So, What’s with the Unicorn?

Welcome to Venture Glossary™, where we arm you with the venture startup terminology tools you need. For example, a “Unicorn” is a startup company valued at over $1 billion. Canadian tech unicorns are known as narwhals. A decacorn is a word used for those companies over $10 billion, while hectocorn is the appropriate term for such a company valued over $100 billion.

l

Lapsed Option

A Lapsed Option is an option that can no longer be exercised because some necessary condition has expired. Often stock options are granted but have a finite time period within which the options must be exercised. Once the finite period ends, the options that have not been exercised are said to “lapse.”

Example:

Once he left the startup, he only had 180 days to exercise his options before they lapsed.

Later-Stage Financing

Later-Stage Financing is a round that occurs once the startup has matured to an extent. Generally speaking, through the A or B round is early-stage financing. Everything after that is later-stage financing. If you were to really break it down, through A would be early, B & C would be mid-stage, and everything after would be later-stage. Later-stage is oftentimes pre-IPO. Contrast with Early-Stage Financing.

Launch

A Launch is when a business kicks off, often by taking its app, technology, or site live. A Launch is a great time for a startup to draw attention to its product, attract talent to its team, and introduce itself to customers. Although the typical launch involves a one-time major event, there are many different types of launches.

Lead Investor

A Lead Investor is the investor who is leading a startup’s financing round. The investor leads by (1) writing the biggest check, (2) negotiating the terms, or (3) both. Oftentimes, a round can not really start until a lead investor is identified.

Example:

We finally identified a lead investor for our $3M Series A round, so now the other smaller investors are ready to close.

Lean Startup

A Lean Startup seeks to prove its business concept as quickly and inexpensively as possible by making a Minimum Viable Product (MVP) the top priority. Popularized by Eric Ries.

More Information:
The Lean Startup Methodology

A Legal Opinion is a letter written by a lawyer providing the lawyer’s official opinion and judgment on a matter as an expert in the field. In the venture capital context, the lawyer is often asked to write an opinion on the validity of a company’s representations and warranties in financial documents.

Letter of Intent (LOI)

A Letter of Intent (LOI) is a document that indicates the material points of a deal, or intent of the parties. It is typically non-binding and a precursor to more definitive documents; though it is not uncommon for certain provisions (like confidentiality, exclusive negotiation period, or break-up fees) to be binding. See also Indication of Interest (IOI) and Memorandum of Understanding (MOU).

License

A License is an agreement between an intellectual property owner and an individual or entity for the use of the intellectual property. The individual or entity does not purchase the intellectual property, but just the right to use or benefit from the intellectual property for a certain period of time and only for certain uses.

Lifestyle Company

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.

Lifetime Value (LTV)

Lifetime Value (LTV) is the present value of the future net profit from a customer over the duration of the relationship. LTV helps determine the long-term value of the customer and how much net value a company generates per customer after calculating customer acquisition costs (See CAC).

Example:

Our CAC is $4, but our LTV is $28.

Light Preferred

Light Preferred is a round of funding that is smaller than a Series A round and gives investors preferred stock that receives less favorable treatment than preferred stock typically receives in Series A rounds.

Limited Liability Company (LLC)

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.”

Limited Liability Partnership (LLP)

A Limited Liability Partnership (LLP) is a General Partnership with an important modification: the partners are not personally liable for all debts and obligations, except to the extent they have agreed bear personal fault.

More Information:
Choosing the Right Entity
Limited Partners (LPs)

Limited Partners (LPs) are partners in a limited partnership that are not personally liable for the company’s debts or liabilities. The limited partner invests in the company but cannot exercise control over the day-to-day operations of the company. If the limited partner does exercise such control, the limited partner may lose its limited liability protection.

Limited Partners (VC Firm)

Limited Partners are the investors in a VC fund.

Limited Partnership (LP)

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.

More Information:
Choosing the Right Entity
Liquidation

A Liquidation is when a company is forced to sell its assets to pay off its liabilities because the company is going through a voluntary or involuntary bankruptcy proceeding or is winding up its business operations.

Liquidation Event

A Liquidation Event is typically defined as a sale of substantially all of the assets of the company (not in a bankruptcy scenario). In investment agreements, liquidation events often trigger investors’ rights regarding distributions, conversions, or preferences.

Liquidation Preference

Liquidation Preference specifies which investors get paid first and how much they get paid in the event of a liquidation event, such as the sale of a company. Liquidation preference helps protect investors by making sure they get their initial investment back before other parties. Preferred stockholders have preference over common stockholders.

Liquidation Preference Overhang

Liquidation Preference Overhang is the extra liquidation preference sometimes inadvertently granted to convertible note holders upon conversion. It arises when a noteholder conversion price is lower than the price per share in the next round, but the noteholder gets a liquidation price per share equal to the next round price.

Lock-up Period

A Lock-up Period is a mutually agreed upon period of time following an IPO that founders, key employees, and investors are restricted from selling their shares in the company.

z

Zebra

Coined by Quartz, a Zebra is an alternative to the business model of a Unicorn. Zebras “balance profit and purpose, champion democracy, and put a premium on sharing power and resources.”

Zombie

A Zombie is a venture-backed company that is nearly terminated, or basically “walking dead.” Usually the company is maintaining just enough cash flow to keep the doors open while an acquirer is sought. It’s not uncommon for investors to pitch in a little more money so that the company can seek a sale and the investors can try to recover most or all of their original investment.

Example:

The startup has become a zombie, with just enough cash coming in to keep the lights on while they look for a buyer.

Zombiecorn

Coined by Anthony Mirhaydari of PitchBook, a Zombiecorn is a Unicorn that becomes way overvalued, delaying the company’s exit and lengthening the time before investors can sell their shares for a profit.

#

1x

1x means “one times original purchase price” in conjunction with a liquidation preference. Liquidation preferences can be participating or non-participating.

Example:

The VC firm was too aggressive; they wanted a 2x liquidation preference, instead of a 1x.

4 Years with a 1-Year Cliff

4 Years with a 1-Year Cliff is the typical vesting schedule used by startups. A one year cliff means that nothing vests for the first year, but after a year the vesting would catch-up to 12/48, and then the remaining balance would vest over three years (typically 1/36 a month for 36 months).

409A Valuation

Section 409A of the Internal Revenue Code regulates the treatment of non-qualified deferred compensation to service providers for federal income tax purposes. A company must issue stock options at fair market value in order to legitimately benefit from this section of the code and will typically hire a third-party agency to issue a report determining exactly what that is. The report is commonly known as a 409A valuation and they are critical to issuing stock options for a venture backed company. Most startups order at least one per year, or after a material financing event, whichever is sooner.

Example:

We have to get our 409A valuation completed before we can issue the next round of options.

83(b) Election

An 83(b) Election is an election made under the Internal Revenue Code that allows a person receiving shares (or units) under a vesting schedule to recognize income based on the entire value of the shares as of the date of the grant – instead of as the shares vest. Basically, you accelerate the ordinary income taxes. In the context of a startup, the ordinary income liability at the time of the grant is negligible because the value of shares early on is so nominal. You want this. But if you fail to file an 83(b) election, then you will be liable for paying ordinary income taxes on the difference between fair market value and the grant price when the shares vest. If your company’s value is increasing over time, this could be a nasty consequence.

q

Qualified Financing

A Qualified Financing is a threshold amount of financing raised that triggers the conversion of a convertible note into equity. The conversion may be automatic or optional.

Qualified IPO

A Qualified IPO is an IPO that is being sold at a price and value greater than the contemplated value in the financing documents.

Qualified Small Business Stock – Section 1202 of Internal Revenue Code

Section 1202 of the Internal Revenue Code provides for beneficial tax treatment for investors who purchase Qualified Small Business Stock (QSBS) in a company. If a stock qualifies as QSBS, investors may exclude up to 100% of the federal capital gains tax associated with the sale of the QSBS, subject to certain limitations. In order for stock to qualify as QSBS, the company and investor must each meet and maintain compliance with a list of certain requirements by the IRS. The primary requirements include, but are not limited to, the following: 1) the company must be a C-corp, 2) the company must be engaged in a “qualified” trade or business, 3) the company must have less than $50 million in assets at the time of the stock issuance, 4) investors cannot be a corporation, and 5) investors must hold the QSBS for at least 5 years prior to selling. Given the complexity associated with QSBS requirements, we recommend consulting with legal and tax advisors before taking steps to qualify any stock as QSBS.

Quiet Period

A Quiet Period or (waiting period) is a time period where a company cannot release certain information without violating federal security laws. The period is the time between when a registration statement is filed and when the registration is approved by the SEC.

Quorum

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

u

UCC Financing Statement

A UCC Financing Statement is a legal form that creditors file to provide notice of their interest (current or future) in the personal property of debtors. It specifically details about the pledged collateral, the terms of the loan, and whether the loan is secured or unsecured. You may also see this called a “UCC-1” or “UCC-1 financing statement.”

Un-Launch

An Un-Launch is when a startup releases its product without fanfare, relying entirely on public reaction. This strategy works well for products that are so popular that they don’t need the hype of a hard launch, although an Un-Launch often means sacrificing press attention.

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.

Example:

A common example of a UWC is a Unanimous Written Consent in Lieu of an Organizational Meeting, which is used to approve an entity’s bylaws or Operating/Company Agreement, and other things requiring unanimous consent, without a formal meeting.

Underwater

Underwater is an adjective that is used to describe a security whose fair market value today is less than its original issuance or exercise price; in other words, if the security expired today, it would be worthless.

