Cap tables & raising
Founder stock and vesting, option pools, SAFEs, convertible notes, priced rounds, dilution and how each lands on the cap table and the books.
10 lessons27 nested pages207 min2 exercisesFree
How do cap tables and fundraising work, and what is the difference between a SAFE, a note and a priced round? This track answers it on the books of Northwind Traders, Inc., the one company every track in the course is taught on.
The 10 lessons
- Founder stock, vesting and the 83(b) electionHow should startup founders issue themselves stock, and how does founder vesting work?
- The cap table explainedHow do you read a cap table, and what is the difference between pre-money and post-money?
- Ways to raise: SAFEs, notes, priced rounds, debt and grantsWhat are the ways a startup can raise money — SAFE, convertible note, priced round, debt or grants?
- SAFE conversion and dilution, worked end to endHow does a SAFE convert in a priced round, and how much dilution will founders take?
- The term sheet explainedHow do I read a startup term sheet — what do the economics and control terms mean?
- Employee stock options: ISOs, NSOs and RSUsWhat is the difference between ISOs and NSOs, and how do startup stock options work?
- Securities law for raising moneyWhat securities laws apply when a startup raises money — Reg D, 506(b), 506(c), accredited investors?
- Equity on the books: stock, SAFEs, notes and stock compHow do you record a SAFE, a convertible note, a stock issuance and stock-based compensation in the books?
- QSBS (Section 1202) and secondary salesWhat is QSBS (Section 1202), and how much gain can founders exclude after the 2025 changes?
- Running a raise: data room, closing and the wireHow do you run a startup fundraise — data room, diligence, closing and the wire?
The words this track teaches
Each links to its glossary definition, with the authority behind it.
- Authorized sharesThe number of shares a corporation's certificate of incorporation permits it to issue — the ceiling, not what anyone holds. Issued shares are those actually sold or granted; the authorized shares method of the Delaware franchise tax counts the ceiling
- Par valueThe nominal value per share a charter assigns — often a fraction of a cent. Delaware lets stock be issued for any consideration not less than par; on the books, shares × par goes to the stock account and the rest of the price to additional paid-in capital
- Common stockThe residual class of shares — founders', employees' and option holders' — paid after creditors and after any preferred stock's preference. The class a 409A valuation prices
- Restricted stockShares bought or received outright but subject to a vesting schedule: if the holder leaves early, the company may repurchase the unvested shares on the agreement's terms. Taxed under §83 as it vests, unless an 83(b) election is filed within 30 days
- VestingEarning equity over time, so a holder who leaves keeps only what has vested. The common schedule is four years with a one-year cliff: nothing for twelve months, a quarter on the first anniversary, then monthly to month 48Convention
- Vesting cliffThe waiting period before any of a grant vests; on the cliff date the whole period's share vests at once. Leave a day before a one-year cliff and nothing has vestedConvention
- 83(b) electionAn election, filed with the IRS within 30 days of receiving restricted stock, to be taxed on its value at grant rather than as it vests — at a founder's purchase price, usually no tax at all, and the capital gain holding period starts at once
- AccelerationA clause that vests unvested equity early. Single-trigger accelerates on one event, usually a sale of the company; double-trigger needs a second, usually the holder's termination without cause within a set period after the saleConvention
- Cap tableThe register of who owns what in a company — every share issued, every option granted, the unissued pool and every SAFE or note that will become shares — shown as share counts and as percentages, issued and fully diluted. It must agree with the stock ledger, the board consents and the booksConvention
- Fully dilutedCounting every share that exists or could: issued stock, options granted, the unissued option pool and convertible securities as converted. The basis a SAFE's Company Capitalization, a priced round's price per share and most ownership percentages are quoted on
- Preferred stockA class or series of stock with rights common lacks, set out in the charter — usually a liquidation preference, conversion into common, anti-dilution protection, protective provisions and board seats. What investors buy in a priced round, and what a SAFE converts into
- Pre-money valuationWhat a company is priced at immediately before new money comes in. Pre-money ÷ pre-money fully diluted shares is the round's price per share — so whatever the term sheet puts in the pre-money (converting SAFEs, a bigger option pool) is paid for by the existing holders
- Post-money valuationPre-money valuation plus the new money. An investor's ownership is its investment ÷ post-money; a post-money SAFE's cap is stated this way, so the SAFE's ownership is known the day it is signed
