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You are about to embark on the full journey of a startup — from a napkin idea all the way
to an IPO. Along the way you will learn how equity works, how funding rounds dilute
ownership, how employee stock options are priced, and what it all means in real dollars.
Pick something fun — this is your company for the next 9 stages.
This is you — the lead founder. We’ll track your equity throughout the journey.
What you will learn:
- ● How founding shares work
- ● SAFEs and convertible notes
- ● Option pools and 409A valuations
- ● Series A / B / C dilution
- ● Vesting cliffs and exercise windows
- ● IPO payouts and waterfall analysis
- ● The real math behind “I own 10%”
Note: Most US startups incorporate as a
Delaware C-Corporation.
This game draws on concepts from
An Introduction to Stock & Options
by David Weekly. We recommend reading the full PDF after playing for a deeper dive into the mechanics.
For more on fundraising, check out these excellent resources from Y Combinator:
Guide to Seed Fundraising,
How to Plan an Early Stage Startup’s Finances,
Standard Deal Documents, and the
YC Startup Library.
If you’re building something people want, I wholeheartedly recommend
applying to Y Combinator.
It’s the single best launchpad for early-stage startups — the knowledge, network, and fundraising support are unmatched.
Created by
Ilia Baranov
with Claude.
Stage 1: Founding Shares
Every company starts by authorizing shares.
Think of these as slices of the pie. The number itself is somewhat arbitrary — 10 million is a common choice
because it makes the math easy and leaves room for future grants. As a founder, you will issue yourself
shares at essentially zero cost (the par value is usually $0.0001/share).
Solo founder — 100% of shares
83(b) Election — File Within 30 Days!
When founders receive shares subject to vesting, they must file an
83(b) election
with the IRS within 30 days of receiving the shares. This is one of the most important tax decisions
a founder will ever make.
- With 83(b): You pay ordinary income tax on the shares’ value at grant.
Since founder shares are issued at par value (~$0.0001/share), the tax bill is essentially $0.
All future appreciation is taxed as long-term capital gains (max ~20% federal + state) when you eventually sell. - Without 83(b): You pay ordinary income tax (up to ~37% federal + state) on
each batch of shares as they vest, at whatever the shares are worth at that point.
If the company is worth $50M when your shares vest, you owe income tax on millions of dollars
of “income” — even though you can’t sell the shares yet.
Throughout this game, we assume the founder has filed an 83(b) election — meaning all future gains
are taxed as capital gains, not ordinary income.
Coming Up: The Employee Option Pool
Before raising your first priced round, you will set aside a portion of shares as an
employee option pool.
This is how startups attract talent without paying top-dollar salaries — employees get the right to buy shares
at today’s price, betting that the company will be worth much more in the future. Typically 10-20% of
shares are reserved for the pool, and it is carved out before investors price the round
(diluting founders, not investors). We will set this up in a couple of stages.
Stage 2: SAFE Round
A SAFE
(Simple Agreement for Future Equity) is the most common way early-stage startups raise their
first outside capital. Unlike a priced round, a SAFE does not immediately create new shares or set a
share price. Instead, the investor’s money converts later
when you do your first priced round.
The standard template is the
YC SAFE,
a short, founder-friendly document used by thousands of startups.
Most SAFEs today are post-money SAFEs —
the valuation cap includes the SAFE money itself. This means if you raise $1M on a $10M cap,
investors will own exactly 10%. This is simpler and more predictable than the older pre-money SAFEs,
where your dilution depended on how much total capital was raised across all SAFEs.
In practice, startups almost always have multiple SAFE investors in this round —
angel investors, small funds, and accelerators each write their own SAFE note.
Some VCs have ownership targets,
meaning they want to own a certain minimum percentage to make the investment worthwhile.
As you raise more, more investors tend to join the round.
The two key terms are the valuation cap
and the discount rate.
The investor gets whichever gives them more shares.
(Note: most post-money SAFEs use only a cap with no discount — try setting the discount to 0% for the modern standard.)
