#equity-instruments
Understanding stock, SAFE notes, convertible notes, and startup financing structures
Opening Balance Equity is a temporary holding account that must read $0.00 once setup is done. This guide explains why it appears, how to set up books mid-year from a trial balance, and the exact journal entry to move the residual into Retained Earnings or Owner's Equity.
Owner's equity is Assets minus Liabilities — the running total of contributions, draws, profit, and losses. This guide structures equity accounts for sole proprietors, partnerships, and LLCs, explains why draws are not expenses, and shows the year-end closing entries that keep a balance sheet in balance.
A practical guide to ASC 820 fair value measurements for private companies, funds, and CFOs—how to classify Level 1, 2, and 3 inputs, build defensible Level 3 valuations for private equity stakes and earn-outs, write disclosures auditors accept, and survive scrutiny of unobservable assumptions.
Section 409A taxes noncompliant deferred compensation in the year of vesting and adds a flat 20% federal penalty plus interest. This guide explains the short-term deferral and separation pay exceptions, the six recognized payout triggers, the six-month delay for specified employees, and how to structure bonuses, severance, RSUs, phantom stock, and discounted stock options so founders avoid the penalty.
A Section 83(b) election lets founders and early employees pay ordinary income tax today on the full value of restricted stock instead of at each vest. Filed within 30 days on IRS Form 15620, it can convert millions of phantom ordinary income into long-term capital gain and start the QSBS holding clock on day one.
A practical guide to Section 302 stock redemptions in closely-held C corporations — when a buyback gets capital gain treatment versus dividend treatment, how Section 318 family attribution disqualifies most family redemptions, and how the four 302(b) tests plus the 302(c)(2) waiver preserve sale treatment.
Section 302 of the Internal Revenue Code decides whether a closely-held C corporation's stock redemption is taxed as a capital sale or a full-amount dividend. This guide explains the three Section 302(b) tests, the Section 318 attribution traps that ensnare family-owned companies, the 10-year family-attribution waiver, and the partial-liquidation safe harbor under Section 302(b)(4).
Section 382 caps a startup's pre-ownership-change net operating loss deductions at the pre-change fair market value multiplied by the long-term tax-exempt rate (about 3.56 percent in February 2026), triggered when 5 percent shareholders collectively gain more than 50 percentage points over a rolling three-year testing period.
Section 83(i) lets qualified employees of qualified private companies defer federal income tax on RSU settlements and NSO exercises for up to five years. The 80 percent grant rule, mandatory escrow, and 30-day election deadline explain why adoption stays in the single digits — and when the election still pays off.
Exercising and holding ISOs adds the bargain element to AMTI on Form 6251 Line 2i, which can produce a six-figure tax bill before a single share is sold. A 2026 guide to the tightened AMT exemption phase-out ($500K single / $1M MFJ at 50¢ per dollar), the qualifying disposition rules under IRC §422, and the planning moves — AMT crossover exercise, §83(b) early exercise, same-year disqualifying sale, and multi-year laddering — that keep tech employees out of the trap.
Under OBBBA, the 2026 AMT exemption phases out at $500K single / $1M joint with a 50-cent rate, doubling the stealth bracket on ISO exercises. Here is exactly how the bargain element flows into Form 6251 line 2i, when a same-year disqualifying disposition eliminates the AMT adjustment, and how to plan exercises to avoid a six-figure phantom-income tax bill.
Section 1244 lets eligible founders and early investors convert up to $50,000 ($100,000 joint) of capital loss on failed C-corporation stock into ordinary loss deductible against W-2 wages, freelance income, or interest. This guide covers who qualifies, the $1 million capital ceiling, Form 4797 reporting, and the formation steps that keep the deduction defensible.
