Most founders who start an equity program in Japan have never done it before. They know they want to offer options to key hires. They know the term "zeisei-tekikaku." They are not sure what to set up first, who to talk to, or how much of this they can handle themselves versus what requires professional help. This article is for that stage.
The goal is not to turn you into a stock option lawyer. The goal is to give you a sequenced view of the decisions and steps involved so that you are not discovering critical requirements for the first time when a potential hire asks you a specific question during an offer conversation.
Step 1: Confirm your corporate structure is ready to issue options
In Japan, stock options take the legal form of shinkabu yoyakuken (stock acquisition rights). Before you can issue any, your company's articles of incorporation (teikan) must allow for it, and you need to have a mechanism for authorizing the pool.
For a kabushiki kaisha (KK) incorporated with standard boilerplate articles, the ability to issue shinkabu yoyakuken is typically included. If your company was incorporated by an accounting firm or legal professional using standard templates, you are likely already authorized. If you are not sure, check your teikan for any language about shinkabu yoyakuken, or ask the person who incorporated your company.
Next, you need to establish the option pool by board resolution. The pool is the total number of shinkabu yoyakuken that the company authorizes itself to issue over time. For a seed-stage company planning to hire its first six to ten team members with equity, a pool representing 10 to 15 percent of the fully diluted share count is a typical starting point. The board resolution must specify the total authorized pool and should include language that designates these rights as intended to qualify under Article 29-2 of the Sozei Tokubetsu Sochi Ho.
Step 2: Establish the fair market value of your shares
Before you can set an exercise price for any grant, you need to calculate the current fair market value of your common shares. For a very early-stage company, this calculation typically uses a net asset approach based on the current balance sheet, possibly blended with an income-based estimate if the company has any revenue to project from.
The FMV calculation must be documented. You cannot set an exercise price of 1,000 yen per share without showing that the calculated FMV at the grant date was at most 1,000 yen. The documentation protects you in any future tax audit or due diligence process. At the seed stage, when the balance sheet is simple and the company is new, this calculation is often straightforward. Still, it should be done formally, not estimated informally.
If you have recently received investment at a known per-share price, note that the investor's preferred share price is not the same as the FMV of your common shares. The preferred shares have rights and preferences that common shares do not, and the FMV of common shares will typically be lower. A tax accountant with startup equity experience can walk you through the calculation specific to your situation.
Step 3: Draft the option agreement template
The option agreement is the contract between your company and each individual grant recipient. It specifies the number of options, the exercise price, the vesting schedule, the exercise period, and the qualified-option designation. For zeisei-tekikaku purposes, the agreement must be in writing and must include the statutory required terms.
You should have a base template that covers all the required elements and that has been reviewed by a legal professional who understands both Kaisha-ho and the zeisei-tekikaku requirements. You will customize the template for each grant recipient, changing the number of options, the grant date, and the specific vesting terms as needed.
Do not use a US-style option agreement template as a starting point. The US legal framework for stock options is different enough from Japan's that a US template will contain provisions that are either legally incorrect in Japan or that miss the specific zeisei-tekikaku requirements. The statutory language requirements under Article 29-2 need to be in your agreement, and those requirements are specific to Japanese law.
Step 4: Issue your first grants with full documentation
Each grant requires three things: a board resolution authorizing this specific tranche at this specific exercise price, a signed option agreement between the company and the recipient, and an entry in the option holder register.
The board resolution must authorize the specific terms of the grant: the exercise price, the total number of rights being issued, the eligible recipients (by name or category), and the exercise period. The resolution should include the qualified-option designation explicitly.
The signed option agreement is the binding document between the company and the grant recipient. Both parties must sign. The agreement should be executed before the grant date, not retroactively.
The option holder register is the ongoing record of all grants, including grant date, exercise price, number of options, vesting schedule, exercises to date, and current status. This register is a living document that you maintain from the first grant onward. It needs to be current and accurate at all times, because it is the source record for investor due diligence, for employee option statements, and for tax compliance purposes.
Step 5: Set up a process for ongoing maintenance
Equity management is not a one-time setup. After you issue your first grants, you will continue to make new grants, track vesting events, handle departures and forfeitures, and eventually process exercises. Each of these events requires a corresponding update to your records.
The simplest process: designate one person as the equity program administrator, establish a regular cadence for updating records (at minimum quarterly, ideally monthly), and create a reference document that lists all the compliance dates relevant to your existing grants, the two-year minimum exercise period start dates, the annual cap calculation dates, and any exercise windows that are coming up.
What you want to avoid is letting the records go stale. A cap table that was accurate six months ago and has not been updated since is not an asset in a due diligence process. A cap table that is updated within a week of every event, with references to the underlying authorization, is exactly what you want to have when an investor asks to see it.
What you do not need to do yourself
You do not need to be an expert in Japanese tax law to run a compliant equity program. What you need is a good tax accountant who has specific experience with startup stock options in Japan, a legal advisor who can review and update your option agreement template, and a system for keeping your records current. The technical judgment, calculating FMV correctly, getting the board resolution language right, structuring the custodial deposit arrangement, belongs with professionals. The ongoing administrative work of tracking grants and updating records is something a well-organized founder or operations person can handle with the right tools.
Starting well is much easier than fixing problems later. The founders who take the three or four days needed to get the initial structure right, before issuing their first grant, save themselves significant time, money, and stress in every subsequent fundraise and hiring conversation.
