Understand the ownership record and the cost of dilution

A capitalization table, often called a cap table, records the company’s ownership. Understand who owns shares and what rights accompany them. New shares can reduce an existing owner’s percentage. This reduction is called dilution.

Several financing rounds can compound dilution. Customer revenue can sometimes let you avoid a round or negotiate later with stronger evidence. Yet protecting every percentage point can also prevent useful investment or recruitment. A smaller share of a valuable business can exceed a large share of a weak one.

Ask what the company gains from each exchange. An excellent partner can increase the value of everyone’s remaining shares. An unsuitable partner can create a lasting obstacle. The contract matters, but it cannot turn a poor relationship into a good one.

Treat changes to an existing ownership structure seriously. Conflicting expectations can make even a necessary repair difficult and emotional. Understand the rights involved and obtain appropriate help. A simple arrangement that people understand can serve them better than attractive figures with complicated conditions.