Underwriter

An Underwriter is responsible for selling new securities to the public on behalf of companies. Underwriters are traditionally investment banks.

Unicorn

A Unicorn is a startup company valued at over $1 billion. Canadian tech unicorns are known as narwhals. A decacorn is a word used for those companies over $10 billion, while hectocorn is the appropriate term for such a company valued over $100 billion.

Uniform Commercial Code (UCC)

The Uniform Commercial Code (UCC) is a set of model rules drafted to provide uniformity across every state. The UCC primarily covers commercial transactions, such as the sale of goods, property, and secured transactions. The UCC has nine different articles relating to aspects of commercial transactions. States have adopted entire articles, provisions from articles, or variations of the articles and provisions.

Unrelated Business Taxable Income

Unrelated Business Taxable Income is income generated by a tax-exempt entity through taxable activities that are essential to generate income for the entity but not related to the entity’s main function. Such income is not exempt from income tax. You may hear it referred to as “UBTI.”

Unsecured Debt

Unsecured Debt is debt that is not backed by collateral in any of the assets of a company. Because the debt is not secured by any specific assets as collateral, any debt secured by specific collateral will take priority over the unsecured debt in the event of dissolution of the startup and sale of its assets.

Unvested

Unvested is a term used to describe the status of securities that remain subject to forfeiture or mandatory buyback provisions, even after being set aside for, or granted to, an individual. Unvested securities typically transform into vested securities, which are not subject to forfeiture or buyback, over time or upon the meeting of certain benchmarks or conditions specified in a Restricted Stock Purchase Agreement (RSPA).

Utility Tokens

Utility Tokens are blockchain based units that grant holders access to goods or services. Utility tokens are likely exempt from securities laws if they function more like a coupon for a product instead of an equity interest in a company.

w

Warm Introduction

A Warm Introduction is an introduction made by an existing acquaintance to someone with whom you would like to become aquatinted, that is coupled with some sort of personal endorsement. In the venture capital world, a warm introduction is the gold standard.

Example:

Startup Founder: Hey Jerry, I just want you to know that I really value our friendship, and if you ever need anything, anything at all, I’m your guy. Because that’s what friends do for each other.

Jerry: Thanks… What do you want?

Founder: Nothing much. Just a warm introduction to 10 of your closest Accredited Investor friends.

Warrant

A Warrant is a security that gives the warrant holder the right, but not the obligation, to buy or sell a security at a certain price before a set expiration time or milestone.

Example:

We used a warrant for a few additional shares as a kicker to get the deal done.

Wash-Out Round

A Wash-Out Round is a round of financing whereby the founders are so diluted that their voting power becomes minimal, or they are essentially “washed-out.”

Example:

The founders got washed-out after the massive down round.

Weighted Average Anti-Dilution

Weighted Average Anti-Dilution is an investor protection tool in which a preferred shareholder’s conversion price (the price by which preferred shares are converted to common shares) is adjusted in a subsequent financing round to a lower price per share, calculated using the share price and number of shares issued in the new round. The result is that each preferred share converts into a greater number of common shares, thereby protecting the preferred shareholder from dilution.

Weighted Average Cost of Capital (WACC)

Weighted Average Cost of Capital (WACC) is a formula used to determine a company’s cost of capital. The WACC is the sum of the average equity cost and the debt cost after tax. The average is weighted based on the ratio of debt to debt plus equity and equity to equity plus debt.

White Label

White Label is using a third party’s back-end or core technology with your own skin or front-end.

Write-Down

A Write-Down is a reduction in the reported value of a company or asset.

Write-Off

A Write-Off is a reduction in a company’s or asset’s reported value to zero.

v

Valuation

Valuation is the process of determining a company’s worth. Valuations can be determined as multiplies of the company’s metrics or comparisons to other companies that recently valued at certain amounts.

Example:

“Valuation” is probably the most common term from the hit TV show Shark Tank.

Startup Owner: “I am seeking $100,000 for 10% equity in my company.”

Shark: “The valuation of your company is $1,000,000, yet your sales are only $20,000. The valuation of your company is way too high. You’re dead to me. I’m out.”

Venture Capital

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.

Venture Capital Fund

Venture Capital Funds are investment funds that invest in startups and seek high returns in exchange for the risky nature of investing in startups.

Example:

Sequoia Ventures, Khosla Ventures, and Andreesen Horowitz are well known venture funds.

Venture Capitalist (VC)

A Venture Capitalist (VC) is a person whose job is investing in startups – a professional investor, so to speak. Venture capitalists work for venture capital firms.

Example:

Marc Andreessen of Andreessen Horowitz is one of the most famous former entrepreneurs turned venture capitalist.

Venture Debt

Venture Debt is a bank lending to startups. Because startups are so risky, they generally do not qualify for traditional bank loans until much later in their life cycle. There are, however, a handful of banks who will lend to startups as part of a large venture round.

Venture-Backed Startup

Venture-Backed Startups are startups receiving venture capital funding. Most companies do not receive venture capital in early rounds of financing until they have proved the company is viable.

Example:

First-time founder: “Bro, my startup is now venture-backed.”

Experienced founder: “Congrats on giving up your startup.”

Vested

Vested refers to the amount of equity that a recipient (i.e. an employee) owns and is no longer subject to forfeiture. Typically, stock options “vest” as the employee continues her employment with a startup, meaning that the employee can now exercise the options and own the stock outright.

Vesting

Vesting is the period of time that securities (usually stock options) may be subject to forfeiture or repurchase based on meeting certain time or milestone criteria. Vesting co-founder equity helps to protect the company’s equity – so that a departing co-founder doesn’t depart with a lot of equity, but rather only the equity that has vested.

Example:

We offered our new hires the standard package – equity options that vest over 4 years with a 1 year cliff.

Vesting Schedule

A Vesting Schedule is the timeline over which a stock recipient’s equity (usually stock options) vests. The typical vesting schedule is four years with a one year cliff. See Four Years with a One Year Cliff.

Vintage Year

Vintage Year is the year a VC fund first started investing.

Voting Rights

Voting Rights are the rights and/or obligations of a shareholder(s) to vote on certain corporate matters.

More Information:
The 50-50 Equity Split(up)

t

Tag Along Rights

Tag Along Rights are contractual obligations protecting minority shareholders and are most common in venture capital deals. An illustration of how tag along rights work is when a majority shareholder sells his or her portion of the company and minority shareholders have a contractual right to join the transaction and sell their minority stakes in the company under the same terms as the majority shareholder.

Takeover

A Takeover occurs when an acquiring company “takes over” the operations, holdings, and debt of a target company. Takeovers can be hostile, such as when the acquiring company purchases a substantial stake in the target company as soon as the markets open (a “dawn raid”). Alternatively, an acquisition or merger can be a welcome takeover, involving collaboration among the acquiring and target companies to decide the terms of the deal.

Tender Offer

A Tender Offer is an offer by an issuer or a third party to purchase a significant block of existing shares of a publicly or privately traded company.

Term Sheet

A Term Sheet is a document that details the terms and conditions of the financing for an investment opportunity between an investor and a startup. It is usually non-binding. Note that in early stages of financing – Friends & Family and Seed – the company drafts the term sheet. But typically, once you get to a Series A round, the investors will draft the term sheet, or letter of intent (LOI).

Example:

We just sent out our Seed term sheet to a handful of interested investors. Hopefully one of them will lead our round.

Texas Business Organizations Code (TBOC)

The Texas Business Organizations Code (TBOC) codifies the statutes that govern for-profit and non-profit entities in Texas.

Total Addressable Market (TAM)

The Total Addressable Market measures the total amount of people or money spent in the market that encompasses a product.

Example:

The investors decided to pass on the startup because the TAM wasn’t large enough to be an attractive business opportunity.

Total Contract Value (TCV)

Total Contract Value (TCV) is simply the total value of the contract, including value from any one-time charges, services fees, and recurring charges.

Trade Secret

A Trade Secret is any confidential business information which provides a competitive advantage. Trade secrets are often protected by contract law but are also protected by federal and state statutes. Examples of trade secrets include sales methods, distribution methods, advertising strategies, client lists, and formulas.

Tranche

Tranche is financing by investors where money is typically invested over two or three milestones based on the progress of the company.

Example:

Our first investor tranched his investment – 33% upfront, 33% once we got to 10,000 downloads, and the final 33% once we hit $100k in revenue.

Trough of Sorrow

The Trough of Sorrow is a period in the life of a startup in which the excitement of founding a startup has worn off, but before the business really hits its stride. Many startup founders experience this struggle, especially coming out of an exciting accelerator.

Turnaround

A Turnaround is an increase in a company’s financial metrics after adopting a new strategy. Companies may experience increases in revenue, profit, or goodwill.

r

Ramen-Profitability

A startup reaches Ramen-Profitability when it is making enough money to cover costs and living expenses for its staff.

More Information:
Ramen Profitable (Paul Graham)
Ratchet

A Ratchet is an anti-dilution protection that, in a down round, allows an investor to adjust the price it paid to prevent all or some of the dilution by maintaining the same percentage or a slightly lower percentage of ownership in the company.

Recapitalization

A Recapitalization is a change in a startup’s capital structure to an optimal mix of debt and equity. A company often must exchange one form of security for another.

Recurring Revenue

Recurring Revenue is the measure of revenue components that are recurring in nature. This excludes one-time (non-recurring) fees and professional service fees.

Redemption Right

A Redemption Right is a right to make a company buy back, or “redeem” stock. A redemption right is typically requested by an investor in conjunction with a financing round.

Example:

The VC gave us a great valuation, but he also has a redemption right after five years.

