Modeling Dilution: How to Use Your Cap Table for Fundraising Scenarios
Takeaway: Your cap table platform is not just a record-keeper, but a powerful simulator; using its modeling tools to understand the precise dilutive impact of a financing round is a critical part of any successful and sophisticated fundraising negotiation.
One of the most powerful features of a professional cap table management platform is its ability to look into the future. These platforms are not just static ledgers; they are dynamic modeling tools that allow you to simulate complex fundraising scenarios in minutes. For a founder, mastering this tool is essential. It is what allows you to move from a theoretical understanding of dilution to a precise, share-by-share picture of how a financing round will impact your ownership.
Running these models before you sign a term sheet is a non-negotiable part of your preparation. It is the only way to truly understand the deal you are making and to negotiate from a position of informed strength.
The Core Inputs: The Anatomy of a Financing Model
Your cap table platform will have a dedicated fundraising or "round modeling" tool. To use it, you will need to input the key terms from your proposed term sheet:
Pre-Money Valuation: The value of the company before the new investment.
New Investment: The total amount of new capital being invested in the round.
New Option Pool: The size of the new employee option pool that is being created as part of the financing. Remember, this is a critical and highly dilutive component, and its size is a key point of negotiation.
A Step-by-Step Example: Modeling a Series A
Let's walk through a common scenario to see how the model works.
The "Before" Picture (Your Pre-Financing Cap Table):
Founders: Own 8,000,000 shares of Common Stock.
Existing Option Pool: 1,000,000 shares.
SAFEs: $1,000,000 in post-money SAFEs with a $10M valuation cap.
Pre-Financing Fully Diluted Shares (excluding SAFEs): 9,000,000 shares.
The Series A Term Sheet:
Pre-Money Valuation: $20,000,000
New Investment: $8,000,000
New Option Pool: To be increased to represent 15% of the post-financing capitalization.
When you input these terms into your cap table platform, it will automatically run a series of complex calculations in the correct legal order:
It will first calculate the conversion of your SAFEs. At a $20M pre-money, the $10M valuation cap on the SAFEs is more favorable, so they will convert at the cap, creating new shares for your seed investors.
It will then calculate the size of the new option pool based on the post-financing share count. This will create a significant number of new, un-issued shares.
Finally, it will calculate the price per share for the new Series A investors and determine how many shares they will receive for their $8 million investment.
The "After" Picture: Understanding Your Dilution
The output of the model will be a pro-forma, post-financing cap table that shows you, with perfect clarity, exactly what the ownership of the company will look like after the deal closes. You will be able to see the precise ownership percentage of the founders, your seed investors, the new Series A investors, and the size of the new, unallocated option pool.
This model is your most powerful negotiating tool. You can instantly see the impact of changing the pre-money valuation by a million dollars or increasing the size of the option pool by a percentage point. It transforms dilution from an abstract concept into a concrete, quantifiable number, allowing you to make data-driven decisions in the most important negotiation of your company's early life.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.