Cap Tables & Dilution: 31 Key Terms

By Devon Coombs, CPA, MBA · Teaching Professor of Finance, Santa Clara University · Reviewed August 2026

A capitalization table records who owns what in a startup, and dilution describes how those ownership percentages change as new shares are issued. The vocabulary here spans security types such as common stock and convertible preferred, protective mechanics like broad-based weighted average anti-dilution, and vesting concepts including the cliff and double-trigger acceleration. Founders who understand terms like the 83(b) election and the down round are generally better positioned to evaluate deal terms before signing, which is why the topic receives a full week in the free Entrepreneurial Finance course.

These terms are taught in Week 6: Cap Tables, Dilution, and Deal Terms of the free Entrepreneurial Finance course; the full course glossary collects every chapter in one place.

83(b) election: A filing within 30 days of a restricted-stock grant electing to be taxed at grant, so later appreciation is capital gain.
Authorized shares: The maximum number of shares a corporation may issue under its charter. A ceiling, not ownership, until issued.
Broad-based weighted average: The market-standard, most founder-friendly antidilution, adjusting the conversion price by the size of the down round relative to total capitalization.
Capped participating preferred: Participating up to a cap, typically 2 to 4x, above which the investor converts to common instead.; Participating preferred vs Non-participating preferred
Cliff: An initial period, usually one year, before any vesting occurs.
Common stock: The simplest equity security, held by founders and employees, last in the liquidation stack.
Conversion discount: A percentage reduction to the priced-round share price at which a note or SAFE converts, rewarding early risk.
Conversion point: The exit value at which nonparticipating preferred converts to common: preference divided by ownership percentage.
Convertible preferred: The dominant venture instrument, which lets investors allocate cash flow, voting, board, and liquidation rights separately.
Dilution: The reduction in an existing holder's ownership percentage when new shares are issued.; Pre-money valuation vs Post-money valuation
Double-trigger acceleration: Vesting that completes only on both an acquisition and a termination without cause.
Down round: A financing priced below the prior round's price per share.
Drag-along rights: A term requiring shareholders to vote for an approved sale, preventing a minority from blocking an exit.
Early exercise: Exercising unvested options early, which, with an 83(b) election, starts the capital-gains holding period immediately.
Full ratchet: The harshest antidilution, resetting the conversion price to the new low price regardless of the round's size.
Fully diluted shares: Issued shares plus all options, the unallocated pool, warrants, and convertibles counted as-converted. The denominator for share price.
Issued and outstanding shares: Shares actually issued to holders. Only these represent ownership and appear on the cap table.
Liquidation preference overhang: When discounted or capped shares carry the full-price preference, giving an effective preference above the intended 1x.
Liquidation stack: The order of payment in a liquidation: secured debt, unsecured debt, senior preferred, junior preferred, then common.
Nonparticipating preferred: The investor takes the greater of its preference or its as-converted share, not both. Most founder-friendly.; Participating preferred vs Non-participating preferred
Participating preferred: The investor takes its preference and then shares pro rata in the remainder. Least founder-friendly.; Participating preferred vs Non-participating preferred
Pay-to-play: A term requiring existing investors to join a down round or lose preferred status, often converting to common.
Post-money option pool: A pool added after the investment and shared pro rata, so all holders bear its dilution.
Post-money SAFE: The 2018 Y Combinator standard whose cap fixes each investor's ownership at signing, placing inter-SAFE dilution on founders.; SAFE vs Convertible note
Pre-money option pool: A pool carved out of the pre-money valuation, so the founders alone bear its dilution.
Protective provisions: Investor veto rights over defined major decisions, such as a sale, new stock issuance, or dividends.
QSBS: Qualified Small Business Stock under Section 1202. For stock acquired after July 4, 2025, gains phase in at 50% (three years), 75% (four), and 100% (five).
Share price: Equity value divided by fully diluted shares.
Single-trigger acceleration: Vesting that completes on an acquisition alone.
Valuation cap: The maximum valuation at which a note or SAFE converts, protecting early investors if the priced round is high.; SAFE vs Convertible note
Vesting: Earning equity over time, commonly three to four years with a one-year cliff, to prevent dead equity.

More Entrepreneurial Finance term guides

Put the vocabulary to work: the free calculators and decision guides apply these terms, and the free Entrepreneurial Finance course teaches them in context.