: When 1% Isn’t Really 1%
As part of this weekly series on startup cap tables, dilution, SAFEs, and venture financing mechanics, I wanted to start with a very common mistake founders make when granting equity.
A founder starts a company with 1,000,000 shares.
An advisor comes along and they decide to give him “1%”.
So they issue him 10,000 options.
Seems reasonable enough.
Except…he didn’t actually get 1%.
Because once those 10,000 options are issued, the company now has 1,010,000 shares outstanding on a fully diluted basis.
So the advisor actually owns about 0.99%.
No big deal, right?
Then a second advisor joins and is also given “1%”.
The founder again issues 10,000 options.
Now the company has 1,020,000 shares outstanding.
Which means:
The second advisor owns about 0.98%.
And the first advisor gets diluted by the second grant and now owns about 0.98%.
Then eventually someone notices the problem.
The company decides to finally grant a third advisor a true 1% ownership stake on a fully diluted basis.
To actually give someone 1% of a company with 1,020,000 shares outstanding, the company cannot issue 10,000 options.
They have to issue approximately 10,303 options.
So now the third person who was “given 1%” receives materially more options than the first two people who supposedly also received “1%”.
So we have 3 grants for "1%" and one of them actually owns about 3% more compared to the others.
This is one of the reasons carving out an option pool upfront is so important.
Once you establish a properly sized pool, you now have a fixed denominator to grant from. The pool already exists in the capitalization, so granting options from that pool does not continuously change the denominator every time you make a grant and now 1% = 1%.
This sounds incredibly minor when companies are small.
But I see this mistake constantly.
Founders casually talk in percentages without realizing that percentages are self-referential. Issuing shares changes the denominator itself.
Cap table math matters more than most founders realize.
More thoughts on startup ownership mechanics at www.captableexpert.com.
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