Startup equity 101 for founders.

Stock options give a recipient the right to buy shares at a fixed exercise price. Vesting and exercise are separate events; tax depends on whether they are ISOs (favorable, with rules) or NSOs (ordinary income at exercise on the spread). RSUs are an outright grant of shares that vest on a schedule; they create ordinary income at vest, regardless of whether the recipient sells. SAFEs are pre-priced-round investment instruments that convert into preferred stock at a future round; they sit on the balance sheet as equity-like and have no interest or maturity. Convertible notes look similar but are debt that accrues interest and has a maturity date — and they have a different tax and accounting profile. For the books: ASC 718 stock-comp expense applies to options and RSUs; SAFEs and notes do not generate compensation expense (they are financing). For the cap table: every instrument needs to be tracked at issuance with grant date, vest schedule, strike or cap, and any acceleration provisions. The most common founder mistake is granting options without a 409A in place — that creates phantom income at vest. The second most common is letting the cap table live in a spreadsheet past round one.