How to Clean Up Your Cap Table Before Fundraising: Practical Steps for Founders

Step 1: Reconcile Your Cap Table with an Equity Ownership Review

Before you can model future fundraising scenarios, you must have an unimpeachable record of your current ownership. This process of cap table reconciliation creates a single source of truth that aligns your legal documents with your summary spreadsheet. For most pre-seed to Series B startups, the rule is simple: The spreadsheet is a model, the paper is the reality. If they do not match, the spreadsheet is wrong.

To get a definitive, auditable record of who owns what right now, you need to conduct a thorough equity ownership review. Follow these steps to fix your cap table before raising money:

1. Gather All Documentation: Collect every document that grants or modifies equity. This includes articles of incorporation, founder stock purchase agreements, board consents, SAFE and convertible note agreements, advisor equity grants, and employee option agreements.
2. Audit Line by Line: Go through your cap table spreadsheet and trace every single entry back to a signed legal document. Verify names, share counts, issuance dates, vesting schedules, and any special terms. Mismatches are common, especially with early advisor grants or verbal promises that were never properly documented.
3. Document and Correct: For every discrepancy, find the root cause. Was a signature missed? Was an employee termination not correctly recorded, leaving their vested options in limbo? Correcting these issues now, with your own legal counsel, is far less expensive and stressful than doing it under the pressure of an investor's diligence timeline.

This manual review is manageable for early-stage companies. However, almost every SaaS or Biotech startup reaches a point where a spreadsheet becomes a liability. The tipping point is typically the first priced round. The introduction of multiple new investors, a formal option pool, and complex conversion math makes dedicated software like Carta, Pulley, or AngelList Equity essential for maintaining an investor-ready cap table.

Step 2: Model Your Pro Forma Cap Table for SAFE Conversions and Option Pool Adjustments

With a clean baseline, the next step is building a pro forma cap table. This is what the cap table *will look like* after the new investment, SAFE conversions, and option pool increase are complete. This model is crucial for understanding founder dilution concerns and negotiating terms effectively.

First, you must understand how to convert SAFEs to equity. The key distinction is between pre-money and post-money SAFEs. Post-money SAFEs were introduced by Y Combinator (YC) in 2018 (YC), and they calculate the holder's ownership based on the company's valuation after the new money is in, providing more certainty about their final stake. Pre-money SAFEs convert based on the pre-money valuation, meaning their ownership is diluted by the new investment round alongside existing shareholders.

Next comes the option pool adjustment, often called the "Option Pool Shuffle." Investors will require you to create or increase your employee option pool as part of the financing. A target post-money option pool is typically 10-15% of the company's equity after a financing round closes (Industry Standard). The critical detail is *when* this pool is created. Investors will almost always insist the option pool increase happens on the *pre-money* valuation. Creating an option pool 'pre-money' on a $10M pre-money valuation means the company's operating value is considered $9M, with the remaining $1M allocated to the new option pool (Valuation Mechanics). Investors prefer this for a simple reason: it dilutes the founders and existing shareholders, not the new money coming in.

Let’s walk through a common scenario for a US-based SaaS company:

• Valuation: $10M pre-money valuation.
• Raise: $2M in new capital.
• SAFEs: $1M in post-money SAFEs outstanding.
• Option Pool: New investors require a 10% post-money option pool.

In this pro forma model, the post-money valuation becomes $12M ($10M pre-money + $2M new investment). Here is the high-level ownership breakdown after the round closes:

• New Investors: Own 16.67% of the company ($2M investment / $12M post-money valuation).
• SAFE Holders: Own 8.33% ($1M converting / $12M post-money valuation).
• New Option Pool: Is set at 10% of the total equity.
• Founders & Existing Holders: Are left with the remaining 65% of the company.

Modeling this accurately prevents surprises and allows you to negotiate the pre-money valuation and option pool size with a clear understanding of the consequences.

