Cap table overhang refers to the amount of existing ownership claims (typically options/warrants/convertibles—often concentrated in an option pool) that sit “over” the common stock and can dilute current shareholders when they’re exercised or converted.
In practice, people use it to describe situations where a company has a large unallocated or underwater option pool / heavy equity incentives outstanding, which can:
(1) affect pricing and negotiations in a financing or acquisition (because the buyer/investors factor in that future dilution) and
(2) reduce the effective value of existing common holders.