- Option poolShares the board reserves under a stockholder-approved equity plan for future grants of options and other awards. Granted options and the unissued remainder both count in fully diluted shares
- SAFECash from an investor in exchange for a right to shares in a future priced round, usually at a valuation cap or a discount. Not debt and not yet stock; because a SAFE can require cash on a change of control, it is often classified as a liability under ASC 480 and remeasured at fair value — the terms decide
- Convertible noteDebt that converts into stock at a future financing, usually at a discount or a cap, accruing interest until it does — a liability until conversion, with any embedded conversion feature assessed for separate accounting
- Priced roundA financing in which investors buy a new series of preferred stock at a stated price per share, on a negotiated pre-money valuation — as opposed to a SAFE or note, which defers the price. Converting SAFEs and notes convert at its close
- Venture debtA loan to a venture-backed company, usually alongside or just after an equity round, often with warrants for the lender. It extends runway with less dilution than equity, and must be repaid whatever happensConvention
- Revenue-based financingCapital repaid as a fixed percentage of ongoing revenue until a set multiple of the amount advanced is returned. Non-dilutive; costly if revenue grows fast, slow to repay if it doesn'tConvention
- Small Business Innovation ResearchFederal research funding that agencies award to US small businesses in phases, with no equity taken — non-dilutive capital for technical work an agency wants done
- Valuation capThe highest valuation a SAFE or note converts at. On YC's post-money SAFE the Safe Price is the cap ÷ Company Capitalization, and the holder takes whichever of that or the round price issues more shares
- Most favored nation clauseA promise that an investor's terms improve to match better terms the company gives a later investor. YC's MFN SAFE has no cap or discount and takes those of any SAFE issued later
- Pro rata rightAn investor's right to buy its proportionate share of a later round, so it can keep its percentage. In the NVCA model it belongs to Major Investors; on a post-money SAFE it lives in an optional side letter
- Conversion discountA SAFE's or note's right to convert at a percentage below the round price — 20% off a $1.00 round is $0.80 — whichever of the discount price or the cap price is lower wins
- Term sheetThe short summary of a priced round's economics and control terms — price, pre-money, pool, liquidation preference, anti-dilution, board, protective provisions, pro rata — that the definitive documents then implement
- WarrantA right, issued by the company, to buy its shares at a fixed price for a set period — what a venture lender usually takes alongside a loanConvention
- Accredited investorA person or entity Regulation D trusts to bear a private offering's risk — among others, an individual with more than $1,000,000 of net worth excluding the primary residence, or more than $200,000 of income ($300,000 joint) in each of the last two years with the same expected; a director or executive officer of the issuer; an entity with more than $5,000,000 of assets
- Rule 506(b)The private placement most startup rounds use: no limit on the amount, unlimited accredited investors and no more than 35 other purchasers in 90 days (each sophisticated, and given disclosure), and no general solicitation
- DilutionThe fall in a holder's percentage when new shares are issued. The holder's share count does not change; a round priced high enough can dilute ownership and raise the value of the stake at onceConvention
- Option pool shuffleSizing a round's new option pool as a percentage of the post-money but creating it in the pre-money, so its cost falls on existing holders and the effective pre-money is the headline pre-money less the new pool's valueConvention
- Liquidation preferenceA preferred stockholder's right to be paid a stated amount — usually 1× the original issue price plus declared but unpaid dividends — before common stockholders in a sale or liquidation. Non-participating preferred takes the greater of that or its as-converted share; participating preferred takes both
- Anti-dilution protectionA charter provision that lowers preferred stock's conversion price when the company later sells stock below it. Broad-based weighted average moves it part way, by CP2 = CP1 × (A + B) ÷ (A + C); full ratchet moves it all the way down to the new price
- Protective provisionsActions the company may not take without the consent of a set majority of the preferred — selling the company, changing the charter against the preferred, creating a senior class, changing authorized shares, paying dividends, changing the board's size
- Participating preferredPreferred that takes its liquidation preference and then shares in what is left alongside common as if converted, often up to a cap. Non-participating preferred takes the greater of its preference or its as-converted share, not both
- Deemed liquidation eventA merger, sale of control or sale of substantially all assets that the charter treats as a liquidation, so the liquidation preference applies to the sale proceeds