Redline

A Redline is a document which has been marked up with comments or modifications and has been “redlined” so that the other party can easily identify the changes.

Registered Agent

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.

More Information:
What is a Registered Agent?
Registration

Registration is the process of notifying the SEC that the company plans to sell shares to the public and to register the shares with the SEC under the Securities Act of 1933.

Registration Rights

A Registration Right entitles an investor who owns preferred stock the ability to require the company to list its shares on a public exchange. This is so that the investor can sell them on an open market and be able to liquidate her investment.

Regulation A+

Regulation A+ is a newly revamped securities regulation exemption that consists of 2 tiers: Tier 1, which would consist of securities offerings of up to $20 million in a 12-month period, with no more than $6 million in offers by selling security-holders that are affiliates of the issuer; and Tier 2, which would consist of securities offerings of up to $50 million in a 12-month period, with no more than $15 million in offers by selling security-holders that are affiliates of the issuer.

Regulation CF

Regulation CF is the set of rules and forms that implements crowdfunding.

Regulation D (Reg D)

Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. The exemptions are commonly known as Regulation D, and the ’33 Act contains three rules (Rule 504, Rule 505, Rule 506) which provide exemptions from the registration requirement, allowing some companies to offer and sell their securities without having to register the securities with the SEC. (You might still be subject to state security clauses and anti-fraud clauses, even if you do have exemptions). Please consult with an attorney.

Regulation D Rule 501

Regulation D Rule 501 is where the definitions are listed in Regulation D.

Regulation D Rule 502

Regulation D Rule 502 refers to the section of Regulation D that explains how Regulation D works.

Regulation D Rule 503

Regulation D Rule 503 requires companies (the “issuers”) to file a Form D with the SEC in certain situations and is usually applicable to venture offerings.

Regulation D Rule 504

Regulation D Rule 504 provides an exemption for the offer and sale of up to $5,000,000 of securities in a 12-month period. General offering and solicitations are permitted under this rule as long as they are in accordance with state law and restricted to accredited investors. Rule 504 allows companies to sell securities that are not restricted if the securities are only sold to accredited investors and the securities meet certain state registration rules commonly referred to as “Blue Sky” rules. Please consult with an attorney.

Regulation D Rule 505

Regulation D Rule 505 provides an exemption for offers and sales of securities totaling up to $5 million in any 12-month period. Under this exemption, securities may be sold to an unlimited number of “accredited investors” and up to 35 “nonaccredited investors,” who do not need to satisfy the sophistication or wealth standards associated with other exemptions. Purchasers must buy for investment only, and not for resale. The issued securities are restricted, in that the investors may not sell their securities for at least six months, oftentimes up to two years, without registering the transaction. Any offering under Rule 505 should provide significant disclosures in the offering memorandum. Also, Rule 505 exemptions impose a level of financial reporting that Rule 504 companies do not have to meet. Note: the SEC has repealed Rule 505, to be effective on May 22, 2017. Please consult with an attorney.

Regulation D Rule 506

Regulation D Rule 506 is a “safe harbor” for the private offering exemption. Under this rule, companies can raise an unlimited amount of capital to an unlimited number of accredited investors and up to 35 other purchasers. Also, subject to certain restrictions, the company may use general solicitation or advertising to market the securities. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated –  that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment. Further, purchasers receive restricted securities, which may not be freely traded in the secondary market after the offering. Lastly, the seller must be available to answer questions by prospective purchasers. Please consult with an attorney.

Representations and Warranties

Representations and Warranties are certifications of certain important facts by a party to an agreement to the other party to the agreement.

Repurchase Option

A Repurchase Option is a company’s right to buy a shareholder’s stock upon some condition. Often, founders’ shares have a repurchase option if the founder leaves the company within a certain amount of time.

Reserved Shares

Reserved Shares are company shares that are reserved for some internal purpose and will not be issued to shareholders. Some shares are required to be reserved. For example, if a company issues preferred stock, the company must reserve enough shares for the preferred stock to convert into common shares.

Restricted Stock

Restricted Stock is ownership shares of a corporation that are unregistered. Because these shares are unregistered, the stock is non-transferable and can only be transferred in compliance with certain SEC regulations. Restricted stock is most commonly granted to executives, directors, and founders of the company. In an LLC, restricted units are the functional equivalent of restricted stock.

Restricted Stock Purchase Agreement (RSPA)

A Restricted Stock Purchase Agreement (RSPA) is an agreement issuing restricted stock. RSPAs are typically granted to founders to prevent the founder from leaving the company prematurely and taking a lot of the ownership with her. The RSPA establishes when the shares will fully vest and belong to the founder. Typically, the RSPA will vest over four years with a one year cliff.

Return on Investment

Return on Investment is the percentage of proceeds received by an investor as a result of an investment.

Revenue

Revenue is money that is brought into a company by its business activities (typically from sales).

Example:

Founder: “We’re pre-revenue right now.”

Investor: “Call me when you’re post-revenue.”

Reverse Dilution

Reverse Dilution is a term used to describe when some shareholders’ stock is repurchased by a company and the company’s remaining shareholders’ ownership percentage is increased.

Reverse Stock Split

A Reverse Stock Split is a corporate action by which a company reduces the number of outstanding shares. You may also hear it called a “stock consolidation” or a “share rollback.”

Reverse Vesting

Reverse Vesting is when founders receive all their shares and rights in those shares up front, but the shares are subject to repurchase by the company if the founder leaves. Then, the vesting schedule details that the longer the founder stays with the company the more shares vest and are safe from repurchase if the founder leaves the company.

Right of First Offer (ROFO)

The Right of First Offer (ROFO) is a contractual obligation by the owner of an asset to negotiate the sale of the asset with the rights holder before offering sale of the asset to any third parties. In the context of startups, this usually gives an investor the right to purchase his or her pro-rata ownership of any new securities issued by a startup. This is a way to prevent ownership dilution.

Right of First Refusal (ROFR)

The Right of First Refusal (ROFR) is a contractual right for companies to purchase any shares that shareholders want to sell before the shares are offered to outside buyers.

Example:

For example, VCs are usually given a Right of First Refusal after an initial round of financing in a startup to purchase any shares desired to be sold by founders.

Right of Rescission

The Right of Rescission is a shareholder’s right to rescind its investment agreement forcing the company to return the investor’s investment in full in exchange for the company’s shares.

Rights of Co-Sale with Founders

Rights of Co-Sale with Founders is a clause VC funds often want in investment agreements because it allows the fund to sell its shares at the same time as founders if the founders choose to sell their shares.

Risk Tolerance

Risk Tolerance is the level of risk an investor is comfortable with as the investor seeks investments.

Road Show

A Road Show is a company presenting its pitch deck in many cities attempting to raise capital.

Example:

For example, a startup will often go on a Road Show to pitch to various VCs when attempting to raise capital for a round of financing.

Rolling Close

A Rolling Close is a fundraising structure that is not limited by a predetermined value and allows a company to receive investments on an ongoing basis. After an initial investment closing, additional investors are allowed to invest in the same round with the same terms (generally within a 30 to 180 day window).

Rolling Launch

A Rolling Launch is a launch in which a startup follows a carefully laid plan of outreach activities during the weeks before and after the actual event. A Rolling Launch may include making the product available to industry influencers in advance, building anticipation for the product on social media, providing free trials or demos, and getting marketing partners involved in the launch.

Rollup

A Rollup is an acquisition or merger of a smaller company by a larger company in the same market. The larger companies often purchase the smaller companies to optimize their production and distribution channels.

Round

A Round is a financing event by which startups obtain investment, generally from family and friends, angel investors, or venture capitalists. The round is the entire set of investors in a particular offering or class of equity.

Royalties

Royalties are fees paid to a property owner for the use of its property. Royalties are typically paid for the use of intellectual property.

Rule 144

Rule 144 is an exemption from SEC registration that allows all sellers to resale registered or unregistered securities through public markets if certain requirements are met.

Rule 145

Rule 145 is an SEC registration exemption which exempts shares acquired in a merger, acquisition, or consolidation from registration prior to the sale.

Rule 701

Rule 701 is a broad federal securities registration exemption in the Securities Act of 1933 which exempts equity incentive securities if the securities are granted through a written agreement and in accordance with a written plan.

Runaway Valuation

A Runaway Valuation is a valuation that soars due to illogical reasons (i.e. unjustified investor demand for a hot startup). Runaway valuations can be harmful to the next funding round, or set a future valuation target that is untenable.

Runway

Runway refers to the amount of time until a startup goes out of business, assuming current income and expenses stay constant. Usually, the more capital received through financing, the longer the runway for a startup.

p

Paid-In Capital is the aggregate amount of capital received in return for the sale of equity in the company.

Par Value

Par Value is the the initial value of a single share, and the lowest sales price a startup can receive for its shares. Typically, when a company first organizes, the shares have no or a nominal par value such as $0.0001.

Pari Passu

Pari Passu is a Latin phrase meaning “Equal Footing.” Pari Passu refers to the equal treatment of multiple parties without any display of preference.

Participating Preferred Stock

Participating Preferred Stock is preferred stock that receives a liquidation preference, or a priority right upon the company’s liquidation (exit).

Participation Rights

Participation Rights, in regard to preferred stock, are when a preferred stockholder receives its liquidation preference and additionally receives disbursements in equal proportion to its ownership percentage along with the rest of the shareholders.

Partnership

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.

Party Round

A Party Round is a financing round with many participants, usually at small dollar amounts.

Pass Through Entity

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.

Patent

A Patent is an exclusive right granted by a government to manufacture, use, or sell an invention for a certain period of time.