The Valuation Cap Trap
A higher cap feels like validation — but it’s really a promise to deliver growth
before your next priced round. Setting the cap too high creates serious risks:
- Down round risk: If your Series A valuation comes in below the cap,
it signals the company hasn’t grown as expected. This triggers difficult investor conversations,
depresses your negotiating position, and can scare off new investors entirely. - Compounding dilution: With post-money SAFEs, each SAFE investor’s ownership is
fixed by the cap — but earlier SAFE holders aren’t diluted by later ones. All the dilution from
stacking multiple SAFEs falls on the founders. - Investor misalignment: SAFE holders may pressure you to close your next round
once a valuation hits their cap (locking in their deal), even if waiting could yield a better outcome for the company. - Hiring difficulty: A high cap inflates the 409A valuation for employee options,
meaning early employees get a worse deal with higher strike prices — making equity compensation less attractive.
Rule of thumb: set the cap at a valuation you’re confident the company can exceed within 18 months.
$50K$10M
$2M$50M
Stage 3: Option Pool & Employee Grants
Investors almost always require the company to create an
option pool
before their round closes. This pool is carved from the founders’ share of the pie, not the
investors’. A typical pool is 10-20% of the post-money shares. The
409A valuation
determines the strike price for employee options.
As an employee joining a startup, you would receive options from this pool. Your options
vest
over time (typically 4 years with a 1-year cliff) and your strike price is locked in at
your grant date.
This person will receive options from the pool. We’ll track their equity alongside the founder’s.
5%25%
0.05%2.0%
Employee Grant (shares)
—
Latest Preferred Price
—
Your Team’s Option Grants
Other early employees also receive grants from the pool (~80% of the remaining pool is allocated to the team). The individual grant percentages shown below are randomized for illustration purposes and are not indicative of what should actually be offered.
Pool remaining (unallocated)
—
Stage 4: Series A
Series A is typically the first major institutional round. At this point your company has
product-market fit signals and is ready to scale. A large
VC fund
will lead the round, often investing $5-15M at a valuation that reflects your traction.
Every existing shareholder — founders, SAFE investors, and the option pool — gets
diluted
proportionally.
This is your first priced round — and the moment your SAFE investors’ money actually
converts into real shares. Each SAFE holder gets shares at
whichever price is better for them (cap or discount). The conversion happens right before
the new Series A shares are issued, so the SAFE investors are already on the cap table
when dilution from this round is calculated.
Lead Investor: —
$15M$100M
$3M$20M
0% (no refresh)15%
Option Pool Refresh
Investors typically require the company to top up the option pool before
closing the round so there are enough shares to hire the next wave of employees.
The new shares are created before the investor’s shares are issued, which means
the dilution from the refresh falls on existing shareholders (mainly founders),
not on the new investors. This is one of the most founder-unfriendly mechanics in venture
financing — the bigger the refresh, the more the founders are diluted before the round even prices.
What Everyone’s Stake Is Worth
Stage 5: Series B
Series B funding typically comes when the company has proven its business model and needs
capital to scale aggressively. Valuations jump significantly because the risk is lower and
revenue traction is clearer. New institutional investors join, and existing investors may
participate in their pro-rata
allocation. Dilution continues for everyone, but ideally the value of each share has increased
enough that your smaller slice is worth far more in dollar terms.
Lead Investor: —
$50M$500M
$10M$50M
0% (no refresh)10%
Option Pool Refresh
As with Series A, investors negotiate a pool refresh so the company can continue making
competitive equity offers to new hires. The refresh shares are issued before the
new investor’s shares, so the dilution hits founders and earlier investors
rather than the Series B lead. By this stage, the refresh is typically smaller (around 5%)
since the company already has a team in place, but it still chips away at founder ownership.
Stage 6: Series C
Series C is often the last private round before an IPO or major exit. At this stage, the company
is typically profitable or near-profitable, expanding internationally, or preparing for public markets.
Investors at this stage include late-stage VCs, growth equity firms, hedge funds, and sometimes
sovereign wealth funds.
By now, founder ownership has been significantly diluted, but the per-share value has (hopefully)
multiplied many times over.
How rare is a Series C?
Most startups never make it this far. Carta tracked 4,369 US startups founded in 2018 and found
that the funding funnel narrows dramatically at each stage. Of all seed-funded companies:
Source: Carta State of Private Markets
(4,369 US startups founded in 2018, via
Duet Partners).
Stage-to-stage graduation rates are roughly 60% from Series A onward
(Chronograph).
