Startup finance

The money side of going from idea to MVP to a first priced round, for a technical first-time founder with a US Delaware C-corp: founder stock and the 83(b) election, unit economics and SaaS metrics, burn and runway, SAFEs, priced rounds, cap tables, term sheets, employee equity, startup tax breaks and the admin you can't skip. Accounting rules are in accounting, the statements in financial statements, and DCF and VC-method theory in valuation. The product pipeline is the idea-to-MVP playbook; YC's fundraising advice is summarized on Y Combinator.

Entity, founder stock and vesting

Default for a venture-backed startup: a Delaware C-corporation. An LLC is fine for a lifestyle or services business, but it is the wrong vehicle if you plan to raise from VCs.

Incorporate with a startup lawyer or a standard incorporation service that produces: certificate of incorporation, bylaws, board consents, founder stock purchase agreements with vesting, IP assignment (every founder assigns code and inventions to the company), and an equity incentive plan.

Founder stock and vesting

The 83(b) election

Under IRC §83 (opens in a new tab), property subject to a "substantial risk of forfeiture" (unvested stock) is taxed as ordinary income when it vests, on (value at vesting − price paid). Section 83(b) lets you elect to be taxed at transfer instead, on (value at transfer − price paid), which for founder stock is about zero. After that, all growth is capital gain, the capital-gains holding period starts, and so does the QSBS clock.

• Deadline: 30 days after the stock is transferred (the purchase/grant date, not the vesting date). No extensions, no late elections. Miss it and the usual workarounds (e.g. canceling and reissuing stock at today's value) are costly and imperfect.
• Filing online: since July 2025 the IRS accepts Form 15620 (opens in a new tab) online through an IRS account (ID.me sign-in); you get a timestamped confirmation to keep. Only Form 15620 can be filed online, and law-firm alerts (e.g. Sidley, August 2025 (opens in a new tab)) reported quirks such as a 999,999-share cap per submission and two-decimal prices, which can bite on founder stock at $0.0001; check the current form, or mail it.
• Paper: mail to the IRS address for your return, by certified mail with return receipt; keep the proof. File one way only. Give a copy to the company. Since 2016 you no longer attach a copy to your tax return.
• The election is irrevocable. If you later forfeit unvested shares, you don't get the tax back (a tiny amount for founder stock, which is the point).
• It also applies to early-exercised options (see employee equity).

Unit economics

Unit economics ask whether one customer is worth more than it costs to get and serve. Pre-product-market fit the numbers are noisy; track them anyway so you notice when they stabilize.

The ≥ 3 and ≤ 12-month thresholds come from David Skok's SaaS Metrics 2.0 (opens in a new tab) (For Entrepreneurs): he suggests LTV:CAC above 3 (the best businesses reach 7–8) and recovering CAC within about 12 months (5–7 is better). They are rules of thumb from venture-backed SaaS, not laws; a business with 90-day payback and LTV:CAC of 2 can be excellent, and one with LTV:CAC of 5 can die if payback is 30 months and cash runs out first.

Why simple LTV overstates. It assumes churn is constant forever (early cohorts churn fast, so a 3% monthly number measured in month 2 is usually wrong in month 20), ignores the time value of money, often uses revenue instead of margin, and extrapolates lifetimes far longer than the company has existed. Cap the horizon (3–5 years) and use cohort data once you have it.

Worked example. ARPA $500/month, gross margin 80%, monthly churn 3%, CAC $6,000, discount rate 1%/month.

Verdict: below every heuristic. Levers, in rough order of power: churn (fix the product), price (see pricing), CAC (channel mix), gross margin (infrastructure costs).

Gross margin norms (commonly quoted rough ranges, vary widely):

SaaS metrics

Measure NRR and GRR on a cohort: take the customers paying 12 months ago and compare their revenue now; new customers are excluded. Logo and revenue churn diverge: losing many small accounts gives high logo churn but modest revenue churn, and vice versa. Report both. Skok notes that 2% monthly revenue churn already loses about 22% of revenue a year (paraphrased, SaaS Metrics 2.0).

Worked example (one year, a 60%-growth startup).

