# Cap table 101 | section 2 # Building the foundation that leads to success Now that you know the fundamentals of equity, it’s time for the fun part: creating your first cap table. In this section, we build our cap table from scratch and see it evolve as we bring in an advisor, raise early funding rounds, and hire our first employees. Start chapter 1 now or explore [more sections below](/content/learn/cap-table-101/2/?slide=1#ct101-section-overview/index.html). --- Click for sound Chapter 1: The seed round Chapter 2: The series A, and your first valuation Chapter 3: Options pools, dilution, and converting the SAFE What's a valuation cap? Transcript All right. So in the first three lessons, we outlined some of the basic cap table terms and concepts that you need to understand as you start building out your company. Now it’s time for the fun part, where we start putting it all together in the next few lessons. We’re going to imagine a fictional company and follow the founding team through the whole process of legally creating their company, building their cap table, raising multiple rounds of financing, converting debt into equity, and selling their company. Along the way, you’re going to see in detail what each change in your cap table means and why it’s important to your company's survival and success. You ready? Let’s dive in. Okay, so let’s run through the first four important steps in our fictional company’s journey. They are incorporation, how a co-founder split equity in the company, option pool planning, and arguably the biggest thing on most founders’ minds: dilution. ### Step 1: Incorporation Let’s say you and your co-founder have filed your certificate of incorporation for your new company called Meetly. The process is pretty simple and straightforward. You just say who you are, what your business is, and how many shares you’re creating. All right, congrats. You now have a company that’s legally incorporated. In that incorporation document, you’ve declared that you’re creating or authorizing 10 million shares. This is a number we see pretty typically. But as always in real life, make sure you talk to your legal advisors. But for our example here, of that 10 million, you and your co-founder are going to issue yourselves a total of 9 million common shares. That leaves 1 million common shares that are authorized but just haven’t been issued to anyone yet. That’s a key difference to be aware of. Just because the shares have been authorized doesn’t mean that they’ve been issued. You’ll see how this comes into play in a bit. ### Founder Equity Splits You and your co-founder can obviously decide to just split those 9 million shares right down the middle. That would be 4.5 million shares each. Or you can agree that one co-founder should get a little bit higher of the ownership percentage. Maybe the company was that person’s brainchild or maybe they’re going to devote more time to building the company or they just have special experience or talent that’s especially useful. Whatever the case, this moment of incorporation is where you and your co-founder have to make these important decisions. For the sake of this example, let’s say you decide on a 55-45 split, which is a typical ballpark for equity splits. ### The Option Pool Now let’s talk about that last million shares that you’ve left unissued. By leaving 1 million shares unissued, you’re essentially ensuring that there will be shares available for other people like advisors, employees, and consultants in the future. When you bring people on, this pool of 1 million shares is where you’re going to distribute their equity from. ### The Cap Table Let’s take a look at how all of this looks on your cap table right now. It’s pretty simple and straightforward in an automated cap table management system. You’ll have several different options for how to view your cap table, for example, by share class showing that there are 10 million authorized shares of common, that 9 million of them have been issued and 1 million remain unissued. You can also see the capitalization by stakeholder. As you can see, pretty basic. You’ve got two co-founders splitting authorized common shares 55 to 45, and with a total of 10 million shares authorized. One big thing to note is the price per share column right here. In some states, you’re required to list what’s called the par value or nominal value of the shares. But since your company really hasn’t had a chance to establish its value yet, you’ve listed a very small but nonzero number, let’s say .0001 cents per share. Also check out this quantity column. You might be thinking, how does the founder own 55% of the company but only 4,950,000 shares? Shouldn’t it be 5.5 million shares if the total number of shares is 10 million? But 4,950,000 is the right number of shares for 55% ownership because it amounts to 55% of 9 million, which is the number of shares that you’ve actually issued. Remember, those other 1 million shares have been authorized but not yet issued. Currently, Founder A holds 55% of Meetly and Founder B holds 45%. This is important because as you start adding more people to the cap table, you’re going to start issuing those unissued shares, which will affect the ownership percentage of those already on the cap table. This process is called dilution. ### Understanding Dilution Here’s a scenario: You and your co-founder get started and realize you need to hire an engineering chief. This person is important enough to give shares of the company. You decide to grant 100,000 shares in options. Those shares come out of the 1 million share option pool reserved when you incorporated. Notice how the number of available shares has gone down by 100,000 and how the co-founders’ ownership percentages are now slightly smaller. The pie got bigger, but your slice didn’t grow with it. And this, my friends, is how dilution works. Whenever you raise money or bring on new investors, dilution will come into play. ### Raising Funding Let’s say four months into your company, your advisors have helped you, and you’re excited to raise your first round of outside funding. This funding usually comes in the form of a convertible instrument. For this example, you sign a safe agreement with an investor named Carroll, who offers you $100,000. ### Final Thoughts We’ll look at how the cap table changes when actual investors get involved in the next lesson. ## Continue learning #### Sections Overview **Section 1: Introducing the cap table** Dive into the world of cap tables—how they work, types of equity offered, calculating ownership percentages, valuations, vesting schedules, and more. - [Chapter 1: What’s a cap table?](/content/sg/en/learn/cap-table-101/1/?slide=1/index.html) - 02:30 - [Chapter 2: Incorporating, and creating your first cap table](/content/sg/en/learn/cap-table-101/1/?slide=2/index.html) - 06:50 - [Chapter 3: Common vs. preferred shares](/content/sg/en/learn/cap-table-101/1/?slide=3/index.html) - 05:52 - [Chapter 4: How convertible notes work](/content/sg/en/learn/cap-table-101/1/?slide=4/index.html) - 06:33 - [Chapter 5: How SAFEs work](/content/sg/en/learn/cap-table-101/1/?slide=5/index.html) - 04:04 - [Chapter 6: Stock options, strike prices, and vesting schedules](/content/sg/en/learn/cap-table-101/1/?slide=6/index.html) - 09:10 - [Chapter 7: Valuations and fair market values](/content/sg/en/learn/cap-table-101/1/?slide=7/index.html) - 03:59 **Section 2: Building the foundation that leads to success** Ready to create your first cap table? Begin the journey of a fictional company as we build a cap table from scratch, bring in an advisor, raise early funding rounds, and hire our first employees. - [Chapter 1: The seed round](/content/sg/en/learn/cap-table-101/2/?slide=1/index.html) - 11:34 - [Chapter 2: The Series A, and your first valuation](/content/sg/en/learn/cap-table-101/2/?slide=2/index.html) - 07:49 - [Chapter 3: Options pools, dilution, and converting the SAFE](/content/sg/en/learn/cap-table-101/2/?slide=3/index.html) - 06:18 - [Chapter 4: What’s a valuation cap?](/content/sg/en/learn/cap-table-101/2/?slide=4/index.html) - 05:10 **Section 3: The Series B (and beyond)** We’re upping the ante in Section 3 as we raise another funding round to scale our fictional company. We’ll also see how our cap table comes into play when the company sells, goes public, or has a liquidity event. - [Chapter 1: The Series B](/content/sg/en/learn/cap-table-101/3/?slide=1/index.html) - 09:28 - [Chapter 2: Course recap](/content/sg/en/learn/cap-table-101/3/?slide=2/index.html) - 01:37