Lead Investor: —
$150M$1B
$30M$100M
0% (no refresh)10%
Option Pool Refresh
At Series C the pool refresh is usually the smallest (around 3%) since most key hires
are already on board. Still, the same mechanic applies: new pool shares are created
before the investor’s shares, so the dilution falls on founders and all
prior investors. By now the cumulative effect of multiple refreshes is significant —
founders may have lost several extra percentage points of ownership solely to pool top-ups
across rounds.
Stage 7: Employee‘s Vesting & Exercise
Employee‘s stock options vest over time according to a
vesting schedule.
The typical setup is a 4-year vesting period with a 1-year
cliff.
If Employee leaves before 12 months, they get nothing. After 12 months, 25% vests at once, then the
rest vest monthly. Drag the slider to see how Employee‘s vesting progresses.
To actually own the shares, Employee must
exercise
them by paying the strike price. The paper value is what Employee‘s vested shares would be worth if
they could sell at the current share price minus what was paid.
Tax Implications of Exercising Options
Exercising options is not just about paying the strike price — there are significant tax consequences
that depend on the type of option the employee holds:
- ISOs (Incentive Stock Options): No regular income tax at exercise, but the
spread
(current FMV minus strike price) is an
AMT
preference item. If the spread is large, Employee could owe tens or hundreds of thousands in AMT — on paper gains
that can’t yet be sold. This has famously bankrupted startup employees who exercised in boom years
before their company’s stock crashed. - NSOs (Non-Qualified Stock Options): The spread at exercise is taxed as
ordinary income (up to ~37% federal + state), withheld through payroll. This is simpler
but often more expensive than ISOs for lower spreads. - Early exercise: Some companies allow employees to exercise options before they vest
and file an 83(b) election — just like founders. This starts the capital gains clock early and can
eliminate AMT risk, but the employee pays cash upfront for shares they might forfeit if they leave.
Throughout this game, the employee’s “paper value” and “payout” figures are shown pre-tax.
Actual take-home depends on option type, holding period, and tax bracket.
0 months48 months (fully vested)
Early stageLate stage
409A Fair Market Value at Each Stage
The 409A FMV is what an independent appraiser says the common stock is worth. It’s always a fraction of the preferred price because common stock has fewer rights. Earlier employees get lower strike prices — and more upside.
Cliff not reached! Employee has not hit the 12-month cliff yet. Zero options have vested.
Employee‘s Options
Stage 8: IPO / Exit
The big day! There are two main ways a startup reaches a
liquidity event:
- IPO — The company lists its shares on a public stock exchange
(NYSE, NASDAQ, etc.). After a typical 90-180 day
lockup period,
founders, investors, and employees can sell shares on the open market. - Acquisition — Another company buys yours outright. The deal
can be all cash, all stock in the acquiring company, or a mix of both. In a cash acquisition,
shareholders receive a payout based on their ownership percentage. In a stock deal, your shares
convert into shares of the acquirer — which may come with their own lockup restrictions.
In both cases, the exit valuation determines the final price per share, and you can calculate
exactly what everyone’s stake is worth. Most startup exits are actually acquisitions —
IPOs are the exception, not the rule.
This is where the entire journey pays off. Use the slider below to set your exit valuation and
see how you did — as both a founder and an employee with stock options!
$500M$10B
Final Ownership Table
| Shareholder | Shares | Ownership | Cost | Value | Return |
|---|---|---|---|---|---|
| Calculating… | |||||
Employee Payout (Net of Exercise)
—
—
Tax on Sale at IPO
The tax estimates above assume:
- Founder: Filed an 83(b) election at incorporation and held shares for over 1 year.
Entire gain is taxed as long-term capital gains (~23.8% federal: 20% LTCG + 3.8% NIIT).
The cost basis is essentially $0 (par value). - Employee (ISO, qualifying disposition): Exercised and held for 1+ year after exercise
and 2+ years after grant. The entire spread from strike to sale price is taxed as
long-term capital gains (~23.8%). However, AMT may have been owed at exercise. - Employee (NSO or disqualifying disposition): The spread at exercise is ordinary income
(~37%+), and any additional gain from exercise to sale is capital gains. Shown as the higher estimate.
These are rough federal estimates only. State taxes (0-13.3%), AMT credits, and individual
circumstances can significantly change the actual tax bill. Consult a tax advisor.
Journey Summary Scorecard
