Your Cap Table Is Probably Wrong

The capitalization table records who owns what in a company: every share, option, warrant, and convertible, with the price paid and the percentage it represents on a fully diluted basis. Most founders understand what it is. Fewer maintain it with any discipline.

The neglect usually starts early, when equity governance feels less important than shipping product and signing customers. By the time a company is raising institutional capital or sitting across from an acquirer, the backlog of informal promises, undocumented grants, and unreconciled records has hardened into something that takes real effort and legal fees to untangle.

What Goes Wrong

Informal equity promises. Advisors, contractors, and early hires frequently receive equity commitments through email or a conversation, never formalized through actual grant documents and board approval. The company has obligations that don't appear on the cap table, and the people on the other end believe they own equity they can't easily prove.

Grants without authorization. Equity issuances require a board resolution and executed agreements. Without them, the issuance may not be enforceable. This shows up when a lawyer requests the board resolution during diligence and discovers it doesn't exist.

Missing or stale 409A valuations. Options must be granted at fair market value, set by a 409A valuation. Issuing options without one, or against a valuation from two years ago, exposes recipients to Section 409A penalties: immediate income recognition and a 20% excise tax on the spread between strike price and fair market value. The company doesn't pay this; the employees do. They are not pleased when they find out.

Vesting not tracked. When vesting schedules aren't maintained, the cap table overstates earned equity, departed employees may claim unvested shares, and disputes arise about what happened during leaves of absence or role changes.

Conversion and exercise errors. Convertible notes and SAFEs convert into equity at a future round via a calculation involving valuation caps, discount rates, and sometimes pro-rata provisions. Getting the math wrong, or not updating the cap table when it happens, produces discrepancies that compound through every subsequent round.

Founder stock without vesting. Investors expect founder equity to vest over four years with a one-year cliff. Founder shares issued with no vesting schedule are a flag. If a cofounder with 40% of the company leaves after eight months and keeps everything, the remaining team has a structural problem that every future investor will notice.

83(b) elections missed. Founders receiving restricted stock have 30 days from the grant to file an 83(b) election with the IRS. Miss it and they'll owe ordinary income taxes on the full appreciated value of the stock as it vests. Many first-time founders learn about this well after the window has closed.

When It Matters

The cap table rarely causes problems in isolation. It causes problems at specific moments.

Before a fundraise, institutional investors review it early in diligence, checking whether ownership is clear, whether grants were authorized, whether the fully diluted count matches what the founders said in the pitch. Discrepancies invite further scrutiny and delay closes. Finding material issues at term sheet stage is not where you want to be.

Before an acquisition, buyers need to verify exactly what they're acquiring and who gets paid. Undocumented equity claims, vesting disputes, and unresolved convertibles either come out of the purchase price or stop the transaction. Venture capital and exit dynamics mean acquirers don't wait for sellers to sort this out under a signed LOI.

During senior hiring, a CFO candidate or general counsel is going to ask to see the equity structure. Saying "it's in a spreadsheet we haven't touched in a year" signals something.

After multiple rounds, the complexity compounds. Liquidation preferences, anti-dilution provisions, pro-rata rights: each financing adds terms that have to be tracked correctly. A cap table that was close enough after the seed round can be meaningfully wrong by the time you've closed a Series B.

Cleaning It Up

Pull every equity-related document: articles of incorporation, board resolutions, stock purchase and option grant agreements, exercise notices, convertible notes, SAFE agreements, warrants, 83(b) election filings, 409A reports. Every line in the cap table should trace back to a document in this pile.

Then reconcile. Grants in the documents that aren't in the cap table. Grants in the cap table without documentation. Differences in share counts, exercise prices, or vesting terms. Instruments that converted or were exercised without the cap table being updated. Each discrepancy needs to be traced and resolved.

For informal arrangements, advisor grants made by email, verbal commitments to early hires, work with counsel to draft documentation, get board approval, and execute agreements. This is where equity compensation plans get complicated fast. Advisor grants are the most commonly undocumented equity in early-stage companies, by a wide margin.

Update vesting records. Calculate what has actually vested for each grant, flag departures where unvested shares should have been repurchased, and note whether any acceleration provisions were triggered. The cap table should show granted versus vested, not just granted.

When the reconciliation is complete, validate the fully diluted share count: authorized shares, issued shares, option pool, outstanding convertibles. If the math doesn't close, something is still missing.

Going forward, use cap table software. Carta and Pulley are the standard options. Update it every time an equity event happens: a grant, an exercise, a termination, a financing close. Not quarterly. Not when someone asks.

When the Documents Are Gone

Sometimes they just don't exist. The board resolution from 2020 was never written. The option agreement was never signed.

The options are reconstruction, ratification, or negotiation. Reconstruction means pulling contemporaneous evidence: emails, Slack, accounting records, and working with counsel to document what happened retroactively. Ratification means the board formally approves the prior action after the fact, which resolves the authorization problem in jurisdictions that permit it. Negotiation is necessary when the original arrangement wasn't clear enough to reconstruct. Get the stakeholder's account, agree on terms, and execute written documentation.

Disputes that involve meaningful equity and stakeholders unwilling to negotiate require mediation or litigation. These are worth resolving before a financing process, not in the middle of one.

Is your cap table in order?

Cap table errors surface at the worst possible moments: right before a raise, an acquisition, or a key hire. Our team helps startups and growth companies get their equity records clean and keep them that way. Book a free call with Parikh Financial

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