You Don’t Own What You Think You Own
- 3P Ventures LLC
- 7 days ago
- 4 min read
How angels should read a cap table
Angel investing often looks simpler than it is. The checks are smaller, the companies are earlier, and conviction is driven by founders and ideas rather than spreadsheets. Yet most angel outcomes are determined quietly and early, through ownership mechanics that compound over time.
Understanding the cap table is not about financial sophistication for its own sake. It is about knowing what you own, how that ownership changes as capital enters the business, and what it realistically takes for an investment to return meaningful capital.
Pre-money, post-money, and ownership
When a founder says they are raising capital at a $5M pre-money valuation, that valuation applies before new capital is raised. Once the round closes, the company’s value becomes the pre-money valuation plus the new capital raised. Ownership is always calculated using the post-money valuation.
Example
A company raises $1M at a $5M pre-money valuation.
Post-money valuation
$5.0M + $1.0M = $6.0M
An angel investing $50,000 owns:
$50,000 ÷ $6,000,000 = 0.83%
That percentage, not the size of the check, is what compounds through future rounds.
Why priced equity rounds matter to angels
A priced equity round establishes a clear valuation and issues real shares at that price. Ownership is fixed at that moment, and dilution becomes explicit rather than deferred. For angels, priced rounds create clarity and discipline on both sides of the table.
Delaying pricing may preserve flexibility in the earliest stages, but repeated delays push ownership decisions into the future, where they tend to resolve under less favorable conditions.
Example
An angel invests $100,000 in a priced seed round at a $4M pre-money valuation, with $1M raised in total.
Post-money valuation
$4.0M + $1.0M = $5.0M
Angel ownership
$100,000 ÷ $5,000,000 = 2.0%
That ownership is fixed and visible immediately. An angel investing the same amount through a convertible note may not know their true ownership until a later round, when multiple notes may convert simultaneously and reduce the effective stake.
Convertible notes and deferred dilution
Convertible notes are loans that convert into equity at a future financing, typically at a discount or subject to a valuation cap. They are fast and flexible instruments, but they delay clarity of ownership and allow dilution to accumulate quietly.
Used sparingly, notes can be helpful. Used repeatedly, they obscure the true ownership picture until it is too late to correct.
Example
A company raises four convertible notes of $250,000 each, totaling $1.0M. At the next priced round, those notes convert at a $5M valuation cap.
Shares created by note conversion
$1,000,000 ÷ $5,000,000 = 20.0% of the company
That 20 percent dilution may surprise early angels who did not model the conversion, even though no single note appeared large on its own.
Fully diluted ownership is the number that actually matters
Fully diluted ownership reflects the company’s ownership assuming all convertible instruments, options, and warrants become shares. This includes founder stock, preferred shares, notes, SAFEs, and option pools. If it can turn into equity, it belongs in the calculation.
This fully diluted share count is the true denominator for ownership, not the simplified number of issued shares often cited earlier.
Example
A company has the following structure:
Founders: 6.0M shares
Angels: 2.0M shares
Convertible notes (as-converted): 1.0M shares
Option pool: 1.0M shares
Fully diluted shares
6.0M + 2.0M + 1.0M + 1.0M = 10.0M shares
An angel holding 200,000 shares owns:
200,000 ÷ 10,000,000 = 2.0%
Not 2.5 percent, which would be the case if notes and options were ignored.
How ownership erodes even when companies succeed
Angels often assume losses occur only when companies fail. In practice, many disappointing outcomes occur because ownership erodes over time through repeated dilution and layered investor rights. Exits that appear large in absolute terms may still deliver weak outcomes for common shareholders.
Example
An angel invests early and initially owns 1.0% of a company. After multiple rounds, the ownership declines to 0.2%.
At a $100M exit:
$100,000,000 × 0.2% = $200,000
What once appeared to be a strong outcome becomes a modest return relative to time, risk, and illiquidity, before accounting for liquidation preferences.
Questions every angel should ask before investing
Before writing a check, angels should be able to answer the following clearly and quantitatively:
How many shares are outstanding on a fully diluted basis today?
How many shares will exist after all notes, SAFEs, and options convert?
What is my ownership percentage immediately after this round, fully diluted?
How much additional capital does the company realistically need to reach scale?
How will that future capital affect my ownership?
What liquidation preferences exist, and who sits ahead of common shareholders?
At what exit valuation does this investment break even?
At what exit valuation does this investment return 10x?
If these answers are unclear, the risk is not unclear; it is simply unpriced.
The 3P Ventures perspective
Strong angel investing is not about avoiding dilution entirely. It is about understanding how dilution occurs, planning for it, and ensuring ownership remains meaningful relative to the capital required to build the business.
Ownership compounds.
Structure compounds.
Early decisions echo.
In a follow-up, we will explain liquidation preferences and walk through how exit proceeds actually flow, dollar by dollar, and why angels should care long before institutional capital arrives.