Monthly roll-forward for the same kind of company: start MRR $100,000 + new $15,000 + expansion $6,000 − contraction $2,000 − churn $4,000 = end MRR $115,000 (net new MRR $15,000).

Burn, runway and default alive

Paul Graham's Default Alive or Default Dead? (opens in a new tab) (2015) and Ramen Profitable (opens in a new tab) (2009) are summarized on Y Combinator. His warning: founders assume investors will appear; investor interest is a function of growth and is fickle, so plan as if they won't.

Use net burn from the bank statement (cash basis) for runway, and use a trailing 3-month average, not the best month. Runway shrinks faster than the formula says when burn is rising, which it usually is after a raise.

Worked example. Cash $1.8M, gross burn $180k/month (flat), revenue $30k/month. Net burn $150k → runway 12 months on today's numbers. Default alive or dead depends on growth (month-by-month simulation, expenses flat):

The gap between 10% and 12% monthly growth is the difference between needing investors and not. That is why PG says to ask the question early: in month 3 a modest cut in burn can flip the answer; in month 10 it usually can't.

Forecasting and scenario planning

Two models, two jobs: a 13-week cash forecast (weekly, operational: can we make payroll?) and a 24-month operating model (monthly, strategic: how much to raise and what it buys). Keep both in a spreadsheet you understand line by line; a model you can't explain in a board meeting is a liability.

13-week cash forecast

Direct method: actual cash receipts and payments by week, not accrual revenue and expenses. Update weekly; compare last week's forecast with actuals (variance) to learn where you're wrong. Layout in templates.

24-month operating model

Build it driver-first: a few assumptions flow through to cash. Change a driver, see the cash date move.

Scenarios

Pricing

Pricing is covered in more depth on launch and iterate; the finance view:

• Charge from the start. Payment is the strongest validation signal and funds the company.
• Price is the most powerful unit-economics lever: a price rise flows straight to gross margin, LTV and payback.
• Annual prepaid plans (often with a discount) pull cash forward and cut churn; they also create deferred revenue on accrual books.

Funding options

YC's standard deal (ycombinator.com/deal (opens in a new tab), checked Sept 2026): $500,000 in two SAFEs: $125,000 on a post-money SAFE for 7% (an implied $1.79M post-money cap) plus $375,000 on an uncapped MFN SAFE that converts on the terms of the lowest-cap SAFE (or other most favorable terms) issued between roughly the start of the batch and the priced round. YC's own example: if the next SAFEs are at a $15M post-money cap, the $375k converts into 2.5%. YC also gets a pro rata right.

SBIR/STTR status: the programs' authority expired on 30 September 2025; the Small Business Innovation and Economic Security Act (S. 3971) was signed on 13 April 2026 and reauthorised them through 30 September 2031 (SBA (opens in a new tab)). Check sbir.gov (opens in a new tab) for current solicitations and any new per-company proposal limits.

Reg CF: SEC (opens in a new tab): up to $5 million in 12 months, only through an SEC-registered broker-dealer or funding portal, with limits on what non-accredited investors can put in.

SAFEs and convertible notes

A SAFE (simple agreement for future equity, YC, 2013) is a right to shares in a future priced round. It is not debt: no interest, no maturity. The post-money SAFE replaced the original (pre-money) SAFE as YC's standard in 2018 and is what almost everyone means by "a SAFE" today (YC documents (opens in a new tab)).

How conversion works (post-money SAFE)

Per the SAFE text, on the priced round the SAFE converts at the Safe Price = cap ÷ Company Capitalization, where Company Capitalization counts (as-converted) all outstanding shares, issued and promised options, the existing unissued pool, and all converting securities, but not the new money or the round's pool increase (except to cover promised options). The holder gets the greater number of shares under the Safe Price or the round's price.

The practical upshot: each capped post-money SAFE owns exactly amount ÷ cap of the company as it stands just before the priced round. Selling $500k at a $5M cap sells 10%, whatever else you raise on SAFEs.

Worked example. Founders hold 8,000,000 shares; the pool has 1,000,000 shares (400,000 granted, 600,000 unissued). Fully diluted: 9,000,000.

A seed round follows: $3M new money at $12M pre-money ($15M post), with the unissued pool topped up in the pre-money so it is 10% of the post-money fully diluted count.

