A capitalization table, or cap table, is the ledger of who owns the company and what each security allows that holder to do. Fully diluted means you count every share and equity-linked instrument treated as outstanding on an as-converted and as-exercised basis under agreed rules. An ownership bridge walks from pre-transaction fully diluted ownership to post-close ownership, showing every step, the related cash and issuances, and why percentages change.
The payoff for getting this right is speed and certainty. A sound cap table lets any reviewer tie percentages back to charters, plans, and contracts, and forward to post-close governance, economics, and compliance. The bridge is not a valuation model or a liquidation waterfall. It is the book of record for equity flow that answers who rolled, who sold, who bought, and what that means on day one after close.
What a Cap Table Tracks and Why It Matters
Cap tables track each class of equity and equity-linked instrument, the holders, and the rights that ride with those instruments. Because deal math and governance rely on the denominator, you must define fully diluted explicitly for the deal. By doing this early, you reduce re-trade risk, align expectations on employee pool treatment, and keep your legal, finance, and accounting teams in sync.
Entity Types and Equity Variants You Will See
Sponsors routinely face four architectures, each with distinct moving parts and paperwork burdens. For modeling, convert everything to a common unit as-converted and as-exercised per governing documents and the agreed fully diluted convention.
- US C-corporation: Common and preferred under DGCL. Preferred terms drive proceeds and conversion counts. Warrants, options, and RSUs ride on stock plans.
- US LLC/LP: Units and profits interests with distribution priorities in operating or partnership agreements. Equity classification and tax differ from corporations.
- UK Ltd: Ordinary and preference shares. Management may hold EMI options, growth shares, JSOP, or unapproved options.
- EU GmbH/SAS: Customizable units or shares with strict transfer consents in some jurisdictions. Option plans can require notarial form.
Build From the Ledger: Mechanics and Fully Diluted Rules
Start from company records, not a banker’s model. Tie counts to charter or articles and amendments, the share ledger or stock register, option plans and grant logs, warrant registers, SAFE and convertible note documents, and board or shareholder approvals for issuances and plan reserves. For LLCs, add the operating agreement, unit ledger, and profits interest award letters.
Then set the fully diluted denominator for the deal, and state inclusions and exclusions clearly. Common rules include all common and preferred as-converted, options and warrants on an if-exercised basis, RSUs that settle at the deal, and SAFEs or convertibles as converted under cap or discount mechanics with accrued interest where applicable. If an instrument allows a choice, lock it in the transaction agreement. Preferred converts per the contract unless the deal is a deemed liquidation and the class takes cash. If preferences are live, the waterfall drives cash while the bridge reports post-close equity.
Vesting and Performance: Decide Treatment Upfront
Unvested options or RSUs require clear treatment. You can accelerate, cancel for cash, roll into new awards, or continue vesting. Each path has a different impact on cash and post-close fully diluted counts. Performance awards count at 100 percent only if the deal triggers the metric; otherwise exclude them from post-close unless the parties grant credit and disclose the assumption.
Antidilution and Price-Based Adjustments
Weighted-average antidilution adjusts conversion prices if a pre-close round prices below the current conversion price, so update conversion rates and share counts when a recap happens before close. Full ratchets and management ratchets are bespoke. Treat performance or MOIC ratchets as contingent and disclose triggers and sensitivities rather than baking them into day-one fully diluted. For background on ratchet math, see full ratchet vs weighted-average anti-dilution.
Consent Rights and Other Tripwires
Key contracts often restrict transfers or issuances, and these rights can delay or derail closing. Confirm waivers for ROFR or ROFO, and verify tag or drag thresholds are met. Secure pre-emptive right waivers if you issue new equity pre-close. Map change-of-control triggers in warrants or notes that force exercise, redemption, or repricing. Model US 280G parachute payments that can change holders and cash outlay; decide on a shareholder vote or cutback early to avoid timing surprises.
The Ownership Bridge: Five Steps That Hold Up in Diligence
The bridge is a one-page chain of evidence, with footnotes and document citations. It ties pre-close fully diluted through proceeds, rollovers, new money or instruments, and post-close fully diluted by cohort. It should also reconcile to the sources and uses schedule wherever instruments are cashed out or rolled.
- Step 1 – Pre-close fully diluted: List every class and instrument, inclusions or exclusions, and vesting and conversion assumptions.
- Step 2 – Proceeds allocation: Run the waterfall if preferences matter, show cash by class, and note any election to convert to participate pro rata.
- Step 3 – Rollover elections: Identify who rolls, by what mechanism, and the pre-tax value rolled. State the percent of seller’s deemed equity value and note tax differences by cohort.
- Step 4 – New money and instruments: Add sponsor and co-invest, any preferred or structured equity, and the management incentive plan pool. State whether the pool is pre- or post-money and whether it counts in fully diluted at close.
- Step 5 – Post-close fully diluted: Combine rollovers and new issuances, present by cohort, tie to 100 percent, and show governance thresholds such as board seats and protective provisions.
