Book 3

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.

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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.


Section 3.1

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

Level 1
A fully diluted cap table exists and reflects all issued shares, all outstanding SAFEs and convertible notes at their expected conversion share count, all granted options, and the ungranted option pool reserve. The cap table carries a record date and is updated within five business days of any equity transaction.
Level 2
All Level 1 criteria met. The cap table is maintained in a dedicated cap table management tool or a model that dynamically calculates ownership percentages. Each SAFE and convertible note has its conversion mechanics modeled at both the cap-based price and the discount-based price, applying the lower of the two. Pro-rata rights for each existing investor are documented alongside their holdings.
Level 3
All Level 2 criteria met. The cap table model includes a fully automated waterfall analysis across a range of exit scenarios. Anti-dilution triggers and their effects are modeled for each existing preference share series. The cap table is reviewed by legal counsel at minimum annually.

Convertible instrument types in scope

SAFE

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.

Convertible Note

Debt instrument with interest rate and maturity date. Accrued interest increases the conversion basis and must be reflected in the cap table.

Valuation Cap

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.

MFN Clause

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.


Section 3.2

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

Level 1
All outstanding SAFEs and convertible notes are listed in the cap table with their principal amounts, caps, discounts, and MFN status. The expected conversion share count for each instrument is calculated at the anticipated next round price.
Level 2
All Level 1 criteria met. The cap table model calculates the lower of the cap-based and discount-based conversion price for each instrument automatically. Convertible note accrued interest is updated monthly and reflected in the conversion basis. The dilutive effect of all outstanding instruments is modeled at three round price scenarios: at cap, ten percent above cap, and twenty-five percent above cap.
Level 3
All Level 2 criteria met. All convertible instrument agreements are stored in the financial data room with a summary of key terms. Legal counsel has reviewed all outstanding instrument terms within the past twelve months.

Section 3.3

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

Level 1
A board-adopted equity compensation plan exists. All grants are documented in executed grant agreements specifying the number of options, the exercise price, the vesting schedule, the cliff period, and good leaver and bad leaver provisions. All grants appear in the cap table with their vested and unvested split.
Level 2
All Level 1 criteria met. The exercise price for each grant is supported by a documented fair market value determination at the grant date. The cap table model tracks vesting month by month for each grantee. Fully loaded cost for all employees is used in the headcount model. The option pool refresh required at the next funding round is modeled and its dilutive effect calculated.
Level 3
All Level 2 criteria met. All grant agreements are stored in the financial data room. The equity compensation plan is reviewed annually by legal counsel. The board approves all grants above a defined threshold at each board meeting.

Section 3.4

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

Level 1
A use of proceeds document exists for each funding round, specifying the allocation by functional category, the deployment period, and the milestone. Actual deployment is tracked against the plan at minimum quarterly. The runway to milestone is calculated and known.
Level 2
All Level 1 criteria met. Capital efficiency is tracked monthly as capital deployed per unit of defined progress. Any material deviation from the use of proceeds plan is disclosed to investors in the next investor update. The deployment plan is stress-tested against the downside scenario.
Level 3
All Level 2 criteria met. The capital allocation plan is formally approved by the board at each funding close. A post-deployment review is presented to the board at the end of each deployment period comparing actual outcomes against the milestones stated at the time of raise.

Section 3.5

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

Level 1
A waterfall analysis exists showing the distribution of proceeds to each share class at three exit values: at the current implied valuation, at two times the current implied valuation, and at fifty percent of the current implied valuation. The liquidation preference for each preference share series is correctly modeled.
Level 2
All Level 1 criteria met. The waterfall model covers at least ten exit value scenarios across the full range from zero to five times the current implied valuation. Participating preference and non-participating preference are correctly modeled for each series. The conversion threshold at which each preference shareholder's rational choice switches from taking the preference to converting is calculated. Anti-dilution trigger conditions and their share count effects are modeled for each series.
Level 3
All Level 2 criteria met. The waterfall analysis is reviewed by legal counsel at minimum annually. The board reviews founder and employee proceeds across the waterfall scenarios at minimum annually. Any new term sheet is modeled in the waterfall before it is signed.

Key terms in this section


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

https://ffistandard.org/standard/book-3-capital-structure/

Full citation: Founder Financial Infrastructure Standard, Beta v0.5, Book 3. ffistandard.org. 2026.

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