1X

A term in liquidation preference referring to “one times the original purchase price.”

25102(f)

This is a segment of the California Corporation’s Code referring to the limited offering exemption that startup founders in the state use to exempt their founders shares from qualification with California. 25102(f) provides exemptions from the criteria set out in section 25110 of the California Corporations Code. The startup issuer must file a notice with the state’s Department of Corporations.

25102(o)

This is the part of the California Corporation’s Code that startup companies depend on to allow compensatory stock options, which are exempted from qualification with the state. The startup issuer must file a notice with the state’s Department of Corporations and comply with several rules, such as Rule 701 of the Securities Act.

409A

As a part of the Internal Revenue Code, section 409A regulates the tax conditions of “non-qualified deferred compensation.” Startups adhere to this section by issuing stock options at a minimum of fair market value; this helps companies avoid extremely negative tax consequences.

409A Report

This is a report from a third-party valuation firm electing the fair market value of a startup company’s common stock.

4 Years with a One Year Cliff

The general vesting schedule for startup founders’ stock involves shares over a four-year period. The one-year cliff refers to the founders waiting until the first anniversary of their stock issuance to vest any shares, at which point each founder vests 25 percent of their total shares.

83b Election

A tax appointment that founders can make when they are issued stock with a vesting schedule; this election counteracts a potential negative tax consequence. Upon failure to make an 83(b) election, the founder(s) will be taxed for each vesting milestone.

Accelerated Vesting

Type of vesting that occurs at a faster rate compared to the initial vesting schedule of a stock purchase or stock option agreement.

Acceleration Clause

Clause that can be found in a promissory note allowing the lender or note holder to demand the entire amount of the note to be due immediately, which generally occurs when a startup company incurs an “event of default.”

Accelerator

A broad term, which describes a variety of companies or institutions whose intent, is to host and facilitate the development of startup companies. This typically involves controlling costs, mentorship, and investing a small amount of capital into the company for a small percentage of equity.

Accredited Investor

Refers to those who are sufficiently knowledgeable enough to make investment decisions in a startup company’s private offering. They are specifically defined in Rule 501 of Regulation D.

Acquisition

Refers to the process of adopting a controlling interest of at least 50 percent in a startup.

Administrator

Describes a person or entity that conducts particular corporate transactions on behalf of a startup company.

Advisory Board

A board of people selected for their experience, skills, and influence, and tasked with providing advice, counsel, and connections to a startup for the benefit and growth of the startup company.

Alternative Minimum Tax (AMT)

A tax system in the U.S. containing a more strict and separate set of tax rates and rules for deduction, compared to the regular laws.

Amended and Restated Articles of Incorporation

Refers to the legal document that restates, merges, and further improves the original articles of incorporation of a startup company. This document is filed with the secretary of state, typically in combination with the purchase of a new class of stock.

Amortization

The process of paying off debt or a loan in regular payments over time, involving the decrease of an amount over that period of time.

Analyst

An entry-level employee at a venture capital who manages data sheets and conducts research on investments.

Angel Financing

Refers to a small round of financing—seed funding—received by a startup company from angel investors. These types of investments are known as “weak” preferred stock.

Angel Group

Describes a formally organized group of angel investors, typically formed to guide the angel investors’ deal flow.

Angel Investor

A wealthy individual who invests at most $1 million in a startup company through a personal transaction or through another entity before a venture capital firm does.

Annual Meeting

Yearly meeting for the shareholders of a corporation, where pertinent corporate issues are discussed and voted on, and members of the Board of Directors are elected.

Anti-Dilution

A stock term given to venture capital investors protecting them from a large discount in the ownership of a startup company, in the case that the startup has an issuance of shares at a price per share that is lower than what the venture capital investor previously gave.

Arbitrage

The act of buying and selling a security simultaneously so that one takes advantage of the price difference.

Articles of Incorporation

In order to create a corporation, Articles of Incorporation must be filed with the secretary of state containing general information, such as the name, office address, and share structure, of a corporation.

As-Converted Basis

A measurement in which all preferred stock is converted to common stock for the purposes of deciding the total equity base.

Asset Acquisition

A transaction in which the buyer purchases the assets of a startup company, but not the stock of the startup.

Assignment

Refers to the transfer of one’s contractual rights from an investment holding to another person or entity.

Associate

An employee of a venture capital who works on investment analysis or an employee of a law firm who is a junior attorney and does not own equity in the firm.

At-Will Employee

Refers to an employee who can be fired or leave employment at any time for any or no reason.

Authorized Shares

Refers to the maximum number of shares of stocks that startup companies can allot. This is typically determined in the startup company’s charter.

Automatic Conversion

A clause in convertible promissory notes that determines the automatic (meaning it does not require the vote of the startup or investor) conversion of the debt and its corresponding equity raised at a Qualified Financing, which generally refers to the equity financing by the startup where the aggregate of $1 million is purchased by investors.

Back-Up Certificate

Certificate that is issued to the legal counsel of a startup company, where the President or CEO of the startup certifies several facts that the legal counsel will need to publish an opinion letter to facilitate the financing of a venture capital.

Balance Sheet

A financial status sheet that displays a company’s assets, equity, and liability on a particular date.

Bankruptcy

Refers to the status of a company that is unable to pay its debts.

Basis Point

Typically used to describe interest rates; is equivalent to 1/100 of 1 percent.

Basket

Refers to the amount of negative consequences or damages that must be experienced by a buyer before it can recover from the seller under the reimbursement provisions of an acquisition agreement.

Benchmark

Refers to performance goals, and if they are accomplished, it may lead to additional compensation for the management or investment team of a startup company.

Best Efforts Offering

Refers to an offering of a startup company’s securities where the underwriter(s) guarantee their best effort in selling shares.

Black-Scholes Option Pricing Model

A model that considers the current price of stocks, the strike price, the remaining time before the option expires, interest rates, and market volatility in determining the fair price of stock options.

Blanket Lien

Refers to the right of a creditor to seize all assets.

Blended Preferences

Refers to a situation where all of the preferred stock of a startup has equal or pari passu liquidation preference rights.

Blue Sky Law

Refers to the regulatory securities law of single states; startups must consider the Blue Sky Law of each relevant state, as well as federal securities laws when selling their securities to investors.

Board Consent

A term referring to the approval given by a startup company’s board of directors.

Board Observer

An individual who has the right to be present at meetings held by a startup’s Board of Directors; however, he or she cannot vote.

Board of Directors

Can consist of just one person or a group of people who were elected by the stockholders of the startup and are tasked with overseeing the startup. They do not partake in the management of the company. High-level decisions are usually made by or approved by the Board of Directors.

Boilerplate

A legal document that is not typically negotiated or a template legal document.

Bond

A situation in which an investor loans money to a corporate or governmental entity for a set period of time and at a fixed interest rate.

Book Value

Term that is defined as the difference between the total assets and the total liabilities.

Bootstrapping

Refers to the action of startup companies reducing expenses and increasing cash flow, minimizing the need for outside investors.

Break-up Fee

A fee paid to a startup by a potential acquirer if he or she withdraws from the acquisition of the startup.

Bridge Financing

Any short-term funding of a startup company that is intended to be replaced by a larger capital investment from later stage investors.

Broad-based Weighted Average

An anti-dilution process that adapts the price per share of the preferred stock of a prior investor as a result of the issuance of new preferred shares. The prior investor’s preferred stock is modified at a weighted average rate associated with the previously issued stock and new preferred shares.