Pay-to-Play

Pay-to-Play provisions require investors to invest in a future capital round or “pay” the consequences of losing some rights ranging from losing a liquidation preference to losing voting rights.

Payment in Kind (PIK)

Payment in Kind (PIK) securities are securities that distribute dividends in the form of equity or other property rather than cash.

Pebcak

Pebcak, “Problems Emerge Between Chair and Keyboard,” is a sardonic programmer term for what happens when users are too dumb to use software correctly.

Perpetual Warrant

A Perpetual Warrant is a security that gives the warrant holder the right, but not the obligation, to buy or sell a security at a certain price. Unlike a warrant, however, a perpetual warrant has no expiration date and could theoretically last forever.

Piggy-Back Rights

Piggy-Back Rights are an investor’s rights to be included in the company’s registration of securities with the SEC. The registration of securities is often initiated before a company undergoes an IPO.

PIK Dividend

A PIK Dividend is a dividend paid in the form of additional stock to a stockholder, usually preferred stock. PIK means payment in kind.

Pitch Deck

A Pitch Deck is a brief presentation used to provide investors with a quick overview of a business plan.

Pivot

A Pivot is a wholesale change of a startup’s current business model in an attempt to capitalize on a totally different market opportunity.

Placement Agent

A Placement Agent is an individual or firm that assists venture capital and private equity fund managers in finding institutional investors.

Portfolio Company

A Portfolio Company is a company that is part of a venture capital or private equity fund’s investment portfolio.

More Information:
Getting to “No.”
Post-Money Valuation

A Post-Money Valuation is the valuation of a startup immediately after consummation of an investment round. This is calculated as pre-money valuation + cash invested = post-money valuation.

Example:

We raised $1M on a $5M pre-money valuation, so our post-money valuation is $6M.

Pre-Money Shares

Pre-Money Shares are the amount of fully-diluted outstanding shares before a company raises a capital round. Contrarily, post-money shares are the sum of the outstanding shares issued to the new investors and the pre-money shares.

Pre-Money Valuation

A Pre-Money Valuation is a company’s value before it has received any investment. The pre-money valuation determines how much equity an investor can purchase in the company for its investment.

Preemptive Rights

Preemptive Rights are given to shareholders, and before the company can issue additional shares, the company must give the shareholder the option to purchase the amount of newly issued shares that would maintain the shareholder’s percentage of ownership.

Preference

Preference is having a priority over other shareholders, usually regarding distributions in the form of dividends and proceeds from the sale of a company.

Preferred Return

The Preferred Return is the amount of return the preferred shareholders will receive on the investment. If the preferred return is not met, there is said to be an overhang, and no other shareholders will receive a return.

Preferred Stock

Preferred Stock is a type of equity security that is preferred or has preferences over the common stock, largely in terms of dividend payments and fixed payments upon a corporation’s liquidation.

Prepayment

Prepayment is the payment in full of an obligation before the maturity date of the obligation.

Price Cap

A Price Cap, also known as a Conversion Cap or Valuation Cap, is the greatest valuation used to convert a convertible note into equity in the company.

Price Per Share

The Price Per Share is the price for a single share of stock. The price per share can be determined by dividing the pre-money valuation by the number of outstanding shares. $1.5 million pre-money divided by 10,000,000 shares is $0.15 price per share.

Priced Round

A Priced Round (or Equity Round) is any round of financing in which investors receive a set amount of equity for an agreed upon price. Contrast with Convertible Debt Round.

Primary Shares

Primary Shares are a company’s shares sold by the company rather than by shareholders.

Principal (VC Firm)

A Principal is a junior deal partner at a venture capital firm.

Private Company

A Private Company is a company whose shares are privately sold and owned and are not traded on a public market. Unlike public companies, private companies’ stock is often owned by a few shareholders.

Private Equity

Private Equity is equity capital that is not quoted on a public exchange and refers to investments in private companies.

Private Offering

A Private Offering is a company selling its securities to private-accredited investors without registering the securities with the SEC.

Private Placement

A Private Placement is a private sale of securities to a small number of investors. Most sales of securities must be registered with the SEC, but many private placements fall within several exemptions to SEC Rules.

Private Placement Memorandum (PPM)

A Private Placement Memorandum (PPM) is a document to raise capital that provides potential investors with information about the type of investment, the company’s financial health as illustrated by financial statements, the risks associated with the investment, and the company’s objectives during the term of the investment.

Pro Forma

Pro Forma is generally a financial statement or cap table provided to investors that shows the company’s financial structure or capitalization structure if certain assumptions are accepted as true.

Pro-Rata

Pro-Rata means proportional. For instance, if investors have a pro-rata Right of First Offer, then that means each investor will have a right to purchase new securities in proportion to their ownership. I.e. if an investor owns 5% of a company, he/she will have the ability to buy 5% of the securities in the new offer.

Product/Market Fit

Product/Market Fit is a term used to describe when a product meets an existing need within a market. In the context of startups, a Product/Market Fit is often discussed as a necessary precondition to growth.

Example:

An ice cream truck at the end of a rigorous but popular hike is an example of a product/market fit.

Profit and Loss (P&L or PnL)

P&L stands for profit and loss. P&L is commonly used to refer to the P&L statement or income statement which outlines a company’s income and expenses for a given year.

Example:

Daymond John developed his business acumen by reading the Red Lobster PNL’s while he was a waiter for the restaurant.

More Information:
< FUBU: Daymond John
Profits Interest Plan

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”).

Promissory Note

A Promissory Note is a debt instrument whereby a borrower promises to pay a lender in accordance with terms defined in the note.

Promote

See Carried Interest.

Proprietary Rights

Proprietary Rights are property rights that only the owners of the property possess.

Prospectus

A Prospectus is used to solicit potential investors in the sale of securities. Prospectuses often include pertinent information including the company’s business plan, capitalization structure, management structure, and information about the securities being sold. The SEC rules or a state’s securities laws may require the prospectus to be filed as part of the registration process.

Protective Provisions

Protective Provisions are provisions in financing docs which grant an investor (typically a preferred investor) certain rights. Typically the provisions give investors board rights or the right to veto certain board or company actions.

Proxy Voting

Proxy Voting is the delegation of a shareholder’s voting rights to another shareholder. Shareholders may request the right to vote other shareholders’ votes to pass corporate actions, or alternatively, shareholders who are unable to attend a shareholder meeting may allow another shareholder to vote their shares.

Public Company

A Public Company is a corporation whose securities are traded on a public exchange. These securities must be registered with the SEC.

Public Offering

A Public Offering is a company selling its equity to the public. Public offerings in the U.S. must be registered with and approved by the SEC.

Purchase Agreement

A Purchase Agreement is an agreement that memorializes the sale and purchase of property. Startups are often involved in many purchase agreements, including Asset Purchase Agreements, Membership Interest Purchase Agreements, Stock Purchase Agreements, Equity Purchase Agreements, etc.

Put Right

A Put Right is a purchased option to sell a certain amount of a security at a fixed price back to the option seller before a certain date.

Putative Issuance

Putative Issuance refers to the issuance of any class or series of shares of a corporation that was purportedly created or issued as a result of a defective corporate action. A Putative Issuance most commonly occurs when a corporation issues shares in excess of its Authorized Shares. The impact and effect of a Putative Issuance varies by state and commonly requires specific remedial measures be followed to validate such issuance.

o

Offering Documents

Offering Documents are the documents that are involved with the sale of a startup’s securities (see Private Placement). These documents include various agreements specifying the rights of all parties involved, the risks associated with the sale, an agreement for the purchaser to buy the securities, as well as other documents related to each side’s rights and responsibilities.

Offering Memorandum

An Offering Memorandum is a legal document drafted by startups to provide details of an investment round to potential investors. See Private Placement Memorandum (PPM).

One Deal at a Time

A fund where deals are presented one at a time to the investors and the investors can choose to participate on a deal-by-deal basis. Contrast this with Blind Pool.

Operating Cash Flow

Operating Cash Flow is a company’s cash flow from operating the business, and not from investments or raising capital. It is calculated as net operating income plus depreciation.

Operating Partner (VC Firm)

An Operating Partner is a position at a VC firm that is normally under managing director, but above principal.

Option Pool

An Option Pool is a group of shares reserved by the company for long-term compensation to management and employees.

Ordinary Income Tax

Ordinary Income Tax is a tax on income at rates published by the IRS. Ordinary income tax is generally significantly higher than capital gains tax.

Example:

Our accountant set us up to minimize ordinary income taxes.

Outstanding Shares

Outstanding Shares refers to the number of shares that a company has issued to shareholders (including founders, investors, advisors, and option holders).

Overhang

Overhang is when preferred stock shareholders’ liquidation preference is greater than the amount of proceeds the company receives for liquidation. If there is overhang, none of the proceeds will be disbursed to the common shareholders.

Oversubscription

Oversubscription occurs in any offering of securities when the demand for those securities exceeds the maximum size of the offering. When an offering becomes oversubscribed, investors can either elect to accept an allocation that is a reduced percentage of their original ask or withdraw from the investment all together.

n

Nano VC

A Nano VC is a venture fund with less than $100M in funds.

Narrow-Based Weighted Average

The Narrow-Based Weighted Average is an anti-dilution protection for equity holders. If equity is sold at a lower price than the price an investor paid previously, the price the investor previously paid is discounted. The price the investor originally paid and the new lower price are put into a weighted average formula. It is called narrow-based, as opposed to broad-based, because only outstanding common stock is used for the formula rather than all common stock on a fully-diluted basis. Narrow-based is more investor friendly than broad-based.

