Cap tables for technical founders: UK essentials from first hire to Series B

Cap Tables for Technical Founders: A UK Essentials Guide

As a technical founder, your focus is on building a product that solves a real problem. The mechanics of company ownership, particularly how to manage a cap table for UK startups, can feel like a secondary concern. Yet, early decisions about equity have long-term consequences that affect control, fundraising, and your team’s financial outcomes. Getting the UK company ownership structure right from day one prevents complex and expensive corrections later. This guide provides a pragmatic roadmap for navigating your cap table from your first hire to your Series B, focusing on the essentials you need without a dedicated finance team. See the Finance for Technical Founders hub for more resources.

Foundational Understanding: Your First Cap Table

A capitalisation table, or cap table, is the definitive record of who owns what in your company. At its simplest, it is a spreadsheet listing each shareholder, the number and class of shares they own, and their resulting percentage ownership. This document is the single source of truth for your startup's equity. It becomes the foundation for every future fundraising conversation, employee equity grant, and strategic decision involving ownership.

For a pre-seed company, the cap table often starts with just the founders. The reality for most pre-seed startups is more pragmatic: a simple spreadsheet is perfectly adequate for tracking this initial ownership split. However, as soon as you contemplate your first hire or fundraising round, this simple ledger begins to evolve into a more complex tool that must also track your option pool, convertible instruments, and different share classes.

Stage 1: The Pre-Seed Phase and Your First Hire

Hiring your first key employee is a significant milestone, but it also introduces a critical challenge: how do you grant equity to early team members without creating a large tax liability for them or diluting yourself unnecessarily? This is a core part of early stage cap table management that you must get right.

Why EMI Options are the UK Standard

In the UK, the answer is almost always an Enterprise Management Incentive (EMI) scheme. This is a highly tax-advantaged government scheme designed specifically for smaller, high-growth companies. When you grant equity, you typically use options, which are the right to buy shares in the future at a pre-agreed price (the 'strike price').

An EMI scheme makes these options incredibly attractive. According to the UK Government EMI Scheme Rules, “Under the UK's Enterprise Management Incentive (EMI) scheme, employees pay 10% Capital Gains Tax on exit, with no income tax or National Insurance (NI) contributions when they exercise the options.” This tax efficiency is a powerful tool for attracting top talent when you cannot compete on salary alone. Without an EMI scheme, employees would face income tax and NI on the difference between the strike price and the market value at exercise, a significantly higher tax burden.

Setting Up Your First Employee Option Pool

Before granting any options, you must create an employee option pool. This is a percentage of your company's equity reserved for future employees. A standard option pool size for an early-stage UK business is 10% to 15%. This pool is typically carved out of the existing equity, meaning it dilutes all current shareholders, including the founders.

Setting one up correctly is non-negotiable. The process involves a critical interaction with HMRC to validate the scheme's tax benefits. To be eligible, your company must meet certain criteria. For instance, “To be eligible for EMI, a company must have gross assets of £3 million or less at the time of the grant” (UK Government EMI Scheme Rules). There are also restrictions on the type of trade and the number of employees.

The HMRC Valuation: Form VAL231

Unlike the 409A valuations common in the US, in the UK, “A company valuation must be agreed with HMRC before granting EMI options, typically via a VAL231 form” (HMRC). You submit your proposed valuation with supporting evidence, and HMRC either agrees or negotiates. This step is vital because it sets the strike price for the options. A low, agreed-upon valuation is beneficial for employees, as it maximises their potential upside. Getting this valuation wrong or failing to get it agreed upon can invalidate the scheme’s tax benefits entirely. An employee's holdings are also capped; “The total value of unexercised EMI options an employee can hold is limited to £250,000, measured over a 3-year period” (UK Government EMI Scheme Rules).

Stage 2: The Seed Round Reality Check

When an investor presents you with a term sheet for your seed round, your cap table transforms from a simple spreadsheet into a more complex legal and financial instrument. This is where you encounter different share classes, investor rights, and the true mechanics of dilution.

Priced Rounds and Share Class Differences UK Startups Face

A seed round is typically a "priced round", meaning the investor agrees on a specific valuation for the company. At this point, you will issue new shares to the investor. They will not be taking the same type of shares as you and your co-founders. Founders and early employees typically hold Ordinary Shares, which represent basic ownership and voting rights. Investors will almost always require Preference Shares.

Preference Shares give investors certain rights and protections that ordinary shareholders do not have. This distinction is a primary source of confusion for founders but is central to understanding your UK company ownership structure. The most common rights attached to preference shares are liquidation preference and anti-dilution protection.

Understanding Liquidation Preference

Liquidation preference answers the question of who gets paid first and how much they get if the company is sold or liquidated. A standard and founder-friendly venture capital term is ‘1x non-participating’ liquidation preference. This means the investor has the right to receive their initial investment back (1x their money) before any proceeds are distributed to ordinary shareholders.

