Welcome, Future Founder!
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).
Adjust each founder's share of the equity. Percentages must total 100%.
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.
Dilution Check
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.
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.
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.
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.
Dilution Check
⚠ Down Round Warning
Your Series A pre-money valuation (--) is lower than your SAFE valuation cap (--). This is a down round — and it causes real problems:
- SAFE investors get hurt: They invested at a higher cap expecting growth. The cap becomes meaningless since the actual price is lower — they convert at the Series A price, getting fewer shares than they anticipated.
- Signal risk: A down round signals to the market that the company hasn't grown to justify its earlier valuation, making future fundraising harder and potentially scaring off new investors.
- Founder morale & dilution: Founders face extra dilution because the lower valuation means more shares must be issued for the same amount of capital. Existing shareholders' stakes are worth less on paper.
- Anti-dilution clauses: Later-stage investors often have anti-dilution protections that trigger in down rounds, further diluting founders and early employees.
In practice, many startups in this situation renegotiate SAFE terms, delay the priced round, or seek bridge financing to buy time for growth.
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.
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.
Dilution Check
⚠ Down Round Warning
Your Series B pre-money (--) is lower than the Series A post-money (--). This means the company is being valued lower than after the last round — a down round. Existing investors' shares are worth less, anti-dilution protections may trigger (further diluting founders and employees), and it signals to the market that growth has stalled.
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).
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.
Dilution Check
⚠ Down Round Warning
Your Series C pre-money (--) is lower than the Series B post-money (--). A down round at this late stage is especially damaging — it can trigger full-ratchet anti-dilution clauses, wipe out employee option value (options may be underwater), and make an IPO much harder to execute.
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.
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.
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!
⚠ Down Round Exit
Your IPO valuation (--) is lower than the Series C post-money (--). This is a down-round IPO — one of the most painful outcomes in startup finance:
- Liquidation preferences kick in: Preferred investors (Series A/B/C) typically have a 1x liquidation preference, meaning they get their money back before common shareholders see a cent. In a down IPO, this can wipe out most of the common stock value.
- Employee options may be underwater: If the IPO price per share is below the strike price, employee options are worthless — all that vesting was for nothing.
- Ratchet clauses: Anti-dilution protections can force additional share issuance to protect preferred investors, further crushing founder and employee ownership.
- Reputation damage: A down-round IPO makes future hiring, partnerships, and customer trust significantly harder.
Final Ownership Table
| Shareholder | Shares | Ownership | Cost | Value | Return |
|---|---|---|---|---|---|
| Calculating... | |||||
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.