National Venture Capital Association (NVCA)

The National Venture Capital Association (NVCA) is a venture trade association that pools resources and fosters innovation.

Newco

Newco is a name given to a hypothetical company for ease of description before the company actually has a name. Well, other than the few companies actually named Newco. Yes. They exist. We checked.

Next Level

Next Level is the startup community’s highest acclaim or stamp of approval for new products or developments.

Ninja

A Ninja is a smart and talented person with a specific set of skills.

No-Action Letter

A No-Action Letter is a letter from the SEC that states the startup’s anticipated action most likely will not result in enforcement action by the SEC. A startup who does not know if its service or product will break federal securities laws should request a No-Action Letter.

No-Shop Clause

A No-Shop Clause is a provision in an agreement, usually a letter of intent or term sheet, whereby the parties agree not to pursue an investment or deal with any third parties for a set period of time.

Example:

Our term sheet included a thirty-day no-shop clause.

Non-Accredited Investor

A Non-Accredited Investor is an investor who fails Rule 501 of Regulation D of the SEC’s accredited investor test. In other words, the investor has less than a million dollars in net worth a receives less than $200,000 a year (or $300,000 with a spouse) in income. Many states’ Blue Sky laws place limits on the number of non-accredited investors that can be included in a financing round, or companies must make more disclosures.

Non-Compete Agreement

A Non-Compete is an agreement signed by employees and management prohibiting the individual from working for or forming a competing company. Non-competes include a specified geographic region and last for a specified time period after termination.

Non-Disclosure Agreement (NDA)

A Non-Disclosure Agreement (NDA), also known as a confidentiality agreement, is a contract in which a party agrees to protect confidential information from disclosure to other parties. Be leery of asking investors to sign NDAs; they see too many deals and chances are that your startup is not unique.

Non-Participating

Non-Participating, in regard to preferred stock, is preferred stock that only receives liquidation disbursements equal to its liquidation preference and does not receive additional liquidation disbursements in equal proportion to its ownership percentage.

Non-Qualified Stock Option (NQSO or NSO)

A Non-Qualified Stock Option (NQSO or NSO) is a stock option that does not qualify for treatment as an incentive stock option under the Internal Revenue Code. Accordingly, when the option is exercised, the holder will pay ordinary income tax on the difference between the exercise price and the grant price.

Non-Solicitation Agreement

Non-Solicitation Agreements are usually in employment agreements to prevent the contracting employee from soliciting the company’s other employees and the company’s customers for a competing business venture.

Non-Voting Stock

Non-Voting Stock is stock without voting rights. Issuing non-voting stock allows the company to raise capital without giving up decision making power or control to new investors.

m

Major Investors

Major Investors are investors who own a large portion of a company’s shares and as such receive preferential rights. The amount of shares necessary to become a major investor varies among financial documents and companies.

Majority Shareholder

A Majority Shareholder is a shareholder who owns more shares in the company than any other shareholder.

Management Fee

The Management Fee is a fee charged by fund managers to investors for the management of the investments. Most VC management fees are two to three percent of the total amount of the fund’s capital commitment.

Management Rights

Management Rights are often required by an investor as part of the terms of an investment into a startup, usually in order to satisfy certain ERISA requirements. Management rights may be comprised of certain information and inspection rights, board observation rights, and a range of discretion regarding involvement in the core management rights and operational management rights of the company.

Managing Director (VC Firm)

A Managing Director is a senior partner at a VC firm.

Mandatory Redemption

Mandatory Redemption is an investor right to require a company to repurchase some or all of his or her shares at a future date for a given price.

Market Terms

Market Terms are terms in an agreement that are standard or “market.” In regard to venture capital agreements, most startups and investors use SeriesSeed.com and NVCA.org as a baseline for setting terms for those rounds.

More Information:
SeriesSeed.com
NVCA.org
Material Adverse Change Clause

Material Adverse Change Clause is a contractual provision that states the transaction will not take place if some event occurs. These provisions are found in venture financings.

Materiality Qualifier

Materiality Qualifier is modifying a part of a contract to require a higher threshold. For example, a “material” breach of a contract requires the bad actor to commit a greater wrong than just a breach of any term of the contract.

Materiality Scrape

A Materiality Scrape is a provision generally found in purchase agreements (i.e. stock purchase agreement, asset purchase agreement, merger agreement, etc.) that effectively eliminates any materiality qualifiers in representations and warranties for determining whether a breach has occurred in regard to indemnification provisions.

Memorandum of Understanding (MOU)

See Letter of Intent (LOI) and Indication of Interest (IOI).

Mergers and Acquisition (M&A)

Mergers and Acquisition (M&A) is a term used to refer to the corporate strategy involved in the consolidation of companies.

Example:

This is my boyfriend, Brice. He works in M&A for Globo Bank.

Micro VC

A Micro VC is a venture fund with less than $25M in funds.

Milestones

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.

Minimum Viable Product (MVP)

The Minimum Viable Product (MVP) is the most basic commercially viable iteration of a product. Once an MVP is launched, a company can find issues with the product and correct them with a better, bug-free product.

Moat

Moats are the advantages a company has over its competitors. Moat is often used to refer to the head start and infrastructure that larger, more established companies have over startups.

Monthly Recurring Revenue (MRR)

Monthly Recurring Revenue (MRR) is the amount of revenue a company generates from recurring payments in a single month.

Most Favored Nations Clause

A Most Favored Nations Clause requires that the company gives the investor the best possible investment terms in the future. Note that this right usually expires after the next round. From a company perspective, try to avoid MFN clauses when possible.

Example:

Don’t forget that our seed investors have a MFN clause, so they’ll get the same rights as the Series A investors.

Multiples

Multiples is a valuation method of companies. A company’s value will be expressed by multiplying certain metrics like net income or revenue and comparing them against what public and private companies’ values were with similar multiples. If a similar public or private company is worth a certain multiple times revenue, then the company’s value will be similar. A private company’s valuation, however, will be lower due to the shares not having as great of a market as public companies.

a

Accelerated Vesting

Accelerated Vesting is a process whereby a holder of restricted equity has the vesting schedule sped-up, or accelerated, upon the occurrence of certain events, i.e. termination of the holder without cause or a sale of the company.

Acceleration Clause

An Acceleration Clause refers to a contractual clause which allows debt owed over time to be “accelerated” so that it is owed immediately. You see this most often in promissory notes, where a default or breach of a provision of the agreement will cause the entire debt obligation to accelerate and become due immediately.

Accelerator

An Accelerator is a program whose intent is to “accelerate” the development of startups. Typically an accelerator will last one to three months and aims to provide support to startups through small amounts of seed capital, mentoring, training, and events for a finite period. It is common for an accelerator to receive some equity in the participating companies in exchange for the company’s participation in the program.

Example:

We gave up 8% to our accelerator, but once we graduate we’re going to be ready for Series Seed Funding at a $2M valuation.

Accredited Investor

Accredited Investor is defined under the Securities Act of 1933. Anyone (individual or entity) who meets the definition is able to invest in certain private offerings. Simply put, an accredited investor is an individual with a net worth (individually or with a spouse) of at least $1,000,000 exclusive of a primary residence, or who has earned at least $200,000 individually, or $300,000 jointly with a spouse in each of the last two years. There is also a long list of ways that an entity can qualify as an accredited investors.

Acquihire

Acquihire is the acquisition of a company primarily for the talent or employees, and not necessarily the product or service offerings.

Advisor Agreement

An Advisor Agreement is a formalized agreement between an entrepreneur and a startup advisor that details and defines the relationship. Advisors typically receive a small amount of equity for their services.

Advisory Board

An Advisory Board is less formal than a startup’s board of directors. An advisory board typically consists of people whose experience, knowledge, and influence can benefit the growth and direction of the startup.

Alpha Testing

Alpha Testing refers to internally testing a pre-production model of a product, typically on a controlled basis, to work out the kinks without anyone else seeing it.

Analyst (VC Firm)

An Analyst is a very junior person at a venture capital firm, often a recent college graduate.

Angel Financing

Angel Financing refers to a startup’s financing round whereby the investors are angel investors (see Angel Investor). This round typically comes after a Friends and Family round, but before a Series A round. Many Seed and AA rounds are composed of angel investors.

Angel Investor

Angel Investors are individuals who provide seed or startup finance to entrepreneurs. In addition to an investment, angel investors may also provide industry contacts and knowledge.

Annual Contract Value (ACV)

Annual Contract Value (ACV) is the value of a contract over a 12-month period. A figure like this is important for internal planning, and investors may ask about it if your revenue model includes contracted terms.

Annual Recurring Revenue (ARR)

Annual Recurring Revenue (ARR) is the amount of revenue a company generates from recurring payments over a year.

Anti-Dilution

Anti-Dilution refers to a right, usually requested by investors purchasing preferred shares, to protection against future rounds whereby securities are sold at a lower price than the current round. There are several types of anti-dilution. See also Broad-Based Weighted Average, Narrow-Based Weighted Average, and Full Rachet.

Articles of Incorporation (AOI)

Articles of Incorporation (AOI) are what some states, including California, call the primary organization document for a corporation. In Texas, it’s called a “Certificate of Formation” and in Delaware it’s called a “Certificate of Incorporation.” Many people just refer to these docs as a corporation’s charter.

As-Converted Basis

As-Converted Basis refers to the calculation of securities assuming conversion of all stock.

Example:

This shall require the consent of a majority of the Common Stock shareholders, determined on an as-converted basis.