Founders go from 88.9% (pre-SAFE, fully diluted) to 71.1% after the SAFEs convert and 52.6% after the seed (full table in cap tables). Had they raised only SAFE A, A would still own 10% and founders 80.0% before the seed; SAFE B's 10% came entirely out of the founders' and option holders' share.

The pre-money SAFE (original 2013 form) set its cap on a pre-money basis and included the priced round's pool increase in the conversion denominator, so the ownership sold depended on every other SAFE and on a future pool negotiation. SAFE holders diluted each other and founders couldn't compute what they had sold. Avoid it for new rounds.

SAFE vs convertible note

Priced rounds and the option pool shuffle

A priced round sells a new series of preferred stock at a set price per share, with the full document set (NVCA model documents (opens in a new tab): certificate of incorporation, stock purchase agreement, investors' rights, voting, ROFR and co-sale agreements).

The option pool shuffle. Investors usually require the pool to be enlarged so that the unissued pool is some % of the post-money fully diluted count, and they require it in the pre-money. That makes the founders (and other existing holders) pay for the whole pool, and it quietly lowers the effective valuation.

Worked example. Founders own 10,000,000 shares. Term sheet: $3M at $12M pre ($15M post), 15% post-money unissued pool included in the pre-money.

Effective pre-money = headline pre-money − value of the new pool = $12M − 15% × $15M = $9.75M. The counter: build a hiring plan showing the options you'll actually grant before the next round, and size the pool to that, not to a round number.

Typical dilution. Carta's State of Private Markets: 2025 in Review (Q4 2025) reports median dilution at both seed and Series A of roughly 19–20%, slightly lower than two years earlier; medians vary by sector and year. Brian Ralston's 2016 YC guide (paraphrased): 10% in a seed round is great, most give up to 20%, and try not to exceed 25%.

Cap tables and dilution

Fully diluted shares = issued common + preferred (as converted) + granted options/RSUs + unissued pool + shares issuable on SAFEs and notes. Investors price and quote ownership on a fully diluted basis; your percentage "on the cap table" as outstanding shares is higher and misleading.

Dilution per round multiplies: after rounds selling $d_1, d_2, \dots$ (including pool increases),

Worked cap table continuing the SAFE example: after the seed, 1,000,000 options are granted from the pool; then a Series A of $10M at $40M pre-money ($50M post), again topping the unissued pool up to 10% post-money in the pre-money. Series A price = $40M ÷ (15,214,333 + 1,577,558) = $2.3821; new shares 4,197,976.

Holder                  Founding          Pre-SAFE         +SAFEs*          Post-seed          Post-A
Founders          8,000,000 100.0%  8,000,000  88.9%  8,000,000  71.1%  8,000,000  52.6%  8,000,000  38.1%
Options granted           –           400,000   4.4%    400,000   3.6%    400,000   2.6%  1,400,000   6.7%
Pool unissued             –           600,000   6.7%    600,000   5.3%  1,521,429  10.0%  2,098,987  10.0%
SAFE A ($500k @ $5M)      –                 –         1,125,000  10.0%  1,125,000   7.4%  1,125,000   5.4%
SAFE B ($1M @ $10M)       –                 –         1,125,000  10.0%  1,125,000   7.4%  1,125,000   5.4%
Seed ($3M @ $12M pre)     –                 –                 –         3,042,904  20.0%  3,042,904  14.5%
Series A ($10M @ $40M)    –                 –                 –                 –         4,197,976  20.0%
Total fully diluted 8,000,000  100%  9,000,000  100% 11,250,000   100% 15,214,333   100% 20,989,867   100%
 
* SAFEs shown as if converted at the Company Capitalization, before the seed money.
  Percentages rounded; each column sums to its total.
  Seed pool increase 921,429; Series A pool increase 1,577,558.

Read it like an investor: founders own 38% of a company valued at $50M post (about $19M on paper, as common behind $14.5M of preference). The two pool top-ups together (about 2.5M shares) cost the founders more than both SAFEs combined (2.25M).

Term sheet essentials

Liquidation preference waterfall

One preferred series: $10M invested for 20% (post-money $50M). Everyone else (founders, employees, other holders) owns 80% on an as-converted basis.

