Cap Table Structuring for Malaysian Startups
A cap table structuring engagement pins down who owns what before and after a round: fully diluted percentages, the size of the option pool, and how each round's math carries into the next one. A "clean" term sheet can still leave founders more diluted than the headline valuation implied, because the option pool is usually sized before the round is priced, not after. This guide sets out how pre-money and post-money dilution actually work, where the option pool fight happens, and the Companies Act 2016 steps that turn a spreadsheet model into a binding entry on the register of members.
Most founders build their first cap table in a spreadsheet and only find its gaps when a term sheet lands and the investor's lawyer asks for the fully diluted numbers. By then the option pool has usually already been created — and created out of the founders' side of the table, not the investor's.
What actually goes on a Malaysian startup cap table
A complete cap table is not just the shareholders named in the company's register of members, or in the last return of allotment lodged with SSM. It has to show every claim on future equity, not only the shares already issued.
Line item | What it represents | Shows up as issued shares? |
|---|---|---|
Ordinary shares | Founder and existing shareholder holdings | Yes |
Preference shares | Investor holdings with attached rights (liquidation preference, anti-dilution, conversion) | Yes |
Convertible note / SAFE | A right to receive shares on a future triggering event, priced by a cap and/or discount | No, until conversion |
ESOS pool — allocated | Shares set aside under an employee share option scheme but not yet granted to anyone | No |
ESOS pool — granted, unvested | Options granted to specific employees, vesting has not completed | No, counted fully diluted |
A cap table that only lists issued shares understates dilution. Investors model on a fully diluted basis — issued shares plus the entire ESOS pool plus every convertible instrument as if converted — because that is the denominator their percentage is actually calculated against.
Pre-money and post-money dilution, with the numbers
Pre-money valuation is what the company is worth immediately before new money comes in. Post-money valuation is pre-money plus the new investment. The investor's ownership percentage is the amount they put in, divided by the post-money valuation — not the pre-money figure, which is the mistake that produces most founder surprises.
Two adjacent questions usually come up at the same point in this process: see investment and subscription agreements in malaysia and equity crowdfunding compliance in malaysia for how each is handled.
Amount | |
|---|---|
Pre-money valuation | RM 8,000,000 |
New investment | RM 2,000,000 |
Post-money valuation | RM 10,000,000 |
Investor ownership (RM 2,000,000 ÷ RM 10,000,000) | 20% |
Existing shareholders, diluted proportionally | 80% |
That 80% is then split between founders and any option pool that gets created as part of the same round — which is where the real negotiation sits, because the pool almost never comes out of the investor's new 20%.
Where the option pool actually comes from
Most term sheets ask for the ESOS pool to be created, topped up, or expanded before the round closes and included in the pre-money valuation. This is standard investor practice internationally and increasingly standard in Malaysian venture rounds, but it means the pool dilutes only the existing shareholders — largely the founders — not the incoming investor. A pool sized at the same percentage but created post-money would dilute the investor too, which is why investors consistently prefer the pre-money version.
Pool sizes vary by stage and by what hiring the company has committed to in its forecast, and any specific percentage should be checked against current market terms at the time of the round rather than assumed from a template. What matters commercially is not the number in isolation but where in the round structure it sits, because a pool created pre-money and a pool of the identical size created post-money produce materially different founder outcomes.
This is the modelling work our cap table and equity structuring advisory does before a term sheet is signed — running the fully diluted numbers under both pool placements so founders know the real dilution before they agree to either.
What has to happen legally every time a line on the cap table changes
A spreadsheet model is not a legal event. Every new allotment, whether to an investor, a converting noteholder, or an employee exercising an option, has to be documented through the Companies Act 2016 (Act 777) mechanics below. Two approvals do the work, and they are commonly confused: the company's approval under section 75, and — unless the constitution disapplies it — the pre-emptive offer under section 85.