Broker-Dealer

Describes an individual or firm that buys and sells securities.

Burn Rate

The rate at which a startup company uses its cash to cover expenses, quantifying how quickly a startup will use up its cash.

Business Plan

A detailed plan created by a startup company to display to potential investors their idea(s) and how they are going to achieve and implement them. This usually involves marketing strategies and general business information.

Buy-Sell Agreement

A buyout agreement that outlines the consequences in the event that one of the co-owners of a company leaves the company for any reason. This typically involves the former co-owner offering his or her shares for sale to the other co-owner(s) of the company.

Bylaws

Refers to a legal document that establishes the corporate governance of the startup company, including rules and regulations related to management and administration.

Call Right

Refers to the holder’s right to buy an agreed upon number of securities at a particular time and at a particular price.

Capital Account

An account that measures an LLC member’s first contributions; this measure is increased by additional contributions that are made by that member.

Capital Call

A notice that is sent to investors by their venture capital fund indicating that the investors must contribute a portion of their capital commitment to the fund.

Capital Commitment

Refers to the amount of money and/or property that members of an LLC must contribute to the capital of the LLC.

Capital Gains

Refers to the difference between the sale and purchase of an asset.

Capital Gains Tax

Tax rate on investment earnings determined by the purchase and sale of assets.

Capitalization Table

Generally an excel sheet, this is a table that displays the owners of a company’s capital stock and their respective percentages of ownership.

Capital Stock

Refers to the different varieties of common and preferred stocks that a startup company is allowed to issue according to their Charter or Certificate of Incorporation.

Carried Interest

Refers to the share of a venture capital fund’s capital gains; this is generally given to compensate the general partner or manager of the fund. Often times, the general partner cannot share in the profits until a fund returns the initial capital and a preferential rate of return to the limited partner.

Carveout

Refers to the situation that is excluded from a negative covenant in a contract.

C-Corporation

A limited liability entity that distributes shares of stock allowing for an unlimited number of individuals or companies to own equity in the company. This type of corporation is taxed separately from its owners, which can lead to double taxation.

Certificate of Incorporation

A legal document that contains information about a corporation and is filed with the secretary of state to create the corporation.

Certificate of Incumbency

An official document, which lists the names of current board members and officers, as well as their positions within a corporation.

Change of Control

Refers to the outcome as a result of one of two situations: (1) a startup is acquired by another entity or (2) all of or substantially all of a startup’s assets are sold.

Chapter 7

Type of bankruptcy where the startup company completely stops all operations, going out of business.

Chapter 11

Type of bankruptcy in which a startup attempts to reorganize their assets and liabilities in order to continue operations subject to the obligations under the reorganization.

Charter

Legal document that contains the corporations general information and is filed with the secretary of state.

Chief Executive Officer (CEO)

The highest-ranking executive member of a corporation who is responsible for important decisions and strategies related to the corporation.

Class F Common Stock

Class of common stock created by the Funder Founder Institute that provides protective provisions in favor of offer founders, such as (1) each founder is allowed 2 Board votes relative to a single non-founder board member; (2) ten to one share votes relative to regular common shares; (3) rights to provide approval on new investments, size increases to the Board, etc.; (4) monthly vesting with no cliff.

Clawback

Refers to a clause in a venture capital or private equity fund’s limited partnership agreement, giving the limited partners the authority to reclaim a portion of disbursements that were allotted to a general partner; this is taken out of a profitable return when the fund was solely partially called and based on losses from the rest of the fund.

Cliff

The length of time, typically one year, before either a startup company founder or a recipient of stock options transitions to partial vesting in their restricted stock or stock options.

Closing

A condition in which the all requirements necessary to consummate a financing round through transactions, signed documents, and the authorization to wire the capital, is satisfied.

Collateral

An asset that belongs to a borrower (i.e. property or equipment), in which a lender has legal interest in until the borrower’s loan is fully paid off.

Common Stock

Kind of equity security in a startup that is generally issued to founders, managers, and employers.

Conditions Precedent

Events that must initially occur for a (financing) closing to take place.

Confidential Information

Information about a startup company that is private knowledge and considered proprietary (i.e. information about finances, business plans, etc.)

Consideration

Typically in the form of money, services, or promised actions; consideration from both entities of a contract is required to ensure a legal binding and enforceable measures.

Contingent Liability

A possible liability consequential of an outcome or event.

Control

Refers to when an entity owns more than a set majority of the equity of a company, or owns the largest portion of shares relative to all other shareholders.

Control Terms

Conditions that affect the control or authority that an investor has in a startup pursuant to an investment.

Conversion Discount

Refers to the authority of a convertible note holder to change the convertible debt into the shares of a next round of equity financing at a lower or discounted price.

Conversion Price Adjustment

A subsequent price change to an investor’s initial issuance price of securities; generally occurs when additional securities are issued by the startup company at a discounted price per share than the investor’s original price.

Conversion Rights

Rights that allow for the preferred stock to be converted to common stock.

Convertible Debt

Involved in a situation where a startup issues an angel investor a promissory note, with an amount decided by the investor, containing a conversion feature. It is an investment structure commonly developed or issued by startup companies when raising seed capital from angel investors.

Convertible Note

After the satisfaction of certain conditions, this note can be converted into equity for debt-related issues. They are commonly converted into equity with a discount or price cap mechanism.

Convertible Security

Investment that can be changed or converted into a different form.

Convertible Stock

Allows a holder to convert (usually) preferred stock to common stock. This can be achieved at the holder’s request or after certain outcomes have been satisfied as defined in the investment agreements.

Corporate Governance

The rules, regulations, and processes of a corporation.

Corporate Resolution

A binding corporate decision that must be voted on by a corporation’s Board of Directors.

Corporate VC

A VC that invests its own corporate funds directly into startups, typically to further their own interests; this is different from a regular VC which typically invests its funds with limited partners.

Co-Sale

The authority of investors to sell their shares of stock in the same ratios and for the same terms as the managers, founders, and/or other investors in the event that such parties decide to sell.

Covenants

Legal promises within a contract.

Cram Down Round

Refers to a financing round where prior investors, management, and the founders experience significant dilution, as well as loss some preferential authority.

Creditor

An individual or entity from whom money is borrowed and will be paid back with interest at a future date.

Cross-Default

Provision included in an agreement that initiates default of such agreement in the event that the borrower defaults on an obligation included in a separate document or transaction.

Cross-Fund Investment

Situation in which a VC is operating more than one fund simultaneously and more than one of their funds invest in the same startup company.

Crowdfunding

A way of gaining startup capital by offering products, services, and sometimes equity, in exchange for investments from people through the Internet.

Cumulative Dividend

Allows the owner of preferred stock the authority to receive accrued dividends in full before dividends are paid to any other classes of stock.

Cumulative Voting

Allows for minority shareholders to have increased influence in corporate stockholder votes; this is typically experienced in an election of the Board of Directors.

Data Room

Virtual, but sometimes physical, location in which a startup company’s due diligence materials are placed for inspection by prospective investors.

Date of Issue

Signifies when the stock of a corporation becomes publically available for purchase and trade.

Deal Flow

Describes the rate at which venture capitalists, private equity firms, and angel investors receive investment proposals from startup companies.

