Reading a cap table after a down round: who owns what when the price falls

A capitalisation table, or cap table, is a list of everyone who owns shares or rights to shares in a company. It shows founders, investors, employees with stock options, and anyone holding convertible instruments. For each, it lists the number of shares and the percentage owned.

Our guide on the cap table covers the basics. The key point here is that a cap table is a snapshot. Every new round redraws it.

Cap tables usually show the fully diluted view, which counts every share that could exist if all options and convertible rights were used. It is the best view to judge ownership because it shows the true slices. Investors also look at the table to see who has control and which rights sit with which shares.

A down round is a funding round in which shares are sold at a lower price than in the previous round. The company is then valued at less than before. This can happen because growth slowed, markets cooled or the earlier valuation was too high.

A flat round, at the same price, is not a down round. Our down round guide explains why they happen and what they signal.

Down rounds have been talked about more in India since the funding boom cooled, and several well-known companies have been valued below earlier peaks. Each case has its own reasons, so a lower price on its own does not tell you whether the business is weak or the earlier price was simply too high.

Three things move. First, the new investors buy shares at the lower price, so they get more shares for each rupee. Second, earlier investors may get extra shares through anti-dilution protection. Third, the company may enlarge its employee option pool to keep hiring.

All three increase the total number of shares, so each existing holder owns a smaller percentage. The effect is bigger than in a normal round.

Convertible instruments such as notes and SAFEs also change. They convert into shares at a discount or a cap, and in a down round the conversion math can create more shares than the holder expected. Our guides on convertible notes and SAFEs explain how they convert.

• New price: the round is priced below the earlier one.
• Anti-dilution: earlier investors may be given extra shares or a lower conversion price.
• Option pool: more shares are set aside for employees.
• Total shares rise, so every existing percentage falls.

Many preferred shares include a clause that protects the investor if the company sells shares at a lower price later. The most common versions adjust the price at which the investor's shares convert into ordinary shares, so the investor gets more ordinary shares. The weighted-average type softens the change by considering how many new shares are sold. A full ratchet resets the price to the new lower one.

The extra shares come out of the common holders' share, mostly founders and employees. Our guide on anti-dilution protection explains the types.

Not every investor has this protection. Early angels and employees usually do not. Only holders of preferred shares with the clause benefit, and sometimes they agree to waive it in exchange for staying in the company's next round. A waiver can ease the pain for founders, so ask if it is on the table.

Founders lose in two ways. They own a smaller percentage, and the value of that stake is lower because the price per share fell. Founders may also lose control if the investors' voting rights grow.

Sometimes new investors ask for a founder to take a longer vesting period or to keep working for a set period. Founders should model the table before agreeing.

A founder's bargaining power depends on the cash position. A company with many months of money left can push back on harsh terms. One close to running out has little room. This is why the timing of fundraising matters so much.

Employees with stock options see the same fall in value. If their options were priced at the earlier higher valuation, they may be worth little or nothing at the new price. The company may reprice options to a lower exercise price, which helps staff but adds more shares.

A larger option pool can also help, since it makes room for new hires. Employees should ask how many options they hold, at what price, and how the new round affects them. Our guide on ESOPs covers the basics.

Staff morale is a real cost. If options feel worthless, good people may leave. Some companies give new grants at the lower price, which are more likely to pay off, or extend the time employees have to exercise options. Whether this is fair to earlier hires is a common debate.

The headline tells you the new price, not who bore the cost. Ask: how many shares were sold, did earlier investors get adjustments, and was the option pool enlarged? A smaller round at a lower valuation can leave the company better funded and the founders with a smaller slice.

A down round is not always a failure. Some companies recover and grow into a higher value later. It is a reset that shifts value between the owners.

Also watch the new investors' rights. A lower price often comes with stronger protections, such as a bigger liquidation preference, which decides who is paid first in a sale. A smaller percentage with weaker rights can leave common holders worse off than the percentages alone suggest.

Look at the fully diluted share count, which includes options and convertible rights. Compare each holder's percentage before and after the round. Check whether any holder's rights, such as liquidation preference or anti-dilution, changed.

Compare the new post-money valuation with the last round's figure, since the gap shows how large the reset is. Keep a record of each version of the table so you can trace how every number changed.

This is general information, not legal or financial advice. Ask a professional to model your own cap table before a round.