Asset Acquisition

An Asset Acquisition is a transaction whereby an acquirer purchases the assets of the company, rather than the ownership interests.

Example:

It was more tax favorable for BigCo to purchase the assets of LittleCo, instead of the equity interests.

Associate (VC Firm)

An Associate is a person at a venture capital firm who is involved in deal analysis and management. The seniority of this position varies by firm, but generally associates need a partner to support their activities.

At-Will Employee

An At-Will Employee is an employee who does not have an employment agreement and can be terminated by the company for any reason.

Authorized Shares

Authorized Shares refers to the number of shares authorized by a corporation, which is the most shares that the corporation can issue. This number is set forth in the corporation’s state formation documents and must be amended when the corporation needs to issue more shares if none are available for issuance.

Automatic Conversion

Automatic Conversion refers to a term found in convertible promissory notes (same as convertible debt) whereby the note will automatically convert into equity upon the occurrence of certain events, i.e. a next round financing or maturity. Note that automatic conversion into the next qualified financing round is standard; automatic conversion at maturity is generally negotiated (but usually preferred from the company’s standpoint).

Example:

Our convertible notes call for the principal plus interest to automatically convert into the next round whereby the company raises at least $1M.

k

Key Employee

A Key Employee is an employee who plays a significant part in a startup’s success and has a major ownership and/or decision-making role in the business. Key employees are usually founders and C-level executives. Key employees may have certain restrictions or be tied to certain provisions in a later-stage financing round.

Example:

Our Series A round terms mandated that we get key man insurance on the founders and that each of the key employees grant a right of first refusal to Series A investors on transfer of their equity.

More Information:
Hiring Your First Employees
Key Man Insurance

Key Man Insurance is simply insurance taken out on the key persons (usually founders) of a business. In the event of a key person’s death, the insurance proceeds can be used to fund the business or to buy out the key person’s estate. This is oftentimes a requirement of venture funding.

Key Performance Indicator (KPI)

A key performance indicator is a measurable value that helps a startup measure key business metrics.

Example:

Our monthly investor update includes five KPIs – new pipeline customers, closed customers, MRR, ARR, and Burn Rate.

KISS Agreement

KISS is the acronym for “Keep It Simple Security,” which can be an alternative for either a debt or equity financing.

j

J-Curve

A J-Curve is a cash flow graph depicting returns vs. time. It demonstrates that at the beginning of a private equity fund cash flow and returns are going to be negative due to investing the funds, losses, and expenses. The upward curve of the J represents the time when the cash flow is increasing and results are trending upward.

Joinder Page

A Joinder Page is a signature page executed and joined to an agreement that was previously executed. The person executing the joinder page becomes bound by the agreement.

Joint Venture

A Joint Venture is an agreement between individuals or entities to complete some specific business task within a certain timeframe.

Jumpstart Our Business Startups Act (JOBS Act)

The Jumpstart Our Business Startups Act (JOBS Act) is a law intended to encourage funding of United States small businesses and startups by easing securities regulations imposed by the SEC. The Act focuses on making it easier for startups to get capital financing, with the Crowdfunding Act playing a major part. The Crowdfunding Act allows just about any investor to invest in startups by removing 1930s era SEC regulations, and thus gives startups significantly greater access to capital.

Junior Debt

Junior Debt is debt that is a lower priority to senior debt. Junior debt is also known as “subordinated debt.”

i

Illiquid

A security or asset is Illiquid if there is not a ready market to sell the security for cash.

In-Kind Distribution

An In-Kind Distribution is a distribution to investors made in the form of securities or other property when a company is unable or unwilling to distribute cash.

Incentive Stock Option (ISO)

An Incentive Stock Option (ISO) is a type of stock option typically granted to founders or key executives. ISOs receive long-term capital gains treatment if the shares are held for more than a year from the date the shareholder receives the options, as opposed to when the options are exercised. Also, the shareholder is not taxed until the options are exercised, as opposed to when the options are received.

Incentive Unit Plan

An 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”).

Incorporation

Incorporation is the act of incorporating a company through filing a required document with the secretary of state and paying an incorporation fee.

Incubator

An Incubator is an entity designed to develop business ideas and/or new technology to the extent they become attractive to venture capitalists. An incubator typically provides physical space and some or all of the services needed for a business idea to develop.

Indemnification

Indemnification is compensation for a harm the company may not have caused but had to pay for. Generally, a third party is harmed and a company must pay the third party for wrongful acts committed by another party. The party who caused the harm must compensate the company for the money the company paid to the third party.

Indemnification Cap

An Indemnification Cap is the maximum amount that a company in a contract may have to pay to another party to the contract for the company breaching one or more representation and warranty provisions in the contract. These caps are typically present in a sale or purchase agreement.

Indemnity

Indemnity is a company’s agreement to pay another party’s losses under a contract regardless of whether the company caused the losses.

Independent Contractor

An Independent Contractor is a service provider under a contract, but unlike employees, the independent contractor controls how the service is performed. Whether the service provider controls the performance and is an independent contractor or whether the service provider does not have control over the performance is determined using a factored analysis in most states. Some of these factors are how the service is performed, when the service is performed, what tools are used to perform the service, who provides the tools, and what workers perform the service.

Independent Director

An Independent Director is a member of the board of directors who is not associated with the company or its investors. Shareholders elect independent directors to provide an outside perspective.

Indication of Interest (IOI)

An Indication of Interest (IOI) is a preliminary letter sent by a buyer (sometimes an investor) to indicate a basic level of interest. It’s one step past “nice to meet you,” but well short of a Letter of Intent, and no where close to a binding document. See also Letter of Intent (LOI) or Memorandum of Understanding (MOU).

Information Rights

Information Rights are investors’ agreed upon rights to receive certain financial records and other information from the company. Some rights will provide timelines for the company to provide certain financial reports and statements to the investor. Most information rights also allow investors the opportunity to view these records in person and discuss the information with the company’s officers.

More Information:
Keep Your Investors Updated
Initial Coin Offering (ICO)

An Initial Coin Offering (ICO) is the IPO of the crypotcurreny world. An ICO is a fundraising technique where a company makes a portion of their cryptocurrency available for purchase by the public.

Initial Public Offering (IPO)

An Initial Public Offering (IPO) is the first sale of a company’s stock on a public stock exchange. The company must comply with stringent SEC requirements to be eligible to be a publicly traded company. And, in most instances, a startup has been very successful if it reaches an initial public offering.

Inside Round

An Inside Round is a round of financing where money is raised only from investors from previous rounds.

More Information:
When to do an inside round
Insolvency

Insolvency is when a company cannot afford to pay its debts. If insolvency lasts for an extended period, creditors may bring an action to liquidate some of the company’s assets to repay the creditor, or alternatively, initiate a bankruptcy proceeding against the company.

Institutional Investor

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.

Integration

Integration, in regard to a sale of securities, is when the SEC determines that two of a company’s financing rounds were actually one large round for securities regulation purposes. The SEC then combines the two rounds, and depending on the amounts of money raised and who the investors were, the combined round may not fall under the securities exemptions that previous rounds did individually.

Intellectual Property

Intellectual property (IP) refers to creations of the mind, such as inventions, literary and artistic works, designs, symbols, names, and images. IP is protected in varying degrees by state, federal, and international laws. Common examples of IP include patents, trademarks, and copyrights.

Interest

Interest is a fee paid at a particular rate for borrowing money from a lender.

Internal Rate of Return (IRR)

The Internal Rate of Return (IRR) is a metric used to determine whether an investment’s expected rate of return warrants an investment. This is determined by comparing the expected rate of return against alternative investments’ expected returns.

Invention Assignment

An Invention Assignment is an agreement where a founder or developer assigns to the company all of the intellectual property the founder or developer has created related to the company.

Investment Adviser

An Investment Adviser is an individual or entity that is registered to provide investment advice about securities.

Investment Banker

An Investment Banker is an entity or individual that underwrites companies’ security offerings. Investment bankers may also facilitate mergers and acquisitions.

Investment Company Act

The Investment Company Act is legislation that regulates “investment companies,” or companies that invest and trade in securities and sell their own securities. The Act forces the companies to register with the SEC, lists specific requirements for the companies, and helps define the size, structure, and function of the companies.

Investment Thesis

An Investment Thesis is the core set of investment principles for a fund. The principles set forth the industry and/or types of companies that the fund will invest in.

Example:

The VC fund’s investment thesis is to focus on SaaS based companies in secondary markets who are generating MRR of between $50k and $100k.

Investor Rights Agreement (IRA)

An Investor Rights Agreement (IRA) is an agreement between an investor and a company that contractually guarantees the investor certain rights including, but not limited to, voting rights, inspection rights, rights of first refusal, and observer rights.

Example:

The VC fund’s investment thesis is to focus on SaaS based companies in secondary markets who are generating MRR of between $50k and $100k.

 

Issue Price

The Issue Price is the price at which a company’s securities are sold.

Issued Shares

Issued Shares are the amount of shares the company has sold or granted to shareholders.

Issuer

An Issuer is an entity that has “issued” or sold its securities.

Iterating

Iterating is when a startup makes a minor change to its current business model in an attempt to capitalize on a similar or related market opportunity.

h

Haircut

A Haircut is either the difference between the purchase price and sale price of an asset, or the market value and collateral value of an asset.

Hard Launch

A Hard Launch is when a business debuts its product with a lot of fanfare and publicity, sometimes at a big event or conference. Also known as a Big Bang Launch.

Harvest Period

Harvest Period is the time period in a venture fund’s life where the fund is focusing on “harvesting” its portfolio companies, or helping them grow. It usually comes after the fund is done making investments.