Debenture

A debt instrument that is not secured by any asset and is supported solely by the promise of repayment.

Debt Financing

Corporate financing method in which the startup issues corporate debt to investors in exchange for investment.

Debt-to-Equity Ratio

Determined by dividing the total number of liabilities or debt by the total amount of equity.

Deck

A presentation that startups use to display their company, team, and products and/or services.

Default

Situation in which a company is unable to make payments on a loan, debt, or upon the occurrence of specified events stated in the loan document.

Demand Registration Rights

The authority of an investor to force a startup company to register their shares with the SEC, effectively changing the status of the stock to public.

Depreciation

Utilized for the allocation of the cost of an asset over its useful life; beneficial for tax and accounting reasons.

Director

A leader elected by his or her shareholders to serve on the Board of Directors. Many important corporate decisions fall into the hands of directors.

Directors’ and Officers’ (D&O) Insurance

An insurance policy generally purchased by a startup company to protect Directors and Officers from personal liability.

Disclosure

Providing information; this is typically necessary of a startup during the due diligence process before financing occurs. In financing, disclosure is anything that deviates from a company’s warranty or representation.

Disclosure Documents

Documents prepared for prospective investors or acquirers.

Distressed Debt

Refers to securities or bonds of a company that are or are close to defaulting.

Distribution

A startup company’s payment of cash or additional shares to its stockholders.

Dividends

A corporation’s payment to particular stockholders; this is usually made at the discretion of the Board of Directors

Dodd-Frank

Short for the “Dodd-Frank Wall Street Reform and Consumer Protection Act;” this was passed after the 2008 financial crisis and contains new regulations and increased governmental oversight for financial institutions and their customers.

Domestic Corporation

An incorporated company that operates in the same state.

Double Trigger Acceleration

A two-step requirement that must be satisfied before a founder’s shares receive accelerated vesting.

Down Round

A round of financing where the valuation of the startup is lower than the valuation in a prior round.

Drag Along Rights

Allows for a corporation’s certain voting blocks to force other investors, founders, and/or common stock holders to agree to a particular action.

Drawdown

An approximation of the actual capital call or gradual transfer of committed investment funds from limited partners of a private equity fund.

Drive-By VC

Refers to a venture capitalist that invests in a startup company and takes little to no role in its management.

Dry Powder

Describes the availability of capital at the disposal of an investor or startup.

Due Diligence

Process of investigation performed by potential investors or acquirers to determine the accuracy of information provided by a potential corporation and viability of an investment/acquisition.

Early-Stage Financing

A risky investment in a startup before the company has proved its concept and/or generates any revenue.

Earnout

A provision within a contract that is used in the sale of a startup, where the seller can possibly receive additional future payments, typically based on financial performance measures like net income or revenue.

EBITDA

Short for “Earnings Before Interest, Taxes, Depreciation, and Amortization.” Refers to a measurement of cash flow of a company that is used by potential investors and/or acquirers.

Economic Terms

Commonly in the form of pre-money valuation, liquidation preferences, and anti-dilution. These influence the returns on an investment, typically by a venture capitalist or private equity firm, in a startup.

Economies of Scale

Describes a situation where the cost or price of generating a product or providing a service is reduced as quantity increases.

Effective Pre-Money

The pre-money valuation after considering the option pool.

EIN

Stands for “Employer Identification Number,” and is used to identify a specific individual or business entity. All startups must obtain an EIN after incorporation.

Elevator Pitch

Describes a brief and persuasive presentation made by an entrepreneur to a potential investor or acquirer about an opportunity.

Employee Stock Option Plan

Allows a particular portion of a startup company’s stock to be reserved for employees for incentive or retention purposes.

Employment Agreement

Contract between an employee and a company; outlines employment terms, salary, and other incentives.

Engagement Letter

Refers to a written agreement between a startup company and a service provider (i.e. accounting firm, investment bank, law firm, etc.); it outlines the services that should be performed by the provider and how the startup will pay for those services.

Entrepreneur in Residence (EIR)

Refers to an entrepreneur who works a temporary position at a venture capital firm and has previously owned various startups.

Equity

Broad term describing company ownership; it is typically represented by stock.

Equity Financing

A type of corporate financing where startup companies sell shares of their capital stock to their investors.

ERISA

Stands for “The Employee Retirement Income Security Act,” a law that imposes various regulations for the protection of American employees’ retirement assets (i.e. preventing the misuse of funds).

Escrow

Funds that are held by a third party on behalf of two parties until particular obligations are fulfilled.

Evergreen Fund

Open-ended funds in which its returns are allowed to be put back to work.

Exercise

An event in which the holder of a stock option buys stock pursuant to that option.

Exercise Price

The price at which a stock option is exercised, typically per share exercise.

Exit Event

A situation where founders and investors are selling their equity with the intent to sell.

Exit Strategy

The method in which the founders and investors of a startup company plan or intend to get returns on their investment.

Face Value

Initial or original price of a security or stock; also refers to the amount that must be paid upon maturity for a bond.

Fairness Opinion

Refers to a professional evaluation to determine the fairness of an acquisition, merger, or deal. An investment bank usually issues them.

Family Office

Describes a private wealth management company that provides a range of services, such as tax preparation, budgeting, investment advice, and charitable giving, to families with a high net worth.

Federal Funds Rate

Interest rate at which financial institutions loan each other money; this usually occurs overnight for the purposes of complying with regulations requiring that such institutions keep a particular percentage of cash on deposit at the Federal Reserve.

Federal Reserve Act

Refers to the Federal Reserve System, created in 1913, that is still in authority today. The Act established economic stability through increased regulation and security, preventing financial discord, which was typical before the enactment of the act.

Fiduciary Duties

Refers to the duties of loyalty and care, lawfully imposed on individuals that are obliged to an entity as determined by their relationship to a company. For instance, management owes a fiduciary duty to a startup company.

Financial Accounting Standards Board

A group of independent accounting professionals who compose the financial accounting standards in the U.S. These standards are known as GAAP, or generally acceptable accounting practices.

Financing Out Clause

Clause that allows a potential acquirer to, without penalty, close an acquisition in the event that the potential buyer cannot afford to finance the close of the acquisition.

Finder

An individual who helps generate business or arrange a transaction.

Finder’s Fee

A fee paid to a third party entity by a startup company for introducing such startup to investors or potential acquirers.

FINRA

A regulatory committee responsible for governing business between dealers, brokers, and the investing public; developed as a result of the merger of the New York Stock Exchange’s regulation committee and the National Association of Securities Dealers.

First Time Fund

The first fund that a private equity firm raises.

Flat Round

A financing round that is closed at the same valuation as the startup company’s previous financing round.

Float

Refers to the total amount of a company’s stock that is outstanding, publicly owned, and can be traded. The larger the Float, the more stable the stock is.

Floatation

Refers to a situation where a company’s stock is publicly traded.

Follow-on Financing

A situation in which a startup raises an additional financing round after their first successful or significant round.

Foreign Corrupt Practices Act

An act prohibiting U.S. businesses and entities from bribing foreign individuals to do business in their country.

Foreign Qualification

Required qualification of a startup to conduct business outside the state of its incorporation.

Form 8-K

Form to be filed with the SEC by a publicly traded company when an event or change, such as a merger, acquisition, or bankruptcy, occurs.

Form 10-K

Annual report that must be filed with the SEC, which includes a summary of the performance of a corporation.