• 1× non-participating: investor gets the greater of $10M or 20% of proceeds (it converts to common when 20% of the exit exceeds $10M, i.e. exits above $50M).
• Participating (uncapped): investor gets $10M and 20% of what's left ("double dip").

At a $20M exit, the "80%" owners get half the money, not 80%. Real companies stack preferences (seed + A + B, usually pari passu or senior by series), so total preference outstanding is the number to know: exits below it pay common little or nothing. Model this before accepting a high valuation with heavy terms.

Anti-dilution

Triggered when a later round is priced below this series' price (a down round). It lowers the conversion price so the series converts into more common.

Broad-based weighted average (NVCA standard):

$CP_1$ old conversion price; $A$ shares outstanding before the new issue (broad-based: fully diluted, including options and pool); $B$ shares the new money would buy at $CP_1$; $C$ shares actually issued. Full ratchet: $CP_2$ = the new round's price, whatever the size of the round.

Example. Series A: 10M shares at $1.00; 50M fully diluted. Down round: 5M shares at $0.50 ($2.5M). $B = 2.5\text{M}$, $C = 5\text{M}$: $CP_2 = 1.00 \times 52.5/55 = 0.9545$ ($0.9545 a share). Series A now converts into 10.48M common (+476k). Under full ratchet it converts into 20M (+10M), all of it out of common.

Employee equity

Statute: IRC §422 (opens in a new tab). AMT and personal tax are on retirement and taxes.

409A valuations. Options must be granted with a strike price at least equal to fair market value of common on the grant date, or they become deferred compensation under §409A (immediate income plus a 20% additional tax for the holder). The regulations (opens in a new tab) give a presumption of reasonableness (safe harbor) to an independent appraisal used within 12 months (refresh sooner after a financing or material event), and to a written good-faith valuation by a qualified person for an illiquid start-up under 10 years old with no sale expected within 90 days or IPO within 180 days. Common is valued below the preferred price because it has no liquidation preference, no protective provisions and is less liquid; a 409A after a seed commonly lands well under the preferred price.

Pool sizing (heuristics, not rules): commonly 10–20% of post-money fully diluted at seed/Series A. Better: list the hires until the next round with a grant % each (early engineers and executives get the most), sum, add a buffer.

Taxes

QSBS (§1202)

IRC §1202 (opens in a new tab) excludes gain on qualified small business stock: stock acquired at original issue from a domestic C-corp (for cash, property or services) whose aggregate gross assets never exceeded the threshold before and immediately after issuance, with at least 80% of assets used in an active qualified business. Excluded fields include, among others, health, law, engineering, architecture, accounting, financial services, banking, insurance, farming, extraction, hospitality, consulting, brokerage, and any business whose principal asset is employees' reputation or skill. The One Big Beautiful Bill Act (signed 4 July 2025) changed it for stock issued after that date:

Partial exclusions leave the non-excluded part taxed at the special 28% rate for §1202 gain; state conformity varies. Why it matters to founders: a timely 83(b), a C-corp from day one, and keeping records of the gross-asset test at each issuance can make millions of gain tax-free. Get a QSBS memo from your accountant before any sale.

R&D credit and the payroll-tax offset

The federal research credit (§41) can be used by startups with no income tax against payroll taxes. A qualified small business (gross receipts under $5M in the year and none before the 5-year period ending that year) can elect up to $500,000 a year (up from $250,000; Inflation Reduction Act, tax years beginning after 31 Dec 2022), first against the employer share of Social Security tax and then Medicare, for up to 5 years (IRS (opens in a new tab)). Elect on Form 6765 with a timely-filed original return (not an amended one), then claim on Form 8974 with the quarterly Form 941. Engineers' wages building novel software commonly qualify; keep contemporaneous records.

§174 research expenses

From 2022 the TCJA forced domestic research and experimental (R&E) costs, including software development, to be capitalized and amortized over 5 years (15 for foreign), which gave loss-making startups taxable income. OBBBA added §174A: domestic R&E is deductible immediately again for tax years beginning after 31 Dec 2024; foreign R&E stays at 15-year amortization. Transition (Rev. Proc. 2025-28 (opens in a new tab)): taxpayers can deduct remaining unamortised 2022–2024 domestic amounts over 1 or 2 years, and small businesses (average gross receipts ≤ $31M under the §448(c) test) could elect to apply §174A retroactively to tax years beginning after 2021; the main deadline for that retroactive election was 6 July 2026, now passed. Ask your accountant what was filed.

