Equity and Startup Financing

Owner equity, distributions and contributions, equity awards, SAFEs and convertible notes.

Reference Notes

Equity accounts, owner distributions, contributions and the cap table; guaranteed payments, partner and LLC member pay, S corporation salary

Equity records what the owners put in and what the business has earned and kept: capital or common stock and additional paid-in capital, retained earnings or members' equity, and distributions or dividends taken out. An owner's draw is not an expense; in an S corporation the line between an owner's salary and distributions has tax consequences, and a partner, or an LLC member taxed as one, is paid through guaranteed payments rather than wages, so a preparer should set both. A cap table that agrees with the equity accounts and the legal documents is one of the first things an investor's counsel checks.

Source: FASB ASC 505; IRC 707(c) and Rev. Rul. 69-184 (partners are not employees); practiceLast revised September 2026General information, not advice

Stock-based compensation and equity awards: options, restricted stock, phantom units, phantom stock, stock appreciation rights (SARs), profits interests, 409A valuations

Options, restricted stock and similar awards to employees that will be settled in shares are expensed at their grant-date fair value over the period the employee must work to earn them, with a credit to equity, even though no cash leaves the company. An award settled in cash, such as phantom units or a cash-settled stock appreciation right, and some awards the holder can require the company to buy back, is a liability remeasured every period, which a private company may measure at intrinsic value (ASC 718-30). A startup that grants options without recording the expense understates its costs and will restate before an audit or a financing. Valuing an award needs the current price of the underlying stock, which is its own exercise; for equity-classified awards only, a private company may use as a practical expedient a valuation that meets the presumption of reasonableness in the section 409A tax regulations (ASU 2021-07). An LLC's profits interests are assessed under the scoping examples of ASU 2024-01.

Source: FASB ASC 718 (718-10, 718-30); ASU 2021-07 (equity-classified awards; Treas. Reg. 1.409A-1(b)(5)(iv)(B)); ASU 2024-01Last revised September 2026General information, not advice

SAFE notes, simple agreements for future equity, convertible notes, warrants: startup financing instruments

A SAFE is not equity just because it will usually become shares: because a liquidity or dissolution event can require the company to pay cash, a typical SAFE is classified as a liability under ASC 480 and carried at fair value until it converts, although the answer depends on its terms. A convertible note is debt, and since ASU 2020-06 it is usually carried as a single liability at amortized cost, unless an embedded feature must be separated as a derivative under ASC 815-15 or the company elects fair value. A warrant is tested first under ASC 480 and then under ASC 815-40 to decide whether it is a liability or equity, and a warrant classified as a liability is remeasured at fair value every period. Each instrument's terms decide its classification, so the agreements belong beside the cap table, and an investor's or a buyer's diligence team reads both.

Source: FASB ASC 480-10; ASC 815-15 and 815-40; ASC 470-20 as amended by ASU 2020-06Last revised September 2026General information, not advice

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