Form 2553

The s-corporation election form that must be filed with the IRS to elect pass through taxation for a startup.

Form S-1

A form filed with the SEC by a corporation that asks for general information and provides disclosure to potential investors; this is the first registration form that a corporation must file with the SEC prior to selling shares of its stock to the public.

Form S-2

A form made available to companies that have been in full compliance with the Securities Exchange Act of 1934 for a minimum of three years without interruption. This form is a way to fulfill the reporting requirements with the SEC when companies sell securities to the public.

Form S-3

An SEC security registration form used by companies that have satisfied previous reporting requirements listed under the Securities Exchange Act of 1934.

Form S-4

A form that must be filed with the SEC after a merger or acquisition.

Founder

Describes an individual who is involved in the creation and early stages of a startup company.

Founder’s Stock

Common stock issued to founders of a startup, typically at or close to par value, and includes a vesting schedule.

Free Cash Flow

An indication of the cash that is available for use by a startup company after all of its expenses have been paid.

Freedom To Operate Opinion

An opinion stating that the holder of intellectual property is free to use that IP without infringing on the rights of other people; this is typically drafted by an IP attorney.

Freeze Out

An event where the minority shareholders of a company are forced to sell their shares or otherwise surrender their voting rights by the majority shareholders of such company.

Friends and Family Round

A round of financing where solely the friends and family of founders of a startup company provide the capital.

Full Ratchet

An anti-dilution protection method; the price per share of the preferred stock of a prior investor is adjusted downward to match the price of the new investor’s preferred stock.

Fully-Diluted Basis

Refers to the assumption of the highest potential amount of common stock that a startup company will have outstanding; this is not dependent on vesting provisions.

Fund

Allows for multiple people to invest in. Funds are used by venture capitalists and private equity firms, and they are typically a limited partnership or LLC.

Fund of Funds

Refers to a fund that is created to invest in other funds, as opposed to investing directly into startup companies or securities.

Funds Flow Memo

A memo that outlines the amounts and wire instructions for payments to be made at a closing; distributed prior to a closing.

GAAP

Stands for “generally accepted accounting principles,” and was set by the Financial Accounting Standards Board. GAAP advocate for transparency and more standardization.

Game Theory

Approximates and predicts conduct by examining the effects of one individual’s actions on others and their decision matrices.

General Partner

Partner in a limited partnership who is responsible for decisions related to management.

General Solicitation

An attempt to lure investors by advertising a startup company’s capital raise.

Going Private

Involves a series of transactions in which the corporation or private investor for that corporation purchases its stock from the public.

Golden Parachute

Compensation packages that are given to upper level executives in the event such executives are terminated due to a change in control, such as an acquisition or merger.

Go-Shop

A provision allowing a company that is being sold to seek out competing offers after it has already been given a firm purchase offer.

Grossing Up

Refers to an adjustment in equity for employees and/or management of a startup, usually occurring after a round of financing.

Growth Stage

A stage in which a startup company is generating revenue from its product(s) or service(s) and thus has received at least one round of financing.

Haircut

Refers to the percentage by which a payment obligation or the market value of an asset is reduced.

Hedge Fund

A fund that is allowed at least one alternative investment strategy, such as hedging against market downturns, using return-enhancing tools (i.e. leverage or derivatives), and investing in currencies or distressed securities.

Hockey Stick

Refers to the shape of a graph that displays revenue increasing at a dramatic rate in the future.

Holdback

Refers to money that is held back from the purchase price by an acquirer to ensure that there are no issues with any warranties and representations of the startup company to be acquired.

Holdback Escrow

Refers to an amount of the money that is held back from the purchase price and escrowed in case there are breaches in the deal agreement. This can serve as security for the buyer and be placed in a third party escrow account.

Holding Company

An entity developed solely to hold assets or stock in one or more corporations (i.e. does not have any operations).

Holding Period

Refers to the time between the purchase and sale of an asset or securities, or the time that an investment stays in a portfolio.

Hostile Takeover

Refers to the acquisition or takeover of a corporation that occurs while the current officers and directors of that corporation do not agree with the acquisition.

Hurdle Rate

Refers to the minimum rate of return that is required by an investor.

Illiquid

Describes an asset or security that cannot be easily sold.

Incentive Stock Option (ISO)

Refers to a kind of stock option that allows the stock option holder to experience favorable tax treatment. The primary benefits include: (1) a delay of his or her personal taxable event until the holder sells the stock and (2) instead of receiving ordinary income tax rates, the holder receives long-term capital gains for taxable gain at the stock sale.

Incorporation

The process of how a business officially becomes a corporation. This involves filing several documents and paying the application fee corresponding to the state of potential incorporation.

Incubator

Refers to several types of companies or facilities whom function to support the development of startup companies.

Indemnification

For parties involved in a contract, this refers to the compensation of one party to another for the damage incurred from a third-party.

Indemnification Cap

The maximum amount that an individual (buyer) may be compensated by a seller for losses as a result of deviations from the representations and warranties in the purchase or acquisition agreement.

Indemnity

Refers to the security for potential loss as determined by a particular contract given by one party to a contract to another.

Independent Contractor

An individual, who is not an employee of a company, that provides services or products to a business under specific terms within a contract.

Independent Director

An individual who is a part of the Board of Directors in a startup company and is not part of the group of co-founders or investors.

Information Rights

An authority that demands companies to give information and records (such as financial information) to shareholders under certain conditions.

Initial Public Offering (IPO)

Refers to the first stock offering by a private company to the public. These offerings must be registered with the SEC.

In-Kind Distribution

Typically a dividend that is developed in the form of securities versus cash.

Inside Round

Financing round involving only investors who have already invested in the company through a previous round.

Insolvency

Refers to the status of a startup that is unable to pay its debts.

Institutional Investor

Refers to a professional individual or entity that pools and then invests capital on behalf of other companies. Examples of this include pension plans and university endowments.

Integration

The combination of two separate securities offerings of a startup company.

Intellectual Property

Intangible knowledge, writings, techniques, and images that are protected by law through patents, copyright, and trademarks.

Interest

The cost of borrowing money that is paid to a lender and is typically displayed as an annual percentage rate.

Internal Rate of Return (IRR)

Refers to the rate of increase or growth an investment is expected to experience.

Inventions Assignment

Refers to an agreement in which a founder assigns intellectual property that was developed after incorporation to the startup.

Investment Adviser

Any individual or firm that is for compensation and is involved in the business of providing recommendations, issuing reports, or analyzing securities.

Investment Banker

An individual who is employed by a financial institution with the primary purpose of raising capital for governments and companies.

Investor Rights Agreement

An agreement that venture capitalists, other investors, and startups enter during a venture capital financing.

Issued Shares

Refers to the number of authorized shares, which have been sold and are held by shareholders of the company, independent of the holders’ status as insiders, institutional investors, or the public.

Issue Price

Initial price at which the startup issues its stock.

Issuer

Refers to a company that distributes a portion of its stock through a sale or grant.

J Curve

Describes a curve resembling the letter “J” and the idea that the first few years of a fund will experience a decline in the value of the fund and then, the fund will continue to increase for its remaining life.

JOBS Act

Refers to the “Jumpstart Our Business Startups Act” which focuses on reducing regulations that were placed on small businesses by the SEC, making it easier for startups to get capital financing and to facilitate more economic success.

