Every founder eventually asks the same question: "How much of my company do I actually own?" The honest answer is not the number in your incorporation documents. It is the number you get after you count the option pool set aside for your team and every instrument that will one day turn into shares. This is called the fully-diluted view, and learning to read it is the difference between negotiating a term sheet with clarity and signing away more than you realised.
What a cap table is
A capitalisation table, or cap table, is simply a list of who owns your company and how much. For a private limited company in India, it maps every shareholder to their share count and their percentage. Early on it is a spreadsheet with two founders and their equity shares. It grows every time you add an investor, top up your employee pool, or issue a convertible instrument. Keeping it accurate is not optional: your allotments must be filed with the Registrar of Companies in Form PAS-3, and if a foreign investor comes in, that investment is reported to the RBI through Form FC-GPR.
Issued shares versus fully diluted
There are two ways to read any cap table, and they give very different percentages.
- Issued (or outstanding) basis: counts only shares that have actually been allotted today.
- Fully-diluted basis: counts issued shares plus every share that could exist if all options were granted and exercised and all convertibles converted.
Take a simple example. Two founders hold 8,00,000 equity shares. You create an ESOP pool of 1,00,000 options for future hires. An angel invests through an instrument that will convert into 1,00,000 shares. On an issued basis, before the options are exercised and before conversion, the founders look like they own close to 100 percent. On a fully-diluted basis the denominator is 10,00,000 shares, so the founders own 80 percent, the pool is 10 percent, and the investor is 10 percent. Serious investors, and you, should always negotiate on the fully-diluted number. It is the honest one.
Where the extra shares hide
Two things inflate that fully-diluted denominator, and both are easy to overlook.
The ESOP pool. Employee stock options let you pay talent in ownership when cash is tight. In India they are governed by Section 62(1)(b) of the Companies Act, 2013 and Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014. A private company can approve the scheme by an ordinary resolution, options must have a minimum vesting period of one year, and the company must maintain a Register of Employee Stock Options. Normally promoters and directors holding more than 10 percent cannot receive ESOPs, but a DPIIT-recognised startup is exempt from this for ten years from incorporation, under the 2019 amendment to the rules. The key point for dilution: the entire pool, even the unallocated part, is usually counted as fully diluted.
Convertibles. These are instruments that start as something else and become equity later. The most common in priced Indian rounds is Compulsorily Convertible Preference Shares (CCPS), which must convert into equity. A DPIIT-recognised startup can also raise a convertible note from a foreign investor, subject to a minimum of Rs. 25 lakh per investor, conversion or repayment within ten years, and a Form CN filing with your authorised dealer bank within 30 days. Until they convert, these do not show up in your issued share count, but they absolutely belong in the fully-diluted view.
What dilution really means
Dilution is widely misunderstood. It does not mean you lose shares. Your share count stays the same. Dilution means your slice becomes a smaller fraction of a larger pie because new shares were created. Owning 60 percent of a company worth a crore is worth less than owning 40 percent of a company worth a hundred crore. Growth is the whole point.
One trap deserves special attention. Investors often ask you to create or expand the ESOP pool before their money goes in, from the pre-money valuation. That means the founders alone absorb the dilution of the pool, not the incoming investor. Model this on your cap table before you agree to it. Read every term sheet on a fully-diluted basis, know exactly what each convertible will become, and you will never be surprised by your own ownership again.