A Compact Illustration
Assume a Delaware C-corp with only common and vested options. Pre-close there are 10,000,000 common and 2,000,000 options at a 1.00 strike, with no other instruments, so pre-close fully diluted is 12,000,000. The deal values equity at 200,000,000. Founders and key managers roll 20 percent of their pre-tax common value. The new option pool is 10 percent post-close fully diluted. Existing options are cashed out at in-the-money value and replaced with new options from the pool.
Now build the bridge in five lines. First, the pre-close fully diluted equals 12.0 million. Second, there is a single class so no waterfall; cash to common equals 200 million, which is the bridge basis. Third, the rollover equals 40 million based on 20 percent times 200 million. The implied pre-close price is 20.00 per share from 200 million divided by 10 million common. Rolled shares equal 2.0 million equivalent. Options are cashed and do not roll. Fourth, the sponsor funds 160 million for new common. The new option pool equals 10 percent post-close and counts in fully diluted by agreement. Fifth, post-close fully diluted the option pool equals 10 percent, and the sponsor and rollover share the remaining 90 percent by value. If the pool is pre-money, sponsor and rollover dilute proportionally. If it is post-money, the pool dilutes both to 90 percent combined. Spell this out in the agreement and mirror it in the bridge.
This simple walk highlights why pool basis and inclusion rules must be explicit. Ambiguity here creates re-trade risk and weakens trust.
Sponsor Instruments, SAFEs, and Convertibles
Deal structures can sit outside or inside the fully diluted count, and the bridge should make that visible. Preferred with a liquidation preference and participation that is non-convertible and senior typically sits outside fully diluted but changes economics and optics. If preferred is convertible and votes as-converted, include it in fully diluted and show both ownership and the preference stack. Penny warrants are included if outstanding at close, while performance-vesting warrants are contingent and should be disclosed with triggers and sensitivities.
Legacy SAFEs and convertibles require document-driven math. Post-money SAFEs convert to a fixed share count, investment divided by the post-money cap, and dilute all holders including the pool. With multiple SAFEs, the order and aggregation can change counts, so cite the instruments. Convertible notes convert at the lower of the cap-implied or discount-implied price and include accrued interest through conversion. If a note allows repayment at change of control, decide and reflect both sources and uses and fully diluted. For context on how the equity layer shapes outcomes, see equity financing in M&A.
Documentation Map and Accountability
Documentation is the source of truth. The charter or operating agreement defines classes, conversion, preferences, voting, and transfer limits. Equity plans and awards set vesting, acceleration, and change-of-control treatment. Warrants, notes, and SAFEs define exercise, conversion, antidilution, and cash-out terms. Shareholder or investor rights agreements capture ROFR, pre-emption, drag or tag, and consent thresholds. The transaction agreement sets price mechanics, rollover terms, award treatment, pool sizing, true-ups, and escrows. Rollover and subscription agreements document exchange mechanics and tax elections. The approvals and closing deliverables include authorizations, waivers, payoff letters, option cancellations, 280G approvals, and registry filings.
Company counsel owns legacy cleanup. Sponsor counsel owns newco charters, investor rights, and the MIP. One owner, usually the deal finance lead, reconciles numbers across both stacks and runs sign-off with counsel and the CFO. As a quality bar, require three-way tie-outs among the bridge, the earnings bridge, and the cash-free debt-free enterprise value exhibit.
Economics, Accounting, and Tax: No Surprises
External costs can be modest, but internal verification cannot be. Legal time covers cleanup of missing approvals, rescissions, and overlapping plan terms. Valuation work such as 409A and EMI sets strikes and preserves tax compliance. Administration can include transfer agent or platform migration. Tax planning spans 280G, 83(b), 409A, and EMI qualification. The biggest cost is delay from bad data; a clean bridge prevents re-trades and post-close disputes.
Accounting treatment must align to substance. Share-based compensation under ASC 718 or IFRS 2 measures awards at grant-date fair value. Modifications at change of control can trigger incremental expense, so cash-out plus new grants often means a settlement and a new grant. EPS and fully diluted share counts under ASC 260 or IAS 33 should match the bridge’s fully diluted convention, including conversion assumptions for convertibles under ASU 2020-06. Preferred with redeemable features can fall outside permanent equity under ASC 480-10-S99, which affects leverage metrics. Consolidation conclusions under ASC 810 or IFRS 10 hinge on control rights embedded in the cap table.
Tax choices change equity outcomes. US 83(b) elections for restricted stock or profits interests must be filed within 30 days to avoid ordinary income at vesting. US 409A requires strikes at or above fair market value from a contemporaneous independent appraisal and has rules for repricing or substitution. US 280G modeling should address acceleration and any gross-ups, noting that a private-company vote can mitigate the excise tax. UK EMI options require careful treatment on exchanges to preserve relief. LLC profits interests need to meet Rev. Proc. 93-27 and 2001-43 and often benefit from an 83(b) election.