Joinder Page

A signature page within a document of agreement that is signed by an entity that is closing their investment.

Joint Venture

Typically a general partnership, it is a limited-time arrangement that functions to accomplish a specific business goal

Junior Debt

Low priority debt that will not be paid first in the event of a liquidation.

Junk Bond

Bonds that have a higher risk of default and are rated as below investment grade by Moody’s or S&P.

Key Employee

Typically a co-founder or an individual who joined the company shortly after the co-founders, and has been integral to the successful of the company.

Key Person Clause

Prevents and individual who is pertinent to the success of a partnership or business from leaving.

Key Person Insurance

An insurance policy on the capacity of a key employee that is taken out by a business in order to compensate the business for potential damages that would occur in the even that this key employee becomes incapacitated or passes away.

Lapsed Option

An option that cannot be exercised due to the expiration of its time period.

Last In, First Out (LIFO)

An occurrence in liquidations where individuals or entities who were the last to invest are paid prior to those who invested earlier.

Later Stage Financing

A method of financing that involves providing capital to a startup company after it has proven success and before an IPO.

Lead Investor

An investor who typically makes the largest investment, manages the documentation, and closes in a round of financing.

Legal Opinion

A letter containing assurances related to a startup company’s warranties and representations, written by the lawyer of the startup.

Letter of Intent

A letter containing confirmation of the intent of the buyer and seller involved in a transaction, or the intent of an investor to be involved in a financing round.

Leverage

Utilizing debt to acquire assets, increase revenues, and build operations.

Leveraged Buyout (LBO)

Purchasing a company, typically a majority share of the equity, through the use of debt or borrowed capital.

License

Refers to a contract where an IP owner authorizes an individual or entity to make, use, or sell the IP for compensation and under certain conditions.

Lifestyle Company

A startup company that was started with the purpose of accomplishing an exit event but reaches a level of profitability where the potential for an exit event is not close.

Lifting A Leg

The “leg” refers to each side of a hedge (when transactions or investments are hedged); “lifting a leg” refers to removing one side of the hedge due to profitability from one side of the hedge that supports both sides.

Light Preferred

Describes a financing through preferred stock that is below the level of a full “series A” financing; also known as seed preferred.

Liquidation

Typically occurs in the context of a startup; refers to when a startup company sells off its assets before they cease operations as a result of bankruptcy or going out of business.

Liquidation Event

Refers to an event that results in an investor being given a contractual right to priority in receiving the proceeds from the company’s liquidation.

Liquidation Preference

Refers to the amount that preferred stock holders must be paid before common stock holders receive distributions.

Liquidity Event

Refers to a transaction where a stockholder was given cash as determined by the ownership of his or her shares.

Limited Liability Company (LLC)

A pass through tax entity whose purpose is to limit the founders’ liability.

Limited Liability Partnership (LLP)

A partnership where the partners have limited liability.

Limited Partners

Investors in a limited partnership who are protected from liability and losses beyond their original investment.

Limited Partnership

A entity comprised of a general partner and several limited partners; general partners manage the entity and are held liable for the partnership’s actions, while the limited partners are protected from liability and losses.

Lock-up Period

Period of time, typically six to twelve months, when investors, employees, and/or management agree not to sell their shares of stock after an IPO.

Major Investor

Term used to distinguish between investors based on the amount of stock they hold.

Majority Shareholder

Refers to the shareholder with the largest amount of stock at any given time.

Management Buyout

Describes an event where a public corporation’s management buys all of the publicly held stock that is outstanding, for the purpose of changing the corporation’s status to “private.”

Management Fee

A fee that limited partners in a fund must pay to the general partner of a venture capital that is not a result of the fund’s success.

Management Rights

Rights that are required by a venture capital and satisfy particular ERISA requirements. These are necessary in startup financing and includes the right to consult with the startup, provide recommendations, inspect the startup, and attend its board meetings.

Mandatory Redemption

Refers to a right that necessitates a corporation to a stockholder’s shares as a result of a particular event.

Market Terms

Terms used in a financing, such as liquidation preference and conversation rates, that are used in any given transaction.

Material Adverse Change Clause

A provision typically found in mergers and acquisitions contracts or financing documents allowing one party to back out of a deal in case a material adverse change occurs.

Materiality Qualifier

Describes the act of utilizing “material” to modify terms in contracts or agreements for the purposes of softening a representation.

Materiality Scrape

Provision within an acquisition agreement, which states that, any “material” qualification in the representations and warranties of a startup company must be discarded when examining the accuracy of such reps and warranties for indemnification purposes.

Mentors

Individuals who provide recommendations to startup companies based on knowledge or prior experiences, generally for no compensation.

Merger

Combination of two or more businesses for the purposes of accomplishing improved efficiency, profit, and/or value.

Mergers and Acquisitions (M&A)

Refers to the corporate strategy associated with buying, selling, and/or merging different businesses.

Mezzanine Level

Refers to one of the final stages in the development of a startup company that happens before an IPO.

Mezzanine Financing

One of the final stages of financing that a startup experiences before an IPO or private sale.

Micro VC

Refers to a venture fund that is larger than common angel investor groups and smaller than a conventional VC fund.

Milestones

Goals related to the operations or financing of a company that help determine whether it will receive additional compensation for management or financing.

Narrow-Based Weighted Average

Anti-dilution method where the price per share is adjusted downward in relation to the preferred stock of a prior investor, as a result of new preferred shares to the new investor at a lower price than the price received by the previous investor.

National Venture Capital Association

The leading trade association for venture capitalists.

NDA

Stands for “non-disclosure agreement,” an agreement in which a third-party protects a startup company’s confidential information idea from disclosure to other entities or individuals.

Newco

Term that describes a hypothetical or potential new startup or entity.

No-Action Letter

A document that must be filed with the SEC by a startup, stating that the SEC will not take criminal or civil action on the startup for a particular transaction.

Non-Accredited Investor

Refers to an investor who does not have a net worth that meets the conditions outlined in Rule 501 of Regulation D of the SEC.

Non-Voting Stock

Stock that does not allow for its holders to vote.

Non-Compete

Agreement signed by employees and members of the management team stating that they agree not to work for competitors or form a competing business within a certain period of time after termination from the company.

Non-Cumulative Dividends

Dividends that do not accumulate if not paid by the startup.

Non-Qualified Stock Option (NSO)

Type of stock option that does not meet all of the requirements to be qualified as ISOs by the Internal Revenue Code; when the option is exercised, ordinary income tax is paid.

Non-Participating

Refers to an investor who decides to receive liquidation preference and after payment of such preference, does not participate pro rata with other stockholders in the remaining sale.

Non-Solicitation

An agreement that prohibits an individual, such as a current or former employee, from soliciting customers or other current employees of the startup.

No-Par Value Stock

A rare occurrence, this is stock that is issued without a par value.

No-Shop Clause

Refers to a provision found in an agreement where one party agrees to not enter a contractual relationship with other potential individuals or entities for a particular period of time.

Offering Documents

Refers to documents associated with the private placement of a startup company’s securities. This includes various agreements like a purchase agreement.

Officer

An individual who is hired by the board of directors and responsible for the daily operations of a company; typically include the president, vice president, chief executive officer, chief financial officer, and secretary.

Operating Expenses

Refers to expenses that a startup company has due to running its business.