Step | What the Act requires | Timing |
|---|---|---|
Company approval to allot | Section 75(1): unless the prior approval of the company by way of resolution has been obtained, the directors must not allot shares, grant rights to subscribe for shares, convert a security into shares, or allot shares under an agreement or option. The section 75(2) exceptions are narrow, and an issue made in contravention is void under section 75(4) | Before the shares are allotted |
Approval lodged with the Registrar | Section 76: the approval may be confined to a particular allotment or apply generally, and must be lodged with SSM. It expires at the conclusion of the next annual general meeting — or twelve months after it was given, for a company not required to hold one — unless it is refreshed | Lodged within 14 days of the approval |
Register of members updated | The new allotment entered in the company's register of members | Within 14 days of allotment |
Return of allotment lodged with SSM | Statutory return of allotment filed with the Registrar | Within 14 days of allotment |
Pre-emptive rights (section 85) | Section 85(1) is subject to the constitution: where a company issues shares ranking equally with existing shares as to voting or distribution rights, those shares must first be offered to the existing holders in a manner that would maintain their relative voting and distribution rights | Before the shares are offered to an outsider |
Because section 85 is expressly subject to the constitution, the constitution is the first document to read before an issue is priced — it can disapply pre-emption altogether. Where it does not, the practical question is what counts as a direction to the contrary. That question went to the Federal Court in the Apex Equity / Concrete Parade litigation in 2024, and the position now is that a shareholders' resolution approving an issue of new shares can itself operate as that direction — a separately worded waiver is not always required. The safer drafting practice is still to put the waiver on the face of the resolution, so the record shows what the shareholders were told and what they approved.
An ESOS pool needs its own authorisation trail: the constitution has to be checked for anything that blocks the scheme or changes the pre-emption position, the company's section 75 approval has to cover both the grant of the options and the allotment of shares on exercise, and every option grant that later converts to shares runs through the same allotment mechanics as any other issuance — it does not get a lighter-touch process just because it started as an option rather than a subscription.
What it costs when the cap table and the statutory registers do not match
Due diligence for the next round, or for an exit, starts by reconciling the cap table model against the register of members, the return-of-allotment filings, and every option grant letter. Gaps are common and expensive to fix under time pressure: an allotment never lodged with SSM, an option grant with no board resolution behind it, a pre-emptive rights offer that was never formally waived. Each of those is a defect a buyer's or investor's lawyer will flag, and fixing a defect discovered during diligence costs more — in fees, in delay, and in negotiating leverage — than getting the paperwork right when the shares were first issued. In the worst cases, an improperly authorised allotment can be challenged entirely, unwinding an ownership position the founders and the company both relied on.
Frequently Asked Questions
What is a cap table and why does it matter for a Malaysian startup?
A cap table is a full record of who owns what in a company, on a fully diluted basis — issued shares, the ESOS pool, and every convertible instrument as if converted. It matters because investors, acquirers, and the company's own statutory registers all need to agree, and disagreement between them is one of the most common issues found in Malaysian startup due diligence.
What is the difference between pre-money and post-money dilution?
Pre-money valuation is the company's value before new investment; post-money is pre-money plus the new money. An investor's ownership percentage is calculated against the post-money figure, not the pre-money one — a distinction that changes the real dilution number even when the valuation everyone quotes stays the same.
Should the option pool be created before or after the round is priced?
Most investor term sheets ask for the pool to be created pre-money, which dilutes existing shareholders rather than the incoming investor. Founders should model both placements before agreeing to either, since the difference compounds across every future round.
Does a convertible note or SAFE appear on the cap table before it converts?
Not as issued shares. It appears as a future claim on equity, modelled on a fully diluted basis using its cap and/or discount, and only converts to an actual allotment — with its own section 75 approval and filing obligations under the Companies Act 2016 — on the triggering event set out in the instrument.
What happens if the cap table does not match the register of members?
It gets found in due diligence, usually at the worst possible time — mid-negotiation on the next round or a sale. Missing return-of-allotment filings, ungranted-but-modelled options, and unwaived pre-emptive rights offers all have to be resolved before a buyer or investor will rely on the cap table, which costs time and negotiating leverage the company would rather keep.
Getting the cap table right before the next round
A model that looks clean in a spreadsheet is not the same as a cap table that will survive due diligence. Legal That Works advises Malaysian startups and their founders on cap table and equity structuring advisory — reconciling the model against the statutory registers, running the dilution numbers under different option pool placements, and putting the paperwork behind every line before an investor's lawyer asks for it. If a round is coming, get the cap table right before the term sheet is signed, not after.
This article is for general information only and does not constitute legal advice. Every transaction and every set of facts is different. Obtain specific advice from a qualified adviser before acting on any part of it.
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Author
AKMAL SAUFI MOHAMED KHALED
Managing Partner & Founder
Practice Area
Corporate
