Startup Advisory
Cap Table Management for Indian Startups: How to Set Up and Maintain It
Lekha Editorial Team
CA-reviewed · Published
A cap table — capitalisation table — is the definitive record of who owns what in your company. It sounds simple. In practice, cap tables become wrong the moment you issue shares informally, grant options without documentation, or forget about a convertible note. Wrong cap tables lose funding rounds.
The Three Layers of a Fully Diluted Cap Table
A fully diluted cap table shows every potential share that could exist if all options, warrants, convertible notes, and SAFEs were exercised or converted. It's more useful than a current shareholding view because it shows the true dilution picture.
Layer 1 — issued shares: shares actually issued and registered with the ROC. This matches your register of members and PAS-3 filings. Every row has a shareholder name, share class (equity, preference), number of shares, price paid, and date of allotment.
Layer 2 — options (ESOP pool): all options granted (whether or not vested), plus the remaining ungranted pool. Each grant has an optionee, number of options, exercise price, grant date, and vesting schedule. Options that are not yet exercised are not issued shares — they're potential shares.
Layer 3 — convertible instruments: any SAFEs, convertible notes, or preference shares with conversion rights. These convert to equity at a future date, at a conversion ratio determined by the terms of the instrument. The fully diluted cap table shows the equity these would convert into at the current valuation (or the next round valuation for convertibles with valuation caps).
Common Cap Table Errors and Their Consequences
The informal promise: a co-founder, advisor, or early employee is told they'll receive X% equity. A year later, no shares have been issued, no option grant has been documented, and the person believes they own a percentage that doesn't exist on paper. When they leave or the company fundraises, the dispute is expensive. Fix: either issue shares immediately or document an option grant formally.
The forgotten convertible: a ₹50 lakh convertible note issued to a family friend in year one is forgotten when the Series A data room is being built. The note converts at the Series A at a 20% discount, creating an additional dilution surprise. Fix: include all convertibles in the cap table from day one and model their conversion at each round.
Mismatched ESOPs: the company's ESOP plan says 10% pool, but only 7% is reflected in the authorised capital as options. The remaining 3% hasn't been reflected in any corporate documentation. Fix: ensure the ESOP pool is reflected in shareholder resolutions, the authorised share capital is sufficient to cover the pool, and the plan document matches the actual grants.
What Investors Check in the Cap Table
Three specific things that institutional investors' legal teams verify when reviewing your cap table:
ROC consistency: every shareholder and shareholding percentage in your cap table must exactly match the ROC's records. The investor's counsel will run a company check and pull the list of shareholders from MCA. Any discrepancy — even a rounding difference — triggers a question that slows the process.
Vesting confirmation: for founder shares, investors want to see the vesting schedule documented and confirmed. They will ask what percentage of each founder's shares are vested at the time of investment. A co-founder who holds 30% of the company but only 60% vested creates a governance risk.
Conversion modelling: investors will model the cap table through their investment and all future rounds. Unclear or undocumented conversion terms on convertible instruments create uncertainty in this model. Standard terms (valuation caps, discount rates, most-favoured-nation clauses) that are market-standard create less friction than unusual structures.
Key takeaway
Your cap table is a legal document as much as a financial one. Every row must have a corresponding paper trail. Review it before every fundraise, every option grant, and every time a shareholder changes. The startups that have clean cap tables close rounds in 3 months; the ones with messy cap tables spend 6 months fixing it first.
Frequently asked questions
What is the best tool to manage a startup cap table in India?
For early-stage Indian startups, a well-structured Google Sheet or Excel is sufficient through the seed stage. The sheet should have tabs for: current shareholding (issued shares by shareholder), ESOP pool (grants, vesting status), convertible instruments, and a fully diluted summary. Purpose-built cap table tools (Captable.io, Carta, LetsVenture's cap table module) add structure and help model dilution scenarios. Most founders switch to a purpose-built tool at Series A when multiple investors and ESOP grants make the Excel complex.
How do preference shares affect a cap table?
Preference shares in Indian startups are typically issued to investors at their investment round. They carry rights that ordinary shares don't: liquidation preference (investors get paid before founders in an exit), anti-dilution protection (if future rounds are at a lower valuation, the investor's ownership percentage is adjusted), and sometimes board representation rights. In the cap table, preference shares are listed separately from equity shares, with their conversion ratio to equity shares shown. At most Indian startups, preference shares convert to equity 1:1 on a qualifying IPO.
When should a startup have a secondary share sale?
A secondary sale is when existing shareholders (founders, early investors, employees) sell their shares to new investors, rather than the company issuing new shares. Secondary sales are common at later stages (Series B+) to provide founders with liquidity without requiring an exit, or to clean up the cap table by consolidating small holdings. Early secondary sales (below Series B) are less common and often signal to investors that the founder is more interested in liquidity than in building the company — which can be a subtle negative signal.
What happens to the cap table when a convertible note converts?
At conversion, the convertible note principal (and sometimes accrued interest) converts into equity shares. The number of shares issued depends on the conversion ratio, which is determined by the valuation at conversion and any discount or valuation cap in the note terms. For example: a ₹1 crore note with a ₹10 crore valuation cap converts at the lesser of the actual round valuation or ₹10 crore. At conversion, new shares are allotted, PAS-3 is filed with the ROC, and the note is extinguished. The cap table must be updated immediately at conversion.
How do anti-dilution provisions work in Indian startup cap tables?
Anti-dilution provisions protect an investor when new shares are issued at a lower price than the investor paid (a 'down round'). The most common form is broad-based weighted average anti-dilution: the investor's conversion price is adjusted downward based on a weighted average of all shares outstanding and the new shares being issued. The result is the investor receives more shares than originally agreed to compensate for the dilution. Full ratchet anti-dilution (the most aggressive form) adjusts the conversion price to the new lower price entirely. Full ratchet is rare and highly unfavourable for founders.