Capital Structure
and Equity
The standards for maintaining the fully diluted cap table, modeling convertible instruments, managing equity compensation, allocating capital, and understanding the mechanics of liquidation and exit.
Download Book 3 (PDF)Book 3 governs the equity layer of financial infrastructure. Errors in capital structure management are among the most consequential in early-stage finance because they are difficult to correct after the fact and because they affect every subsequent transaction. A fully diluted cap table that omits outstanding SAFEs, ungranted option pool reserves, or accrued interest on convertible notes does not accurately represent the company's equity obligations and will surface as a material deficiency in any investor due diligence process.
The Cap Table Standard
The cap table on a fully diluted basis is the operative financial record of a company's equity. It includes all issued shares, all granted and ungranted options within the authorised option pool, all warrants, all outstanding SAFEs, and all convertible notes including accrued interest, modeled as if converted to equity at the terms in effect at the record date. The share register, which records only issued shares, is a legal document, not a cap table for financial infrastructure purposes.
Compliance criteria
Convertible instrument types in scope
Simple Agreement for Future Equity. No interest, no maturity date. Converts at a future priced round. Must be on the fully diluted cap table from date of issuance.
Debt instrument with interest rate and maturity date. Accrued interest increases the conversion basis and must be reflected in the cap table.
The maximum valuation at which a SAFE converts. Where the round price exceeds the cap, the cap governs. Both the cap-based and discount-based price must be calculated.
Entitles an earlier SAFE holder to adopt the terms of any subsequent SAFE on more favourable terms. All MFN provisions must be documented and modeled.
The SAFE and Convertible Instrument Standard
Every outstanding SAFE and convertible note must be individually documented with its principal amount, valuation cap, discount rate, most favoured nation clause status, conversion event trigger conditions, and expected conversion share count at the anticipated next round terms. The conversion price is the lower of the cap-based price and the discount-based price.
Compliance criteria
The Equity Compensation Standard
Every equity grant must be documented in a written grant agreement executed by both the company and the recipient. Verbal commitments, email promises, and unsigned agreements do not constitute grants for the purposes of this Standard and do not appear in the cap table. The equity compensation plan must be formally adopted by the board and must document the total shares authorised for issuance under the plan.
Compliance criteria
The Capital Allocation Standard
Capital allocation decisions must be documented before capital is deployed. A use of proceeds document specifying the allocation across functional categories, the deployment period, and the milestone the deployment is expected to achieve is required at Level 1 for any company that has raised external capital. Runway to milestone is the operative measure of capital adequacy, not absolute cash runway.
Compliance criteria
The Liquidation and Exit Mechanics Standard
A waterfall analysis models the distribution of proceeds from a liquidity event to each class of shareholders in priority order, after satisfying the preference stack. The waterfall must be modeled across a range of exit values, not only at the most optimistic scenario. Every term in the preference stack — including liquidation preference amounts, participation rights, anti-dilution provisions, and drag-along rights — must be reflected in the waterfall model.
Compliance criteria
Key terms in this section
- Liquidation Preference — minimum payment to preference shareholders before common shareholders participate
- Liquidation Preference Multiple — the factor applied to the original investment to calculate the minimum payout
- Participating Preference — holder receives preference amount and participates in remaining proceeds
- Non-Participating Preference — holder chooses between preference amount or conversion to common
- Broad-Based Weighted Average Anti-Dilution — the standard anti-dilution mechanism in institutional investment
- Full Ratchet Anti-Dilution — the most aggressive anti-dilution mechanism; uncommon in competitive markets
- Drag-Along Right — compels minority shareholders to approve a liquidity event approved by the defined majority
Common Deficiencies in Book 3
- The cap table records only issued shares and granted options. Outstanding SAFEs and convertible notes are not reflected. The ungranted option pool reserve is excluded. The resulting ownership percentages overstate all existing holder positions.
- SAFE conversion is modeled using only the cap-based conversion price without calculating whether the discount-based price produces a lower conversion price at the anticipated round valuation. Where the discount-based price is lower, the cap does not govern, and the cap-only model understates dilution.
- Convertible note conversion is modeled using the original principal amount without including accrued interest. Notes held for two or more years at eight percent annual interest have accrued material additional conversion basis that is absent from the cap table.
- Equity grants were communicated verbally or by email but no written grant agreement has been executed. The grants do not appear in the cap table and create legal uncertainty that surfaces in every subsequent funding round.
- The headcount model uses salary figures only. Employer-side taxes, benefits, and equipment costs are omitted. The financial model understates operating costs by fifteen to twenty-five percent as a result.
- The use of proceeds document lists high-level categories without specifying the milestone the deployment is expected to achieve. The deployment cannot be tracked against intent, and investors cannot assess whether capital is being deployed as committed.
- The waterfall analysis models only the optimistic exit scenario. No analysis exists showing founder and employee proceeds at exit values below the current implied valuation. The board has not reviewed the downside distribution.
- A term sheet with a participating preference and a two times liquidation preference multiple was signed without modeling the combined effect on founder proceeds across the waterfall. The terms were accepted without understanding their financial consequences.
- The option pool shuffle mechanics were not modeled before accepting a term sheet requiring a pre-money option pool expansion. The effective pre-money valuation received by founders is materially lower than the headline valuation stated in the term sheet.
Citable URL
Full citation: Founder Financial Infrastructure Standard, Beta v0.5, Book 3. ffistandard.org. 2026.