Step 3: Complete Pre-Fundraising Equity Cleanup and Corporate Hygiene

With the major financial modeling complete, the final phase of your pre-fundraising equity cleanup involves addressing common compliance and administrative issues that can stall diligence. These are the non-obvious mistakes that signal a lack of operational rigor to potential investors.

First, check your corporate hygiene. For US-based companies, this means ensuring all state filings are current and taxes are paid. Companies must be in good standing in their state of incorporation, which includes requirements like paying Delaware Franchise Tax (Corporate Governance). A lapse can prevent you from legally closing the financing. In the UK, the equivalent is ensuring all filings with Companies House are up to date and the company is listed as active.

Second, review your stock option administration. Every option grant must be supported by formal board approval recorded in meeting minutes. Furthermore, the strike price must be set according to fair market value. For US companies, an independent 409A valuation is required to set the strike price for stock options (IRC Section 409A). Relying on an outdated 409A valuation, or having none at all, creates significant tax liabilities for your employees and is a major red flag for investors. UK companies with EMI schemes must similarly have an up-to-date, HMRC-agreed valuation.

A scenario we repeatedly see is a last-minute scramble to find board consents for grants made months or years prior. Another is discovering that a key early employee in the US never filed their 83(b) election, creating a tax headache. These seemingly small administrative oversights can delay closing by weeks as lawyers work to fix them. Diligent record-keeping here is non-negotiable.

Maintaining an Investor-Ready Cap Table: Key Disciplines

Preparing your cap table for a fundraise is not a one-time event but a discipline. It reflects your command of the company’s financial and legal structure. For founders at SaaS, Biotech, or E-commerce startups, who often manage this on their own with tools like QuickBooks or Xero, focusing on a few core principles can ensure you are always ready for investor scrutiny.

• Reconcile Now, Not Later: The work of aligning your cap table with signed legal agreements is foundational. This work cannot wait for a term sheet. Schedule a quarterly review to ensure all new grants, terminations, and financing instruments are perfectly recorded.
• Model Everything Proactively: Do not wait for an investor to show you how their investment will impact your ownership. Use a pro forma model to understand the dilutive effects of SAFEs, notes, and the option pool shuffle. Never be surprised by your own cap table.
• Maintain Corporate Compliance: Ensure your company remains in good standing with state or national registrars like the Delaware Division of Corporations or UK Companies House. Keep meticulous records of board approvals for all equity-related matters.
• Know When to Upgrade: A spreadsheet will get you through the pre-seed stage. As you approach a priced round, the complexity demands a professional tool. Migrating to a cap table management platform is an investment in accuracy, efficiency, and investor readiness.

A clean, accurate, and well-documented cap table is more than a diligence requirement; it is a sign of operational discipline that gives investors confidence in your leadership. That confidence is invaluable. To learn more, continue at the Fundraising Preparation hub.

Frequently Asked Questions

Q: What is the difference between a cap table and a pro forma cap table?
A: A standard capitalization table shows the current ownership structure of your company at a specific point in time. A pro forma cap table is a forward-looking model that shows what the ownership structure *will look like* after future events, such as a new funding round, SAFE conversions, and an option pool adjustment.

Q: What is the most common mistake founders make with their cap table?
A: The most common mistake is poor documentation. This includes relying on verbal agreements for equity grants, failing to get board approval for stock options, or not tracking signed documents systematically. These oversights create legal risks and cause significant delays during investor due diligence, eroding confidence at a critical time.

Q: When should a startup move from an Excel cap table to dedicated software?
A: The typical tipping point is the first priced equity round. At this stage, the complexity of converting SAFEs or convertible notes, creating a new option pool, and managing multiple classes of stock makes a spreadsheet error-prone and inefficient. Specialized software provides a secure, single source of truth for all stakeholders.

Q: How does the option pool adjustment impact founder dilution?
A: Investors typically require the new or expanded option pool to be created based on the pre-money valuation. This means the shares for the pool are carved out before their investment is added. As a result, the dilution from the option pool is borne entirely by the founders and existing shareholders, not the new investors.