VW Podcast

The Bylaws of a corporation set forth the rules for governing corporate matters.

A Capital Account is a ledger in an LLC which tracks the contributions and distributions to members. Each member’s capital account is oftentimes adjusted by allocations and distributions of the company’s profits and losses.

A Company Agreement is an internal document for an LLC that provides the framework for how a limited liability company operates. According to the TBOC, “It governs the relations among members, managers, and officers of the company, assignees of membership interests in the company, and the company itself; and other internal affairs of the company.”

A Certificate of Formation is a legal document that is filed in Texas with the secretary of state to create a corporation, limited liability company, and similar entities. Certificates of formation will contain the entity’s basic information (name, registered agent, office address, share structure, etc.). This is known as a Certificate of Incorporation in Delaware.

A Certificate of Incorporation is a state filing that creates a corporation once filed with the secretary of state. The filing informs the secretary of state about the name the company plans to operate under, whom the state can serve process on (the registered agent), where to mail important documents, and equity classification information.

Charter is a blanket term that describes a corporation’s primary governing document. In Delaware this document is the “Certificate of Incorporation,” in Texas it’s the “Certificate of Formation,” and in California it’s known as the “Articles of Incorporation.”

Customer Acquisition Cost (CAC) is the cost to acquire a new customer. CAC can be calculated by dividing the total costs associated with acquisition by the total new customers, within a specific time period.

An Employer Identification Number (EIN) is the number issued by the IRS to a company that identifies the company as a taxpayer in the US. An EIN is required for a company to open up a bank account and file taxes.

An Employee Stock Option Plan (ESOP) is a company issued plan that allows a company to grant options to its employees and service providers.

Gamification occurs when real-world activities are made game-like in order to motivate people to achieve goals. Gamification leverages people’s natural tendencies for competition and achievement. Examples include rewarding users for achievements and earning badges.

An Institutional Investor is an entity with large amounts of resources that invests significant amounts of money on behalf of individuals and companies. Institutional investors are typically investment companies, mutual funds, brokerages, and insurance companies.

A Lifestyle Company is a startup who is no longer seeking rapid growth and an exit (through a sale or IPO), but rather plans to operate as a going concern into the indefinite future. Not a bad thing, but generally not what venture capital investors are looking for.

An Limited Liability Company (LLC) is the best of both worlds when it comes to entities. An LLC offers the benefits of limited liability, taxations as a partnership, and management flexibility. An LLC can elect to be “manager-managed” or “member-managed.”

A Limited Partnership (LP) has two classes of partners: General Partners and Limited Partners. General Partners in an LP are like General Partners in a conventional partnership (i.e., have personal liability for the debts of the business). Limited Partners are not liable for debts of the business.

Milestones are company goals used as incentives for employees or company contracts. If a company reaches certain objectives, it may receive greater funding from an investor or an employee may receive a larger bonus.

A Partnership is created, without filing anything with the state, when two or more individuals go into business for profit. Partners are personally liable for all of the partnership’s debts and liabilities, but the partners receive the benefit of pass through taxation. Partnerships are rarely intentionally created now because of other limited liability options that exist.

A Pass Through Entity passes all income and losses it receives to the company’s owners or investors to be taxed at an individual level. Some examples of pass through entities are partnerships, sole proprietorships, limited liability partnerships, and limited liability companies.

A Profit Interest Plan (Incentive Unit Plan) is used by an LLC to incentivize and compensate service providers to the company, similar to a Stock Option Plan in a corporation. An incentive unit gives the recipient a right to the future profits of the company after the date of the grant (hence, incentive units are also known as “profits interest”).

Quorum is the amount of shareholders whose presence or proxy is necessary at a meeting in order to take corporate action.

A Registered Agent is the official “contact person” for a business. A business must officially designate a registered agent to receive and accept any lawsuits, notices, or other legal documents on behalf of the entity. Texas requires every entity to assign a registered agent before it is authorized to conduct business within the state.

Scalability is whether a company’s product and operations can be successful at growing quickly and operating at a much larger scale.

An S-Corporation is a form of corporation that meets the IRS requirements to elect pass through taxation. The corporation can pass income directly to shareholders. S-corporations can be very valuable in limited instances. They are not typically recommended for startups, but may make sense for some small businesses (particularly services businesses). Please consult with an attorney and/or CPA.

A Shareholders’ Agreement (SHA) is an agreement among a company’s shareholders that sometimes exists in startups. While most of the shareholders’ rights are laid out in the formation documents, the shareholder agreement may supplement these documents and further provide how the shareholders will vote, solve disputes, and other rights.

Stock Options are an option to purchase a fixed amount of shares at a fixed price that typically vest over time.

A Strategic Investor is generally a company who makes an investment in a startup primarily for a strategic business reason, in addition to the potential for financial gain.

Short for Action by Unanimous Written Consent, a UWC is a legal document that memorializes the unanimous consent of the board of directors and/or members of a corporate entity on a specific issue or action.

Venture Capital is capital provided by investors to startups. Startups are inherently risky due to their likelihood of early failure. Because of the high risk, investors may achieve greater returns.