Compliance Overlays and Governance You Cannot Ignore
Reporting regimes require timely updates. In the United States, FinCEN beneficial ownership information filings apply to most entities, and post-close changes can trigger updates. The UK’s PSC regime requires prompt register updates and Companies House filings. Public company thresholds such as 5 percent beneficial ownership under 13D or 13G have accelerated deadlines and group aggregation rules. Banks may require refreshed KYC or AML diligence, and cap table records must support screening.
Cap tables drive control, so the bridge should make control terms obvious. Board composition depends on designation thresholds and what happens on dilution or transfer. Protective provisions and supermajority votes should preserve sponsor protections without unintended dilution by the MIP or co-invest. Transfer restrictions should align ROFR or pre-emption with the exit plan, with affiliate and estate planning carve-outs that do not undercut control.
Pitfalls, Kill Tests, and a Practical Timeline
Common pitfalls repeat across deals. Missing instruments such as SAFEs, warrants, or side letters are eliminated by reconciling the cap table to payoff letters and consents. Fully diluted ambiguity disappears when one definition governs pool sizing, sponsor ownership, and rollover. Double counting goes away when you avoid mixing treasury method on one tab with if-exercised on another. Option pool treatment must be explicit in the term sheet. Vesting and 280G must be tied out before sources and uses are final. Consent rights need hard waivers, not assumptions. Rollover equity must be tax-efficient or it should be canceled for cash and regranted. If preferred will be mezzanine or a liability, do not present it as common-like equity in lender decks without footnotes. BOI or PSC deadlines must be assigned, or penalties follow.
A practical timeline keeps teams aligned. Intake in week 0 to 1 has the CFO deliver ledgers and security documents, and counsel inventories consents and triggers. Build and tie-out in week 1 to 2 assembles the pre-close fully diluted with inclusion rules, and counsel validates against records with escalations for gaps. Waterfall and negotiation in week 2 to 4 align the term sheet and SPA on pool basis, rollover definitions, award treatment, and any ratchets, and include the fully diluted definition with example calculations in exhibits. Paper and close in week 4 to 6 covers newco docs and the MIP, accounting classification, tax steps for 83(b), 409A, EMI, and 280G, waivers, payoff letters, option cancellations, and the bring-down certificate. Day 1 to 30 post-close you issue equity, deliver grants, file ERS and 83(b), update BOI or PSC and any public beneficial ownership filings, and migrate the cap table to the chosen platform.
Comparisons and Alternatives You Should Reconcile
Cap table vs waterfall is ownership vs proceeds. If preferred is in-the-money or instruments are hybrid, you need both. The ownership bridge vs sources and uses is equity flows vs cash flows, and they must reconcile where instruments are cashed out or rolled. When ratchets or earnouts are material, add sensitivities to your LBO model, but keep day-one fully diluted clean and clearly labeled.
Practical Standards and What the Committee Should Ask
Set standards that make the model audit-ready. Use one fully diluted definition in the header and in the SPA exhibit. List inclusions and exclusions and the treatment of the pool, RSUs, warrants, and convertibles. Freeze a single denominator and timestamp, then flow subsequent changes through a reconciliation log. Favor footnotes over clever formulas by placing complex assumptions in notes with document citations. Run cross-checks so sums equal 100 percent, the bridge ties to sources and uses and SPA examples, and governance outcomes match board and consent rights.
- Dilution scope: Which instruments are excluded from fully diluted, and what is the worst-case dilution if assumptions are wrong?
- Pool basis: Is the pool pre- or post-money, and does it dilute sponsor and rollover equally?
- Consent friction: Do any holders have rights that can re-trade economics at close?
- Accounting class: What is the classification of each post-close instrument, and how will it affect covenants and disclosures?
- Filings plan: Are 83(b), EMI, ERS, and BOI or PSC filings tracked with owners and due dates?
Deliverable Shape, Closeout, and a Fresh Quality Check
Deliver two tabs and a one-page memo. Tab 1 is the pre-close fully diluted cap table with inclusion rules and tie-out references. Tab 2 is the ownership bridge with rollover values, new issuances, pool sizing, and post-close fully diluted by cohort, plus governance thresholds. The memo defines fully diluted, states key assumptions and consents, summarizes accounting and tax treatments that move economics, and confirms regulatory filings. As a practical, original quality check, run a blind rebuild: ask counsel to recreate the pre-close cap table from the legal PDFs only, without your model, and compare. A clean pass proves reproducibility.
Close by archiving the full package with index, versions, Q&A, user list, and audit logs. Hash the archive and set a retention schedule. After retention, obtain vendor deletion and destruction certificates, noting that legal holds override deletion. That discipline keeps the record defensible years later, when memory fades and ownership stories are tested.
Key Takeaway
A deal-ready cap table and a clear ownership bridge remove ambiguity at the moment it matters most. Define the fully diluted rules once, build from the ledger, reconcile to cash, and show governance outcomes. When the numbers tie to documents and the model echoes the documents, you trade speed for trust and protect value at close.