Delaware franchise tax trap

Delaware's default invoice uses the authorized shares method, which punishes the typical 10M-authorized-share startup. You may instead pay under the assumed par value capital method, which needs total gross assets and issued shares (Delaware Division of Corporations (opens in a new tab)). Annual report and tax due 1 March; $50 report fee; late filing costs a $200 penalty plus 1.5% interest a month.

Don't pay the scary invoice; recalculate on the Delaware site and file the annual report with issued shares and gross assets.

Fundraising process and securities law

How much to raise: enough for 18–24 months of runway to the milestones the next round's investors will want to see, plus a buffer (Ralston's 2016 YC guide said 12–18 months; 18–24 is the figure most commonly quoted now). Work backwards: milestones → plan → cumulative burn.

Example: burn ramps linearly from $120k to $250k a month over 24 months: 24-month spend $4.44M (18 months: $3.02M). Raise ~$4.5M for 24 months, or ~$3M plus revenue for 18. At 20% dilution, $3M implies a $15M post-money.

Securities law basics. Every SAFE or share sale is a securities offering that must be registered or exempt; startups use Regulation D Rule 506.

Accredited investor (individual, SEC (opens in a new tab)): income over $200,000 ($300,000 with spouse or partner) in each of the last two years with the same expected; or net worth over $1 million excluding the primary residence; or holding a Series 7, 65 or 82 license; directors and executive officers of the issuer also count for its own offering.

Admin and bookkeeping minimums

Common mistakes

Templates

Runway calculator

RUNWAY CALCULATOR                         Month:  ________
Cash in bank (all accounts)               A  ____________
Committed but unreceived financing        B  ____________
Monthly gross burn (3-mo avg)             C  ____________
Monthly cash collected (3-mo avg)         D  ____________
Net burn                                  E = C − D
Runway, months                            F = A / E
Runway incl. committed money              G = (A + B) / E
Minimum cash buffer (e.g. 3 × C)          H  ____________
Months until buffer reached               I = (A − H) / E
Start fundraising no later than           month I − 6
Default alive?  revenue growth g = ____ %/month
  months to breakeven n = ln(C / D) / ln(1 + g)
  cash needed ≈ sum of net burn over n months  → vs A

13-week cash forecast

13-WEEK CASH FORECAST        Wk1  Wk2  Wk3  ...  Wk13  Total
Opening cash                 ___  ___  ___       ___
+ Customer collections       ___  ___  ___       ___
+ Grants, refunds, financing ___  ___  ___       ___
= Total receipts             ___  ___  ___       ___
− Payroll, taxes, benefits   ___  ___  ___       ___
− Contractors                ___  ___  ___       ___
− Cloud / APIs / inference   ___  ___  ___       ___
− Software, rent, marketing  ___  ___  ___       ___
− Taxes, insurance, legal    ___  ___  ___       ___
= Total payments             ___  ___  ___       ___
Closing cash                 ___  ___  ___       ___
Below minimum buffer? (flag) ___  ___  ___       ___
Last week: forecast vs actual ___  reason ____________

Cap table

CAP TABLE (fully diluted)          As of: __________
Holder        Class      Shares   Price  Invested  FD %
Founder 1     Common     _______  _____  ________  ____
Founder 2     Common     _______  _____  ________  ____
Options       Granted    _______   409A     –      ____
Pool          Unissued   _______    –       –      ____
SAFE holders  (as-conv.) _______  _____  ________  ____
Seed          Pref Seed  _______  _____  ________  ____
Series A      Pref A     _______  _____  ________  ____
TOTAL                    _______         ________  100%
Liquidation preference outstanding:  $__________
Check: sum of FD % = 100%; shares match signed documents

