Equity on the books: stock, SAFEs, notes and stock comp
The entries behind every raise: stock at par and APIC, a SAFE as a liability and its conversion, a note's interest, and stock-based compensation — in Northwind's cents.
Money raised is never revenue. Shares sold go to equity; a SAFE usually waits as a liability; a note is debt; options become an expense. Each is a journal entry, and each has to agree with the cap table on the same day.
Raise money, and the balance sheet moves; grant options, and the P&L does. Neither is revenue.
Issuing stock
Northwind's course chart has one equity account for paid-in capital, so JE-1 credits $60,000 to 3000 Common stock. A ledger with an APIC account splits it: shares × par to common stock, the rest to additional paid-in capital.
The founders pay $60,000 into the company's bank account for their shares.
| Account | Debit | Credit |
|---|---|---|
| 1000Cash — operating | 60,000.00 | |
| 3000Common stock | 60,000.00 | |
| Balanced | 60,000.00 | 60,000.00 |
As the accounting track posts it.
8,000,000 shares at $0.0075
| Account | Debit | Credit |
|---|---|---|
| 1000Cash — operating | 60,000.00 | |
| Common stock, at par | 80.00 | |
| Additional paid-in capital | 59,920.00 | |
| Balanced | 60,000.00 | 60,000.00 |
The same purchase with par split out: 8,000,000 shares × $0.00001.
The SAFE
A SAFE is not stock yet and it is not revenue. Because it can settle in a variable number of shares and can pay cash in a sale, it is usually classified as a liability under ASC 480 — the terms decide, so have a CPA confirm it once and write it down. A liability under ASC 480 is generally measured at fair value, so audited companies may remeasure it each reporting date.
Post-money SAFE, $5,000,000 cap
| Account | Debit | Credit |
|---|---|---|
| 1000Cash — operating | 250,000.00 | |
| SAFE liability | 250,000.00 | |
| Balanced | 250,000.00 | 250,000.00 |
The SAFE lands.
473,684 shares × $0.00001 par
| Account | Debit | Credit |
|---|---|---|
| SAFE liability | 250,000.00 | |
| Series Seed preferred stock, at par | 4.74 | |
| Additional paid-in capital | 249,995.26 | |
| Balanced | 250,000.00 | 250,000.00 |
At the Seed the liability converts into 473,684 preferred shares. Carried at the amount received here; any fair-value change up to that day would go through earnings first.
2,439,624 shares at $0.819798
| Account | Debit | Credit |
|---|---|---|
| 1000Cash — operating | 2,000,000.00 | |
| Series Seed preferred stock, at par | 24.40 | |
| Additional paid-in capital | 1,999,975.60 | |
| Balanced | 2,000,000.00 | 2,000,000.00 |
The Seed's new money, the same day. Issuance costs, ignored here, would reduce the APIC.
A convertible note
A note is debt under ASC 470-20 until it converts, with any embedded conversion feature assessed for separate accounting under ASC 815-15. Interest accrues monthly; at conversion the principal and accrued interest come off together.
| Account | Debit | Credit |
|---|---|---|
| Convertible notes payable | 250,000.00 | |
| Accrued interest | 13,708.33 | |
| Series Seed preferred stock, at par | 4.75 | |
| Additional paid-in capital | 263,703.58 | |
| Balanced | 263,708.33 | 263,708.33 |
If Northwind's $250,000 had been the 6% note: conversion at the Seed, principal and $13,708.33 of accrued interest into 474,674 shares.
Stock-based compensation
ASC 718, straight-line from the grant date
| Account | Debit | Credit |
|---|---|---|
| Stock-based compensation expense | 40.62 | |
| Additional paid-in capital | 40.62 | |
| Balanced | 40.62 | 40.62 |
One month of the first grants: $1,950 of grant-date fair value over 48 months. The credit is equity, because the company settles in shares.
Wrong
Credit revenue, or credit common stock, when the SAFE money arrives.
Right
Credit SAFE liability until it converts; then preferred stock and APIC.
Revenue overstates the year; common stock claims shares that don't exist yet.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Anything marked as a convention is ours, not the rule-maker's.
- US GAAP
- ASC 505 (opens in a new tab)EquityFree after registration
- ASC 480-10 — Distinguishing Liabilities from Equity (opens in a new tab)Why a SAFE usually sits with the liabilities until it convertsFree after registration
- ASC 470-20 — Debt with Conversion and Other Options (opens in a new tab)A convertible note is debt until it convertsFree after registration
- ASC 815-15 — Embedded Derivatives (opens in a new tab)When a conversion feature has to be split out of the noteFree after registration
- ASC 718 — Compensation—Stock Compensation (opens in a new tab)Equity awards are an expense, measured at grant-date fair value — and move no cashFree after registration
The full map is in US GAAP, and where these rules come from.
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- APICWhat shareholders paid for stock above its par value, plus the credit side of stock-based compensation — part of contributed capital within equity
- 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
- 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
- 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
- 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)
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Journal entry for issuing common stockWhen shares are issued for cash, debit Cash for the proceeds, credit Common stock for the par value of the shares, and credit Additional paid-in capital for everything above par.
- Journal entry for stock-based compensationEach month of the service period, debit Stock-based compensation expense and credit Additional paid-in capital for the grant-date fair value of the awards divided over the vesting period. No cash moves and no liability is created for equity-classified awards.
- Journal entry for accrued interestAt month-end, debit Interest expense and credit Accrued interest for the interest earned by the lender since the last payment. When the payment is made, debit Accrued interest and credit Cash.
- How to account for SAFEs on your balance sheetA SAFE is cash today and shares later. Why it usually sits with liabilities, how the cap and discount set conversion, and what to book at the priced round.
- Stock options, 409A valuations and vesting for startupsHow option strike prices are set by a 409A valuation, how vesting and the cliff work, and why ASC 718 makes every grant an expense on your P&L.
- JournalEntryDebit and credit as two columns. No signed-column variant.
- StatementOfChangesInEquityThe fourth statement. Equity components across, movements down.
- BalanceSheetAssets / liabilities / equity, with the balance check.