Hedge Fund

A Hedge Fund is an investment vehicle that pools accredited and institutional investors’ money to invest in aggressive and complex positions that will provide an active return to the investors.

Hockey Stick Chart

A Hockey Stick Chart is a line chart in which a sharp increase or decrease occurs over a period of time. Hockey Stick refers to the shape of a graph showing a dramatic increase or decrease in revenue.

Holdback

A Holdback is a portion of the purchase price that a purchaser does not immediately give to the seller upon closing in order to ensure that there are no post-closing issues with any of the representations and warrants of the seller. See Holdback Escrow.

Holdback Escrow

A Holdback Escrow is a portion of the purchase price that a purchase does not immediately give to the seller upon closing to ensure that there are no post-closing issues with any of the representations and warranties of the seller. The purchaser places the holdback escrow in a third-party escrow account until the holdback period has elapsed and the representations and warranties made by the seller have not been deemed breached, and at which point the holdback escrow is released to the seller. The holdback escrow amount is usually a percentage of the total purchase price.

Holding Company

A Holding Company is an entity created for the purpose of owning entities and assets.

Holding Period

A Holding Period is the amount of time that a person or entity owns an asset or security.

Home Run

A Home Run is when a business has an exit that returns 20 or more times what its investors initially put in.

Hostile Takeover

A Hostile Takeover is the takeover of a company without the approval of the board of directors and is usually accomplished by either the purchase of a controlling interest in the company and/or the voting in of a new board of directors.

Hurdle Price

The Hurdle Price is the price associated with an incentive unit in an LLC. Incentive unit holders are entitled to distributions only when each non-incentive unit holding member of the company receives distributions per unit in an amount equal to the hurdle price.

Hurdle Rate

The Hurdle Rate is the minimum rate of return required by an investor in order for a fund manager to collect management fees.

g

Gamify/Gamification

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.

General Partner (GP)

A General Partner (GP) is a partner in a partnership. In limited partnerships, there are general partners, who manage the day-to-day operations of the partnership, and limited partners, who invest in the partnership but are not allowed to control the day-to-day operations or they risk becoming a general partner. Unlike limited partners, general partners do not have limited liability. Thus, funds that use a limited partnership structure often have general partners that are LLCs or other limited liability entities.

General Partner (VC Firm)

A General Partner is a senior partner in a venture capital firm.

General Partnership

A General Partnership is the default entity under most jurisdictions. When two or more entrepreneurs join together to operate a business, they have wittingly, or unwittingly, formed a general partnership. There is no need to file any document with the state to formalize or legitimize their undertaking. You want to avoid a general partnership.

General Solicitation

General Solicitation is a company or fund publicly advertising its securities. General solicitations offer the potential to reach more investors. However, general solicitation may cause the company to have to comply with more stringent security registration requirements at the state and federal levels.

Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (GAAP) are mandatory financial accounting procedures and methods that public companies must comply with when reporting their financials. Private companies are not required to use GAAP as their accounting method, but many do.

Going Concern

A Going Concern is an accounting term for companies that have reached a point of viability where they can continue operations indefinitely with the resources the company has.

Golden Handcuffs

Golden Handcuffs are financial incentives for founders and/or key employees to prevent a departure from the company before some predetermined date or milestone through stock options vesting or bonuses that are only received after the predetermined date.

Golden Parachute

A Golden Parachute is a large severance package given to executives of a company if the executive is forced to resign or is terminated after a merger or acquisition of the company.

GP Commitment (VC Fund)

A GP Commitment is the amount of money, usually between 1% and 5% of the fund, that the general partners invest in their own fund.

Gross Profit

Gross Profit is the profit a company makes after deducting the costs associated with making and selling products and/or providing services.

More Information:
Learn More
Growth Hacker

A Growth Hacker is someone whose job is to figure out ways to grow the company.

Growth Stage

The Growth Stage generally begins once the startup is generating revenues and is now investing more in marketing and user acquisition than in product development.

f

Face Value

Face Value is the dollar value (or the nominal value, the stated value) of a security (i.e. a share of stock, a bond, etc.). Face Value is rarely the market value of the security. For stock, face value is synonymous with par value, the original price of the stock. For bonds, face value is the amount to be paid upon reaching maturity.

Fair Market Value

Fair Market Value is the price that a reasonable third-party would pay for a given asset in the open market.

Family Office

A Family Office is a high-net-worth private wealth management firm for families. The firms typically provide investment advice but also provide creative ways to structure the family’s’ wealth to prevent losses.

Fiduciary Duty

Fiduciary Duty is the legal and ethical duty that an individual has to an entity, which includes the duty of care and the duty of loyalty.

Finder

A Finder is an individual who facilitates transactions, whether acquisitions or M&A, between companies and other parties.

Finder’s Fee

A Finder’s Fee is a commission paid to a third-party for facilitating successful transactions, whether acquisitions or M&A, between a startup, investors, or potential partners.

Flat Round

A Flat Round is a round of financing with the same post-money valuation as that of the previous financing round.

Follow-On Financing

Follow-On Financing is additional funding raised to supplement a startup’s first round of financing and to support business development and growth.

Foreign Corrupt Practices Act (FCPA)

The Foreign Corrupt Practices Act (FCPA) makes it unlawful for U.S. companies and individuals to offer anything of value to foreign officials in order to build or retain business.

Foreign Qualification

Foreign Qualification is permission by a foreign state (a state outside of the state where the company was formed) for a company to transact business in the foreign state. If a company transacts business in a state without being qualified, the company may lose some of its rights in the foreign state.

Form 10-K

Form 10-K is an annual performance report which must be filed with the Securities Exchange Commission. The 10-K provides extensive information regarding the company’s business and financial condition, which includes audited financial statements.

Form 2553

Form 2553 is a form that companies must file with the SEC to be designated as an S-corporation and to receive the taxation benefits of S-corporation status (pass through taxation). The company will not be granted pass through taxation for the current fiscal year if Form 2553 is not filed within the first three months and fifteen days of a fiscal year.

Form 8-K

Form 8-K is a report that publicly traded companies must file when a major event happens within the company. The Form 8-K must be filed with the Securities Exchange Commission, and it is designed to give shareholders and the Securities Exchange Commission notice of the major event. These major events include a CEO change, merger, acquisition, or bankruptcy.

Form D

Form D is an SEC filing form used to file a notice of an exempt offering with the SEC. The exemption is found under Regulation D of the SEC. Form Ds are serious stuff; make sure you’re discussing with your attorney.

Form S-1

Form S-1 is an SEC disclosure form that provides general information and risk disclosures about the company. The company may not undergo an initial public offering if it has not filed Form S-1.

Form S-2

Form S-2 is an SEC form that is used when selling securities to the public, and it is less burdensome than most SEC forms because it applies previously filed information. The SEC allows the forms to be used by companies that have previously registered securities and fully complied with the Securities Exchange Act of 1934 for three consecutive years.

Form S-3

Form S-3 is an SEC security registration form that is less onerous than other SEC registration forms because it cannot be filed unless the company has registered securities with the SEC previously and complied with the Securities Exchange Act of 1934’s reporting requirements regarding the securities previously registered.

Form S-4

Form S-4 is an SEC registration form designed to provide disclosures after companies merge with, acquire, or are acquired by another company.

Founder

A Founder creates or participates in the formation stage of a startup. Founders receive the startup’s initial shares in return for a capital contribution or services provided to the company.

Founders Stock

Founders Stock refers to equity granted to a founder when the company is formed. The equity typically has a par value that is next to nothing and a four year vesting schedule.

Free Cash Flow

Free Cash Flow is a financial metric illustrating cash that the company has on hand to fund the growth of the company or distribute to security holders.

More Information:
Keep Your Investors Updated
Freemium

Freemium is the free, core version of an app as opposed to the premium, paid version of the app, which generally has fewer or no ads and more features.

Freeze Out

A Freeze Out occurs when a majority of shareholders prevents minority shareholders from receiving dividends or making decisions within the company, leaving minority shareholders with little choice but to sell their shares.

Friends and Family Round

A Friends and Family Round is the first round of funding for a company that consists of obtaining capital from founders’ friends and family.

Frothy

Frothy is used to describe a market that has become overvalued thanks to skyrocketing demand. A Frothy market is characterized by rampant investor speculation on future values.

Full Ratchet Anti-Dilution

Full Ratchet Anti-Dilution is a shareholder protection provision that prevents early shareholders who have the protection from being diluted by later down rounds. If the company has a down round, the price the original shareholder paid for its securities is reduced to match the price paid by the investors in the down round. Full ratchet is a great provision for a shareholder who gets the right, but full ratchet may end up causing more harm than good due to pushback from other shareholders who do not enjoy the right. It typically only is appropriate in a pay-to-play or distressed situation.

Full-Stack Venture Capital Firms

Full-Stack Venture Capital Firms are venture capital firms that employ many people beyond deal professionals, such as marketing, operations, PR, engineering, and financial executives, to attempt to help companies more than traditional VC firms.

Fully-Diluted Basis

Fully-Diluted Basis is the total number of shares that would be outstanding if all securities that could convert into shares, such as convertible notes, options, warrants, and preferred shares, converted to common stock. Investors oftentimes want to know what their ownership will look like on a basic and a fully-diluted basis.

Fund

A Fund is an investment entity formed to collect many investors’ investments and then invest for the investors. The fund can invest in companies and in amounts that the investors individually cannot, allowing for diversification and potentially greater returns.

