Startup equity, dilution and cap table

Startup equity, dilution and cap table

If you’re raising funding or startup equity you need to work out how many shares to issue to investors. The easiest way is probably to work out the % holdings after the share issue and work backwards.

For example, if there are 2 co-founders with 100 shares each who are raising £100k and the investor will get 10%, you might think that the investor will get 20 shares (10% of 200 total shares), however this would give them 9% as there would be 220 shares in issue.

The investor would need to receive 22 shares, as this would give them 22/222=10%. This would also dilute the co-founders down to 100/222=45% each.

Take a look at our template for a share capital table and play around with the figures to see how it works:

Share capital table

Share options / option pool

We’ve also included an option pool for share options to be granted to key staff or even advisors. Share options are contracts which specify that the option holder can purchase shares at a specified price if certain conditions are met, for example 1 tranche of options could vest every quarter, whilst another tranche only vests if performance conditions are met.

Need help?

Please get in touch if you need any help with any of the following:

– getting your house in order prior to receiving investment

– calculating number of shares to be issued to investors or option pool

– preparing board minutes, shareholder resolutions, investor offer letters and Companies House forms for share issues

– tax advice for EMI share options or SEIS/EIS tax relief for investors.

However, we highly recommend using a lawyer to draft or check the shareholders agreement or subscription document to ensure that co-founders’ rights are protected as much as possible.

By Mohammed Haque

Mohammed is a chartered accountant (ICAEW) with many years of experience in dealing with complex audit, accounting and tax matters.

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