SAFE conversion worksheet

SAFE CONVERSION (post-money SAFEs, cap applies)
1. Pre-SAFE fully diluted shares (incl. pool)  F = ________
2. For each SAFE i: own_i = amount_i / cap_i
   SAFE 1: ______ / ______ = ____ %
   SAFE 2: ______ / ______ = ____ %
   Sum S = ____ %
3. Company Capitalization  CC = F / (1 − S) = ________
4. Safe Price_i = cap_i / CC ;  shares_i = own_i × CC
5. Priced round: pre-money V, new money M, pool target p
   pool increase X solves:
     unissued + X = p × (1 + M/V) × (CC + X)
   price P = V / (CC + X) ; new shares N = M / P
6. Check each SAFE: if P < Safe Price_i,
   it converts at P instead (more shares)
7. Post-round FD = CC + X + N ; recompute all %

Fundraising checklist

FUNDRAISING CHECKLIST
[ ] Delaware C-corp in good standing; franchise tax paid
[ ] Founder stock agreements with vesting; 83(b) proofs
[ ] IP assignments from all founders, staff, contractors
[ ] Cap table reconciled to signed documents
[ ] Board consents for every issuance and grant
[ ] Current 409A (if options granted)
[ ] Monthly financials (accrual if annual contracts)
[ ] Metrics: MRR/ARR, growth, NRR/GRR, churn, burn multiple
[ ] 24-month model: base, downside, no-raise scenarios
[ ] Round size = milestones + 18–24 months runway + buffer
[ ] Pro forma cap table: all SAFEs converted, pool shuffle
[ ] Waterfall at 3–5 exit values for the proposed terms
[ ] Investor list, pipeline sheet, data room
[ ] Securities: 506(b) vs 506(c) decided; accredited only
[ ] After close: Form D within 15 days; state notices;
    update cap table; send executed docs; bank wires matched

References

• Y Combinator: SAFE financing documents (opens in a new tab): post-money SAFE forms (cap, discount, MFN), pro rata side letter and the SAFE User Guide with conversion examples
• Y Combinator: The YC deal (opens in a new tab): $125k for 7% plus $375k uncapped MFN SAFE
• Y Combinator: SAFE vs convertible note (opens in a new tab): YC's comparison, incl. typical note interest
• Brian Ralston, A Guide to Seed Fundraising (YC, 2016) (opens in a new tab): round sizing and dilution guidance
• Paul Graham, Default Alive or Default Dead? (2015) (opens in a new tab) and Ramen Profitable (2009) (opens in a new tab)
• NVCA model legal documents (opens in a new tab): standard priced-round documents, incl. weighted-average anti-dilution language
• IRC §83 (opens in a new tab), §422 (opens in a new tab) and §1202 (opens in a new tab) (Cornell LII): restricted property and 83(b), ISOs, QSBS as amended in 2025
• Treas. Reg. §1.409A-1 (opens in a new tab): 409A valuation safe harbors
• IRS Form 15620 (opens in a new tab): the 83(b) election form; Morrison Foerster (July 2025) (opens in a new tab) on online filing
• IRS: Qualified small business payroll tax credit for increasing research activities (opens in a new tab)
• IRS Rev. Proc. 2025-28 (opens in a new tab): §174A elections for domestic research expenditures
• Delaware Division of Corporations: franchise tax calculation (opens in a new tab) and annual report and tax (opens in a new tab)
• SEC: Rule 506(b) (opens in a new tab), Rule 506(c) (opens in a new tab), Regulation Crowdfunding (opens in a new tab), accredited investors (opens in a new tab)
• SBA: SBIR/STTR reauthorisation (13 April 2026) (opens in a new tab)
• David Skok, SaaS Metrics 2.0 (opens in a new tab): LTV:CAC, CAC payback and churn guidelines
• David Sacks, The Burn Multiple (Craft Ventures, 2020) (opens in a new tab)
• Brad Feld, The Rule of 40% for a Healthy SaaS Company (2015) (opens in a new tab)
• Scale Venture Partners, SaaS Metrics: A History of the Magic Number (2020) (opens in a new tab)
• Carta, State of Private Markets: 2025 in Review (opens in a new tab): median seed and Series A dilution
• Brad Feld and Jason Mendelson, Venture Deals, 4th ed. (Wiley, 2019): term sheets explained clause by clause