Fundraising due diligence for a Japanese startup almost always includes a cap table review. Investors ask to see the complete ownership picture: every shareholder, every option holder, every convertible instrument. Most founding teams believe their cap table is in good shape until someone with sharp eyes looks at it carefully and starts asking questions.
The mistakes that show up in this review are rarely the result of bad faith. They are the result of equity being treated as secondary administrative work during the months when the team is focused on building the product and closing customers. By the time the fundraise starts, the accumulated small errors and omissions have grown into real due diligence issues.
Here are five categories of mistakes that come up consistently, and what to do about each before you start pitching.
Mistake 1: Convertible note or J-KISS math that does not reconcile
Japan's startup financing ecosystem has adopted the J-KISS (Japan Keep It Simple Security) structure, a Japan-adapted version of the SAFE. J-KISS instruments convert into equity at a future priced round, typically at a discount to the round price and sometimes subject to a valuation cap.
The problem that shows up in due diligence is that the founder's cap table shows one fully diluted ownership percentage for investors and the J-KISS holders, but when an investor models it out using the actual terms of each J-KISS agreement, they get a different answer. The discrepancy is usually small, a few tenths of a percent, but it signals that either the founder does not understand the conversion mechanics of their own instruments, or that the cap table model is wrong.
The fix is to go back to each J-KISS agreement, model the conversion at a range of hypothetical round valuations, confirm that your cap table model produces the same result as the contract, and document the calculation. Do this before you pitch, not during due diligence.
Mistake 2: Advisor grants with no documentation
Most startups have advisors. Some advisors receive cash compensation. Many receive equity grants, typically a small option grant in exchange for ongoing advisory work. The grants are often agreed informally, sometimes in a Line message or an email, with the formal agreement to follow.
By the time of the next fundraise, the formal agreement sometimes never happened. The advisor is listed in the option register because someone remembers the commitment, but there is no signed agreement, no board authorization, and no clear grant date. This creates several problems at once: the grant's zeisei-tekikaku status is undefined because the statutory documentation requirements are not met; the grant date for purposes of the two-year exercise period minimum cannot be established; and the cap table entry cannot be verified against any underlying document.
Fixing this requires either executing a proper agreement retroactively with the original grant date (if both parties are willing and can establish that date credibly), or acknowledging the grant as informally issued and treating it accordingly. Neither path is ideal, but both are better than leaving the documentation gap open.
Mistake 3: Former employee options not properly tracked
When an employee leaves a company that has issued options to them, several things need to happen. The remaining unvested options are forfeited and returned to the pool. The vested options enter a post-termination exercise window, typically 30 to 90 days under the option agreement terms. If the employee exercises within that window, their shares need to be reflected in the cap table. If they do not, their options expire and are returned to the pool.
The mistake is failing to update the cap table to reflect either the exercise or the expiration. A cap table that still shows a former employee as holding 5,000 vested options that expired two years ago is overstating the option pool and understating the remaining available pool. An investor doing a fully diluted calculation will catch this discrepancy when they ask for a list of current option holders with tenure dates.
The fix is to go through your complete former employee list, pull each person's option agreement, determine what their vested position was at departure and whether they exercised, and update the cap table accordingly. This is tedious but not technically complex.
Mistake 4: Board authorization language that does not meet the zeisei-tekikaku requirements
As described in our article on stock option taxation, each tranche of option grants requires a board resolution that includes specific language to establish the grants as intended to qualify under Article 29-2. Generic board resolution templates sometimes omit this language.
The problem is invisible until someone with knowledge of the zeisei-tekikaku requirements reviews the board minutes. An investor who asks to see the board minutes authorizing the company's option grants, and finds that the minutes do not contain the required qualified-option designation, will flag this as a potential compliance issue. The options may still be valid as stock acquisition rights under the Kaisha-ho; the question is whether they will receive favorable tax treatment at exercise.
The fix for missing board language is not always simple. For grants that have already been issued with defective authorization, the options cannot simply be retroactively re-authorized with new board language; the relevant date for qualification purposes is the original grant date. In some cases, consulting with a tax advisor about whether the grants can be replaced with new properly documented grants is the path forward.
Mistake 5: Share issuances not registered with the Legal Affairs Bureau
In Japan, share issuances must be registered with the Legal Affairs Bureau within a specified time frame after the resolution to issue. Companies that skip this step find that their internal cap table reflects shareholders who are not reflected in the official corporate registry. When an investor requests both the internal cap table and the official registry printout (toukibo touhon), the discrepancy is immediately visible.
This is not just a paperwork problem. An unregistered share issuance may have legal implications for the validity of those shares and for the rights of the shareholders in question. Cleaning this up requires engaging with a judicial scrivener (shiho shoshi) to bring the registry current, which takes time and professional fees.
The simplest prevention is a policy of filing registry updates within 30 days of any share issuance or major corporate change. The cost of regular registry maintenance is much lower than the cost of the remediation work and the investor confidence damage that accumulates from years of deferred updates.