- Down roundA priced round at a lower price per share than the last one — the event anti-dilution provisions are written forConvention
- Preferred directorA director the preferred stockholders elect as a separate class, under the charter. The NVCA model splits the board into seats the preferred elect, seats the common elect and at-large seats everyone elects together — so a board seat is a class vote written into the certificate, not a courtesy
- Incentive stock optionA stock option meeting IRC §422: employees only, granted under a stockholder-approved plan, strike at least fair market value, exercisable for no more than ten years. No regular tax at grant or exercise (the spread can trigger AMT); gain is capital if the stock is held two years from grant and one from exercise. Only $100,000 of stock, valued at grant, may first become exercisable in a calendar year
- Nonstatutory stock optionA stock option that is not an ISO — any grant to a contractor or director, and an ISO's excess over the $100,000 limit. With no readily determinable value at grant, the spread is ordinary income at exercise, as wages for an employee
- Exercise priceWhat an option holder pays per share to buy it. Set at least at fair market value on the grant date — the 409A value for a private company — to keep an option outside §409A and, for an ISO, inside §422
- 409A valuationAn appraisal of a private company's common stock at fair market value, so options granted with a strike at or above it avoid the tax penalties of IRC §409A. A tax safe harbor; the books measure option expense under ASC 718, often starting from the same common-stock value
- Stock-based compensationThe cost of equity awards — options, RSUs, restricted stock — measured at grant-date fair value and recognized as expense over the service period. Non-cash, so added back in operating cash flow, but a real cost
- Early exerciseExercising options before they vest, receiving restricted stock the company may repurchase if the holder leaves. Paired with an 83(b) election, the holding periods and the tax measurement start at exercise
- Post-termination exercise periodHow long a departing holder has to exercise vested options before they lapse — often 90 days, because an ISO exercised more than three months after employment ends is taxed as an NSO. A plan may allow longer; the options then lose ISO treatment, not validity
- Restricted stock unitA promise to deliver shares (or their cash value) once vesting conditions are met. Nothing is bought; the shares' value is income when they are delivered. Common at later-stage companies, where an option's low strike no longer exists
- Regulation DThe SEC's exemptions from registering a private offering — Rule 504 and Rule 506. Securities bought under it are restricted, and the issuer files Form D within 15 days of the first sale
- Rule 506(c)The private placement that allows general solicitation — posting the round publicly — on condition that every purchaser is accredited and the issuer takes reasonable steps to verify it
- Form DThe notice of an exempt offering filed with the SEC no later than 15 calendar days after the first sale under Rule 504 or 506 — a notice, not an application — and the basis of the states' notice filings
- Blue sky lawsState securities laws. For a Rule 506 offering federal law preempts state registration, but states may still require a notice filing and a fee where investors live
- Regulation CrowdfundingThe exemption for raising up to $5 million in 12 months from the public, online, through one SEC-registered broker-dealer or funding portal, with per-investor limits for non-accredited investors
- Rule 701The exemption a private company uses to grant options and stock to employees, directors, officers and individual consultants under a written compensatory plan — up to the greatest of $1,000,000, 15% of total assets or 15% of the class in any 12 months, with extra disclosure above $10 million
- APICWhat shareholders paid for stock above its par value, plus the credit side of stock-based compensation — part of contributed capital within equity
- EquityThe residual interest in the assets that remains after deducting liabilities (FASB CON 8 ¶E61)
- LiabilityA present obligation of the entity to transfer an economic benefit (FASB CON 8 ¶E37)
- Qualified small business stockOriginal-issue stock of a domestic C corporation with gross assets of $75 million or less at issuance that lets holders exclude gain on sale — for stock issued after July 4, 2025, 50% after three years, 75% after four and 100% after five, up to the greater of $15 million or ten times basis per issuer. Stock issued earlier keeps the old rules: $50 million of gross assets, five years, $10 million
- Secondary saleA shareholder selling existing shares to a buyer, rather than the company issuing new ones. The company receives nothing; the buyer's shares are not original issue, so they are not QSBS in the buyer's hands, and the company's right of first refusal and transfer restrictions usually apply
- Data roomThe organized set of documents a company opens to investors in diligence — charter, cap table, board consents, stock and option agreements, 83(b) elections, financial statements, material contracts, IP assignmentsConvention