Optics

Describes the way an idea is displayed and observed.

Option Pool

Refers to the portion of a startup’s common stock that is set aside for future issuances to directors, employees, consultants, and advisors.

Ordinary Income Tax

Tax that is imposed on income that one receives, commonly in the form of wages and salaries.

Outstanding Shares

Shares of stock that are issued by a company and held by all shareholders.

Overhang

Describes a situation where the amounts of investors’ liquidation preferences are higher than the current value of the company.

Oversubscription

Describes a situation in which the amount of subscriptions that a startup has received from investors exceeds its current financing round.

Oversubscription Privilege

The right of current shareholders of a startup company to receive or purchase extra shares from what is left over after a financing round.

Paid-In Capital

The amount of capital associated with the issuance or sale of stock (common and preferred) that is possessed by a company.

Partnership

A default business entity that describes two or more people who are in business together, typically without registering or filing with any state. The partners themselves, versus the partnership, are taxed for profits. Partnerships are generally not recommended because they do not provide limited liability, so each individual involved is responsible for any damages or debt incurred.

Par Value

The minimum price that shares of stock can be issued by a startup.

Pari Passu

Refers to the equal treatment of several parties involved in an agreement.

Participating Preferred Stock

Preferred stock that allows the owner to receive: (1) its liquidation preference, (2) its pro rata portion of the remaining sale proceeds.

Participation Rights

Describes preferred stock whose owners receive their full liquidation preference, while the remaining proceeds are distributed to shareholders on a pro rata basis.

Pass Through Entity

A situation in which profits or losses are directed towards investors or owners versus being paid for at the entity level.

Patent

A property right that is granted to an inventor, excluding others from developing, using, or selling the invention or importing it into the U.S. for a set amount of time in exchange for public disclosure of the invention at the grant of the patent.

Payment in Kind (PIK)

Type of security that pays interest or dividends with additional debt instead of cash.

Pay to Play

A clause found in a financing round in which any investor who does not participate in a future round experiences equity dilution and losses certain rights, like anti-dilution protection in relation to other investors.

Perpetual Warrant

A warrant with no expiration date.

Piggy-Back Rights

Registration rights allowing investors the opportunity to have their shares included in the registration of a startup company’s shares with the SEC while preparing for an IPO. Investors cannot start the registration process themselves for these rights.

Placement Agent

A company that searches for institutional investors who are able to invest in a venture capital fund or other equity fund.

Poison Pill

A strategy that is utilized to prevent a hostile takeover from happening by making the takeover prohibitively expensive.

Portfolio Company

A startup company that has received an investment from a private equity fund or a venture capital fund.

Post-Money Valuation

Refers to a startup company’s valuation immediately after a financing round.

Preemptive Rights

Rights that allow shareholders to keep their current percentage of equity while requiring that the company offers shares for the purchase by the holders of such rights, in the event that such company wants to raise additional investment.

Preferred Return

The minimum return on investment that must be produced before other interested parties can participate in profit sharing or other activities.

Preferred Stock

Category of stock that allows certain economic rights, controls, and protections that are not given to holders of common stock.

Pre-Money Shares

Refers to shares of stock that are outstanding before experiencing a financing round and issuing additional stock to venture capitalists or other investors.

Pre-Money Valuation

Refers to a startup’s value immediately before a financing round.

Prepayment

Refers to the event of paying an outstanding debt or loan before it is due or before it matures.

Price Cap

The maximum valuation of a convertible note (valuation that the note will convert into equity).

Price Per Share

Cost in dollars that someone would have to pay to purchase a single share of stock.

Private Company

Company with a relatively small number of shareholders and does not offer its stock or trade with the general public.

Private Equity

Investments made in private companies.

Private Investment in Public Equities

Refers to the action of a private firm or mutual fund purchasing public securities at a discount to raise capital.

Private Offering

The sale of securities by a startup directly to investors.

Private Placement

The increase of capital by a startup without registration of such offering with the SEC.

Private Placement Memorandum

A document outlining the basic information, risks, and terms of an investment, including financial statements and a business plan, to potential investors.

Pro Forma

Describes a financial statement that displays the current state of the capital of a startup.

Promissory Note

A debt instrument where one party agrees to pay another immediately or at a specified time in the future.

Promote

A venture capital or private equity fund’s share of capital gains that is given to the general partner.

Proprietary Rights

Rights associated with the ownership of intellectual property or securities.

Pro Rata

Refers to a proportionate allocation.

Prospectus

A document of disclosure that is filed with the SEC during the registration process for an investment.

Protective Provisions

Rights granted to investors, generally tied to preferred stock, allowing the investor to approve particular proposed transactions.

Proxy Voting

The act of shareholders voting on behalf of other shareholders.

Public Company

A corporation that issues securities through an IPO, traded on a public stock exchange.

Public Offering

The sale of securities, typically stock, of a corporation to the public. The first of this is known as an IPO.

Pump and Dump

Refers to a situation in which a stock, typically with a low cap, is recommended to temporarily inflate or increase the price of the stock so that an individual, who had a vested interest before the price of the stock changed, can make a profit from selling that interest.

Purchase Agreement

A legal contract, which states that a buyer and seller are obligated to a transaction for the purchase and sale of a specific asset.

Put Right

A contract that gives the holder the option and right to sell a specified amount of an underlying asset at a particular price within a specified time.

Qualified Financing

An equity financing by a startup company to raise capital, where the aggregate of $1 million or the deal amount is bought by investors.

Quasi-Public Corporation

A corporation that operates as private and is supported by the government.

Quiet Period

The period between when a company registers a statement with the SEC and when the SEC declares the registration “effective.”

Quorum

The minimum number and level of stockholders or board of directors members in a startup that is necessary to hold a corporate meeting or vote.

Ratchet

A strategy that is used to prevent dilution and protect an investor from losing a percentage of ownership in a company as a result of such company’s future issuance of additional shares to other people.

Recapitalization

Refers to the action of reorganizing a company’s capital structure.

Redemption Right

The right of a stockholder to force the startup company to repurchase such stockholder’s capital stock at a previously agreed-upon price.

Redline

A document that shows changes made by an individual, entity, or party, to a prior version of the document.

Registered Agent

An individual or entity that is physically located within the state of incorporation and is appointed by a corporation to receive service of process and other official notes. Service of process refers to the method in which a third party gives one’s company notice of a legal matter that is pending.

Registered Offering

Public offering of securities that is registered with the SEC.

Registrable Securities

Refers to common stock that is issued or can be issued upon conversion of preferred stock.

Registration

Process of filing and registering with the SEC the shares of a corporation; this involves filing documents regarding the status, representations, and warranties of the corporation.

Registration Rights

Refers to investors’ rights associated with the registration of shares with the SEC for the public to purchase.

Regulation A

Exempts a corporation from registering their public sale of securities in the event that the total amount offered is below $5 million over a 1 year period; this includes a limit of $1.5 million in securities offered by the company’s security-holders.

Regulation D

Includes two exemptions in Rule 504, Rule 505, and Rule 506; typically used by startup companies to secure a private placement exemption, which is less costly than selling securities to the public.

Reincorporation Merger

Refers to a merger performed by a startup company for the purpose of changing the startup’s state of incorporation.

Representations and Warranties

Statements of assurances that one party gives to another.

Repurchase Option

Refers to the right of a company to repurchase any unvested stock that belongs to a co-founder who is departing the company.