Consider this simple exit scenario for a biotech startup. The company raised £2 million from an investor and is later acquired for £10 million. The investor holds preference shares with a 1x non-participating liquidation preference. They are entitled to receive their £2 million back first. The remaining £8 million is then distributed pro-rata among the ordinary shareholders, including founders and employees. The ‘non-participating’ clause is key; it means the investor chooses between getting their £2 million back *or* converting their preference shares to ordinary shares to participate in the £8 million pool. They cannot do both. In practice, we see that this is a common and fair term.

Decoding Anti-Dilution Protection

Another key term is anti-dilution protection. This protects investors if the company raises a future funding round at a lower valuation than the one they invested at (a "down round"). A standard founder-friendly anti-dilution provision is ‘broad-based weighted average’. This clause adjusts the investors’ share price downwards to account for the new, lower valuation, but it does so in a way that is less punitive to founders than more aggressive formulas like 'full ratchet'. It recalculates the conversion price based on the size and price of the new round, softening the dilutive impact on everyone else.

Stage 3: Planning for Series A and Beyond

Surviving the seed round is a major achievement, but now you must plan for future growth while managing your ownership stake. The biggest risk at this stage is underestimating cumulative dilution from multiple funding rounds and failing to allocate enough equity for future key hires. Simple dilution in one round is easy to calculate, but the compounding effect across rounds is what truly matters.

Modelling Cumulative Dilution

A simple waterfall model can illustrate how quickly a founder's stake decreases. It is essential to map this out to avoid future surprises. Imagine you are a founder who starts with 50% of the company. Your ownership stake will not remain there for long. The progression of your equity might look like this:

• Initial Founder Stake: You begin with 50.0% of the company.
• After a 10% EMI Option Pool: Your stake is diluted to 45.0% to make room for future hires.
• After a Seed Round Selling 20%: Your 45.0% is diluted by a further 20%, bringing your ownership down to 36.0%.
• After a Series A Round Selling 20%: Your 36.0% is again diluted by 20%, resulting in a final stake of 28.8%.

This simplified model shows how two funding rounds and an option pool can halve your initial ownership. Without foresight, you can find yourself with too little equity to incentivise the senior leadership team you need for the next stage of growth.

Graduating from Spreadsheets

This is also the stage where managing the cap table on a spreadsheet becomes risky and inefficient. Spreadsheets are prone to manual errors, struggle to model complex scenarios like anti-dilution or liquidation preferences, and offer no easy way to provide transparency to stakeholders. Almost every SaaS or Deeptech startup reaches the point where they transition to a dedicated cap table platform like Carta, Ledgy, or Vestd. These platforms automate calculations, manage EMI scheme compliance, model future funding rounds, and provide a secure portal for employees and investors to view their holdings.

Practical Takeaways for Technical Founders

Successfully managing your cap table as a technical founder in the UK is about proactive planning, not complex financial modelling. First, embrace the EMI scheme early for your first hires. Secure an agreed valuation with HMRC using a VAL231 form before you grant any options. This locks in the tax advantages that are critical for attracting talent.

Second, when you receive a term sheet, focus on the core economic and control terms. Understand the difference between Ordinary and Preference shares and what ‘1x non-participating’ liquidation preference means for an exit scenario. These terms define the real UK company ownership structure far more than a simple percentage.

Third, always model cumulative dilution. Before you agree to the valuation for your seed round, map out what your ownership might look like after a future Series A. This ensures you reserve enough of an option pool for the next wave of critical hires. A spreadsheet can handle this initially, but plan to migrate to a dedicated platform after your first priced round. This move will save you significant time and reduce the risk of errors as your company scales. Explore the Finance for Technical Founders hub for more.

Frequently Asked Questions

Q: What is the difference between an EMI option and just giving an employee shares?
A: Giving shares outright (or at a discount) can trigger an immediate income tax and National Insurance liability for the employee on the value they receive. EMI options defer any tax event until a sale, are far more tax-efficient (10% Capital Gains Tax vs. income tax), and allow for vesting schedules to retain talent.

Q: How does a convertible note (like a SAFE or ASA) show up on my cap table?
A: Initially, convertible instruments like SAFEs or UK-specific Advanced Subscription Agreements (ASAs) are not on the main cap table of issued shares. They are tracked separately as a liability or instrument that will convert into equity at the next priced round. You must model their potential dilution on a "fully-diluted" basis.

Q: When should I stop using a spreadsheet for my cap table?
A: You should plan to move to a dedicated platform after your first priced funding round (e.g., your seed round). This is when you issue preference shares, introduce complex terms, and have external investors who require accurate, auditable reporting. The risk of manual error in a spreadsheet becomes too high at this point.