Reserved Shares

Refers to shares that a company sets aside for administrative reasons.

Restricted Stock

A category of stock that cannot be traded with the public and is allowed to be transferred only if particular conditions are met.

Restricted Stock Purchase Agreement

A contractual agreement, stating the material terms and rights of each party, between a co-founder and a company whereby restricted stock is issued.

Restriction on Sales

A provision regulating the ability of a private company’s stockholders to sell their shares.

Return on Investment

The profit from an investment.

Reverse Break Up Fee

Refers to the money that a startup is paid in the event that the potential acquirer departs from the acquisition deal. This typically occurs when the potential acquirer cannot obtain financing.

Reverse Dilution

Describes a situation where a company receives restricted stock as a return, as a consequence of the repurchase of unvested shares, and the percentage of equity that the other stockholders hold increases.

Reverse Engineer

Refers to the process of examining technology and recreating it.

Reverse Stock Split

Refers to an event in which a corporation decreases the number of shares by dividing the sum of the number of shares and the price per share, by a particular number.

Reverse Vesting

Refers to a situation in which co-founders receive their shares immediately or all at once, but are subject to vesting.

Revlon Duties

An interpretation of fiduciary duties, which states that the Board of Directors must act in the best interest of shareholders.

Right of First Offer

An investor’s contractual right to purchase its pro rata ownership of any new securities issued by a company.

Right of First Refusal

The right to be offered the opportunity to take part in a future transaction.

Right of Rescission

A stockholder’s right to demand or force a company to buy back stock at the same price that the company sold it to the stockholder.

Rights Offering

Refers to the rights of a company’s existing shareholders; these rights guarantee shareholders the opportunity to buy a proportional number of additional securities at a particular price and at a discount within a specific time period.

Risk Tolerance

Describes the amount of risk that an investor is willing to endure. The willingness to accept higher risk usually indicates the expectation of a better return.

Road Show

A series of presentations, typically made in several different locations or cities to potential investors.

Rollup

Refers to the merger and acquisition of smaller companies in a market by a larger company for the purposes of creating scale economies, enhancing value, and increasing efficiency.

Round

A financing event for a company involving several investors who are part of the same transaction.

Royalties

Payments made to copyright or patent owners to compensate them for using their intellectual property, products, and/or services.

Rule 144

Allows for the public resale of control and restricted securities under certain conditions.

Rule 145

Governs and authorizes registered transactions associated with reclassifying securities, mergers, transfers of assets, or consolidations.

Rule 501

Involves the definitions of terms used in Regulation D.

Rule 502

Contains the conditions that must be satisfied in order to be granted exemptions under Regulation D.

Rule 503

Defines when issuers of securities must file a Form D and amendments with the SEC in the event that they are granted exemptions under Regulation D.

Rule 504

Exempts a company from registering and allows the company to raise a maximum of $1 million in any 1-year period from an unlimited number of investors.

Rule 505

Exempts companies from registering when they sell securities of up to $5 million in any 1-year period.

Rule 506

A “safe harbor” in the private offering exemption; satisfying the conditions of this rule indicates that a company complies with Section 4(2) in the Securities Act of 1933.

Rule 701

Federally exempts companies from registering for stock option grants and incentive equity awards.

Runway

Refers to the amount of time that a company has to continuing operating or “survive” as determined by its current financial situation.

Safe Harbor

Refers to a guarantee that no one will be liable for an event if particular precautions are taken or if certain limitations are adhered to as prescribed by law.

Sarbanes-Oxley Act of 2002

An act that was passed to provide investors with protection from fraudulent accounting practices and other illegal practices by corporations.

Scalability

Refers to the capability of a business to respond positively or favorably and thus, continue with expansion; this is a feature or characteristic that venture capitalists look for in companies they plan to finance.

Scale Up

A situation in which a startup grows rapidly while their operational and financial controls are maintained.

S-Corporation

A C-corporation that elects with the IRS for pass through taxation.

Search Fund

A method by which investors and entrepreneurs collaborate to find and acquire a target company.

Secondary Buy-Out

Refers to a situation where a private equity firm sells its stake in a company to another private equity firm.

Secondary Market

Allows investors and co-founders to sell securities and other assets to other investors, versus buying from the company itself.

Secondary Sale

Describes the sale of stock in a particular company from an investor, versus a sale from the company itself.

Secured Debt

Debt that is secured or supported by assets as collateral.

Securities Act of 1933

Passed as a consequence of the 1929 market crash, with the goals of (1) requiring investors receive financial information about securities that are being offered for public sale and (2) preventing or prohibiting misrepresentations and fraud in the sale of securities.

Securities and Exchange Commission (SEC)

Governmental regulatory body that is tasked with enforcing securities laws such as the Securities Act of 1933.

Securities Exchange Act of 1934

A law established by the SEC, authorizing the SEC to oversee all aspects of the securities sector; this involves the authority to register and regulate brokerage firms and transfer agents, in addition to overseeing the nation’s securities self regulatory organizations.

Security

Financial resource, such as stock, bonds, and notes, which represents an equity or interest in a company.

Security Interest

Describes the securing of debt by legally claiming collateral that has been offered to the lender.

Seed Capital

The initial investment given to a startup by angel investors, friends, and/or family to get the company to the initial or seed stage.

Seed Preferred

Describes a financing that is at a lower level than a full-fledged financing; also known as light preferred.

Seed Stage

The starting stage in the development of a startup; the company is recently incorporated and its founders are creating the product and/or service through the use of seed capital given by angel investors, family, and/or friends.

Senior Debt

Higher priority debt than other debt, like junior debt; the holder of senior debt will be paid first in the case of a liquidation of a company or asset.

Senior Securities

Securities with preferential claim over common stock, commonly during the bankruptcy or liquidation of the company.

Series A Preferred Stock

Category of stock that a startup company commonly issues to angel investors and venture capital firms during a Series A financing round.

Series A Round

Refers to a financing round where angel investors and/or venture capital firms initially invest in a startup company.

Series AA Round

Refers to an angel investors financing round using Series AA Preferred Shares.

Series B Round

The round of equity financing that is closed after a company’s Series A round.

Series Seed Financing

Refers to a small financing round, typically the first that a startup experiences, that happens before a Series A financing.

Shareholders’ Agreement

A document governing the association between the shareholders of a company. It includes particular rights, such as the right to transfer shares, the rights of first refusal, etc.

Shell Corporation

Describes a corporation with no ongoing business or operations and no important assets.

Side Letters

A document of agreement between an investor and a company, which gives the investor additional rights not given to other investors and not included in the deal documents.

Single Trigger Acceleration

Acceleration (full or partial) of a co-founders vesting schedule after the startup experiences a “change of control.”

Sliding Fee Scale

Changing or variable costs for products, services, and/or taxes as determined by a person’s ability to pay.

Small Business Administration

A government agency tasked with assisting small businesses and enhancing the overall economy via distribution of information and events.

Small Business Innovation Research Program

A program run by the Small Business Administration that legally mandates for 2.5% of large federal agency research budgets to be reserved for small businesses.

Small Business Investment Company

A licensed company of the Small Business Administration that is tasked with augmenting venture capitalists and private equity firms involved in startup investments.

Sole Proprietor

The sole owner of a business who pays personal income tax on the proceeds or profits from the business as if it was part or all of his or her income.

Special Purpose Acquisition Company

A program that raises funds with the purpose of buying a pre-existing corporation. This corporation does not need to be known during the investment period.

Special Purpose Vehicle

Commonly a subsidiary of a larger corporation; its function is to acquire and/or manage particular assets.

Spinoff

The development or creation of an independent company via the sale or distribution of shares of an existing business or part of a parent company.

Stacked Preference

An event by which there are at least two series of preferred stock, including a series with senior liquidation preference relative to other series.

Staggered Board

A board that is set up for the purpose of preventing a hostile takeover, by staggering the board seats that are up for a vote each year (this ensures that only a fraction of the directors or board seats are up for a vote at one time).

Stalking Horse

An individual or entity that is chosen by a bankrupt company to make the first bid on that company’s assets, in order to prevent the company’s assets from being sold at a large discount due to low-ball bids.

Startup

A company that is in the initial or early stages of development and operations.

Stockholders

Refers to those who own the stock of a corporation.

Stockholders’ Consent

Refers to consent associated with a certain corporation transaction, which belongs to the stockholders of a startup

Stock Options

An equity interest, which allows the recipient the authority or right to purchase stock in a startup at a pre-determined exercise amount.

Stock Plan

A company’s incentive equity plan where the Board of Directors are allowed to issue stock options or restricted stock to employees and advisors of the startup.

Stock Purchase Agreement

A legal document of agreement created between a startup company and a shareholder; it regulates the transfer and sale of a startup’s stock to that shareholder by determining how much stock is to be purchased, the price, and the method of payment. These types of agreements are either restricted or non-restricted.

Stock Split

Process of splitting a startup company’s outstanding stock into multiple shares; current stockholders will then be given additional shares proportional to their current holdings.

Strategic Investment

An investment made by an established company in a startup for the purpose of gaining access to the startup’s business or technology.

Strike Price

Price that a stock option is exercised at, usually per share exercise.

Subordinated Debt

Low priority debt in relation to other debt of a startup; in the event of liquidation, this debt is not prioritized.

Subscription Agreement

A document indicating an investor’s investment into a startup.

Subsidiary

A legal entity that has stock that is at least 50% owned by another company.

Super Angel

Describes a prolific and successful angel investor with extensive experience.

Supermajority Voting

A voting decision where more than a simple majority is necessary.

Super Pro Rata Rights

Rights allowing investors to purchase sufficient shares in future financing rounds in order to maintain their ownership of a startup company, as well as to purchase shares in an amount that would increase their current equity stake.

Sweat Equity

A startup’s equity that a co-fonder earns as a result of that co-founders hard work.

Syndication

Refers to the combined efforts of different financial entities, such as venture capitalist, investment banks, and private equity firms, in conducting a large transaction that individual entities would not be equipped to handle.

Tag Along Rights

Rights allowing a shareholder to be granted the same benefits as other shareholders of a stock sale.

Takedown

Refers to an investment banker’s pro rata share of securities that are given out or distributed in a new offering.

Takeover

A situation in which one corporation acquires or gains control of another.

Taxable Event

Any transaction with a tax consequence.

Tax-Free Reorganization

Refers to a merger or acquisition where the individual selling the stock avoids any tax obligations.

Technology Transfer Agreement

An agreement between a shareholder and a startup company, in which the shareholder assigns or sells particular intellectual property to the company.

Ten Bagger

An investment that returns 10 times the amount of initial capital that was invested.

Tender Offer

An offer given to shareholders to buy their stock in a corporation in order to obtain a majority share of the outstanding equity.

Term Sheet

A document that indicates and confirms the purpose of an investor and startup company to close a financing round.

Time Value of Money

Trade Secret
As defined by the Uniform Trade Secrets Act, a trade secret is any information, such as a pattern, formula, program, or process, that “derives independent economic value, actual or potential, from not being generally known to or readily ascertainable through appropriate means by other persons who might obtain economic value from its disclosure or use;” in addition, a trade secret is necessarily maintained a secret.

Tranche

Refers to an investment that a venture capital firm or other investor makes whereby portions of the total investment are released as the startup accomplishes particular milestones.

UCC

Stands for “Uniform Commercial Code” and is a set of standard regulatory business laws; this includes nine individual articles that deal with loans and banking.

UCC Financing Statement

A document detailing the financing agreement between a borrower and his or her lender.

Underwater

Describes an option with no value as a consequence of the market value of the stock involved; i.e. the option is less than the price of the option exercise.

Underwriter

An entity, such as an investment bank, that is voluntarily responsible for selling new securities to the public on behalf of another entity.

Unrelated Business Taxable Income

Income that is earned by a tax exempt entity and does not qualify for a tax exemption as a consequence of the income’s source being unrelated to the entity’s main function.

Unsecured Debt

Debt without any priority over other debts in a startup, particularly if the startup is dissolving and selling its assets.

Valuation

Refers to the process of deciding or determining the current worth of a startup company, which is commonly assessed between the investor and the startup during a financing.

VC Fund

Label of a private equity fund that participates in high-risk and high-return investments.

Venture-Backed Startup

A startup company that has received funding and support from a venture capital firm, versus angel investors or family/friends.

Venture Capital

Involved in the private equity industry, with an emphasis on high-risk or high-return investments with just-developing companies.

Venture Capital Financing

Refers corporate financing, which typically occurs after a startup company’s initial or seed financing round, that is made by a VC firm.

Venture Capitalist (VC)

An entity or individual who invests in startups full-time.

Venture Capital Limited Partnership

Refers to a limited partnership that invests in just-developing or early-stage companies that have a high potential for growth and success.

Venture Debt

Financing for debt that is provided to startup companies by banks specializing in lending to just-developing companies.

Vested

The amount of equity that is owned by a startup’s co-founder or employee who does not have the option to forfeit even in the event that such employee depart from the company.

Vesting

Refers to the process relating to a co-founder or employee’s equity interest no longer being subject to forfeiture in the event that such employee departs the company.

Vesting Schedule

An instrument that measures the amount of vested equity that a startup’s co-founder or employee has at a given time.

Vintage Year

Refers to the year that a VC fund makes a capital call for a limited partner’s committed payments or funds.

Voluntary Redemption

Refers to a startup company’s right to buy a portion or all of an investor’s shares back at an agreed upon monetary amount at a given time in the future.

Voting Rights

Refers to the rights of a specific stockholder to vote on particular matters.

Warrant

Refers to a security that allows its holder the authority to purchase shares from a company at a pre-determined price.

Washout Round

A type of financing round where previous investors, management members, and founders experience dilution, and a new investor obtains a majority of the equity, as well as control of the company.

Weighted Average Anti-Dilution

A method of anti-dilution whose purpose is to prevent or protect against dilution, by re-pricing an investor’s shares at a lower price per share.

White Knight

Refers to an entity or individual that the Board of Directors of a company brings in to protect from or prevent a hostile takeover by purchasing stocks.

White Label

A service or product generated by one company, such as a startup, that is rebranded by another company for their own distribution or use.

Working Capital Adjustment

An adjustment to the purchase price in an acquisition.

Workout Agreement

A remedy agreement between a borrower and a lender that deals with an event of default, foreclosure, and/or liquidation.

Zone of Insolvency

An intangible zone that a startup is in when it is close to dissolving as a result of having little to no money or assets to pay off its liabilities.