Fund of Funds

A Fund of Funds is an investment portfolio composed of only other investment funds, rather than investments made into stocks or other companies.

e

Early-Stage Financing

Early-Stage Financing refers to investments that happen early in a company’s lifecycle.

Earnings Before Interest and Taxes (EBIT)

Earnings Before Interest and Taxes (EBIT) is an operating profit metric. The EBIT is determined by excluding interest and taxes from expenses and then subtracting those expenses from revenues. Companies’ values are often projected as multiples of EBIT.

Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA)

EBITDA is essentially net income with interest, taxes, depreciation, and amortization added back to it.

Earnout

An Earnout is a portion of a sale agreement whereby the sellers receive certain payments contingent on future events, typically revenue or profit milestones.

Elevator Pitch

An Elevator Pitch is a brief description of a startup. It should be brief enough to be delivered during an elevator ride.

Employee Retirement Income Security Act (ERISA)

The Employee Retirement Income Security Act (ERISA) sets minimum standards for certain pension and health plans to protect the retirement assets of American employees.

Employee Stock Option Plan (ESOP)

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

Employer Identification Number (EIN)

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.

Enterprise Value (EV)

Enterprise Value (EV) is a valuation measurement determined by the sum of the long term debt of a company and its common stock’s market value, minus cash the company has on hand.

Entrepreneur in Residence (EIR)

An Entrepreneur in Residence (EIR) is an entrepreneur with significant startup experience who spends time with startups or companies to lend perspective and guidance.

Equity

Equity broadly refers to the ownership of a company, which can be represented by stock or other units of ownership. When an investor has ownership of a company, he or she has equity in the company.

Equity Crowdfunding
Equity Financing

Equity Financing is the direct investment by investors in exchange for ownership (equity).

Escrow

Escrow describes documents, funds, and/or other assets being held by a third party until the parties of the transaction have satisfied certain obligations.

Escrow Cap

An Escrow Cap is the amount of money in a merger that is set aside to remedy breaches of the merger agreement.

Evergreen Fund

Evergreen Funds are investment funds with an indefinite life that allow for returns to be re-invested back into the fund instead of distributed to the investors.

Executive Managing Director (VC Firm)

An Executive Managing Director is a senior partner in a venture capital firm who is superior to a managing director or general partner.

Executive Summary

An Executive Summary is a short summary document, normally one to three pages, that describes material facts and strategies of a company.

Exercise Price

The Exercise Price is the price per share at which an option is exercised, i.e. the price at which the option holder can buy or sell the underlying security. See Exercising Stock Options.

Exercising Stock Options

Exercising Stock Options means the option holder purchases the underlying stock, at the exercise price, in accordance with the option agreement.

Exit Event

An Exit Event is an event where founders and early investors can sell their interest in a company for cash. An exit can be an initial public offering (IPO) or an acquisition by another company.

Exit Strategy

An Exit Strategy is a company’s plan to sell the company or undergo an initial public offering once the company has reached a certain level of success.

d

Daily Active Users (DAUs)

Daily Active Users (DAUs) are distinct users who engage with a platform in a given day. DAUs are an important gauge of success for any online business. Businesses often measure Weekly Active Users (WAUs) and Monthly Active Users (MAUs) as well.

Data Room

A Data Room is an online repository of company docs. Typically, a startup will create a data room of relevant company docs to share with potential investors. This is preferred to emailing out docs because the startup can keep them all in one place and update them as necessary. The company can also password protect the data room in order to limit access.

Date of Issue

The Date of Issue is the date that the securities (shares or units) are issued to an investor.

Deal Flow

Deal Flow is the flow of potential deals to an investor.

More Information:
Getting to “No.”
Debt Financing

Debt Financing is raising money for working capital or capital expenditure through some form of a loan.

Debt-to-Equity Ratio

The Debt-to-Equity Ratio is a debt ratio used to measure a company’s financial leverage, calculated by dividing a company’s total liabilities by its stockholders’ equity. The D/E ratio indicates how much debt a company is using to finance its assets relative to the amount of value represented in shareholders’ equity.

Default

Default is when a company is unable to perform the obligations it agreed to in a loan agreement. Which failures by the company constitute default and which rights creditors have upon default vary from agreement to agreement. Often, default is failure to make payments on a loan.

Delaware General Corporation Law (DGCL)

DGCL is Delaware General Corporation Law. These statutes govern corporate law (including LLCs) in Delaware.

Demand Registration Rights

Demand Registration Rights are rights that give an investor the right to force a company to register its shares for sale to the public. These rights are typically contained in Series A and later financing rounds.

Demo Day

Demo Day is “pitch day,” or when startups in an accelerator pitch to investors.

Depreciation

Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life.

Dilution

Dilution is the reduction in ownership percentage of a share of stock caused by the issuance of new stock.

Director

A Director is an elected or appointed person who sits on the board of directors and helps the corporation to make certain decisions. Typically the board of directors is responsible for setting the strategic direction of a company.

Directors and Officers’ (D&O) Insurance

Directors and Officers’ (D&O) Insurance is insurance purchased by a company to protect its directors and officers from claims arising out of company activities or to indemnify them for such claims.

Disruptive Technology

Disruptive Technology is a business that completely changes the way an industry operates, such as Uber and Lyft for taxis and Amazon for retail.

Distributed Technology

Distributed Technology is a decentralized technology system where the computing and pertinent data is spread across multiple locations and connected by a network. Because of the decentralization, the system does not have a single point of failure and tasks can be completed faster.

Example:

Blockchain is a common application of distributed technology because each computer involved contains a ledger to record and verify every transaction.

Distribution

Distribution is a payment by a company to its shareholders (or members in the context of an LLC).

Dividend

A Dividend is a payment made by a corporation to its stockholders. Dividends can be paid in cash or stock. Startups rarely, if ever, pay dividends.

Double Trigger Acceleration

Double Trigger Acceleration is the partial or full acceleration of vesting of an employee’s options or stock based on the occurrence of two distinct events. Most typically, the two events are the sale of the company and the involuntary termination of the employee.

Down Round

A Down Round is a round of financing when the startup is at a lower valuation than the valuation placed upon the startup by earlier investors.

Drag Along Rights

Drag Along Rights are the rights of majority investors who are selling their equity in the company to force minor investors to sell their equity interest as well.

Drive-By VC

Drive-By VC is a term used to describe VCs who usually just make investments and do not offer other support or guidance.

Dry Powder

Dry Powder is the amount of money that a VC or investor has available to make investments.

Due Diligence

Due Diligence is the process an investor goes through prior to making an investment in a company. This typically includes meeting and interviewing the founders and key stakeholders, reviewing company documents and financials, and interviewing customers, when applicable.

s

S-Corporation

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.

SaaS Business

A SaaS business is one whereby software is licensed to end users from a central location, usually delivered via the web. “SaaS” stands for “software as a service” and customers are generally billed monthly. Microsoft Office 365, Dropbox, Google G Suite, and Slack are all examples of SaaS businesses. Contrast those with the old days of buying software that came in a box and was installed through a peripheral drive.

SAFE

SAFE is an acronym for “simple agreement for future equity,” which is an alternative to the issuance of convertible debt.

Safe Harbor

A Safe Harbor is a series of actions a company can follow that guarantees the company will not be punished for those actions. Safe harbors are usually created in regard to rules that don’t have a consistent application.

Sarbanes-Oxley Act

The Sarbanes-Oxley Act was passed in 2002, largely in response to a number of significant corporate scandals, including Enron and WorldCom. The Act works to protect investors from fraudulent accounting activities and other problematic practices by corporations. You’ll also hear it called “SOX” or “Sarbox.”

Scalability

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

Scale-Down

A Scale-Down is when a fund manager’s fee is reduced at a scheduled rate as the fund is reducing its investment activity.

Scale-Up

A Scale-Up is when a startup believes it can rapidly accelerate the growth of the company and receive positive returns.

Schmuck Insurance

Schmuck Insurance are preferences, including ones that gurantee a return for an investor, especially in a situation where an investor has concerns about overpaying at a particular point in time.

Search Fund

A Search Fund is a pool of capital raised to support an entrepreneur (usually with a proven track record or a recent MBA graduate) in finding and acquiring a private company with the objective of streamlining operational inefficiencies and growing the business.

Secondary Buyout

A Secondary Buyout is a private sale by a VC or private equity firm of its stake in a startup (or part or all of its entire portfolio) to another VC or private equity firm. See Tender Offer.

Secondary Market

The Secondary Market is the financial market in which investors can purchase financial instruments (stocks, bonds, options, futures) that have previously been issued to other investors; investors purchase securities from each other, rather than directly from the issuing company. The secondary market is sometimes also referred to as “the aftermarket.”

Secondary Sale

A Secondary Sale is a sale where a buyer purchases shares of a startup directly from the startup’s existing shareholders. This type of transaction allows founders and early-stage investors to take some money off the table.

Secondary Shares

Secondary Shares are shares sold by a shareholder to a third party rather than shares sold by a corporation.

Secured Debt

Secured Debt is debt that guarantees some repayment because it is tied to some or all of a company’s assets as collateral. If the debtor defaults, the creditor can obtain a lien against the collateral.

Securities Act of 1933

The Securities Act of 1933 was the first federal legislation regarding the registration of the sale of securities. The Act’s extensive registration and disclosure requirements allow potential investors to have all relevant information needed to make informed investments.

Securities and Exchange Commission (SEC)

The Securities and Exchange Commission (SEC) is the federal regulatory agency that enforces federal securities laws (such as Sarbanes-Oxley, the Securities Act of 1933, the Securities Exchange Act of 1934, and other securities regulation), proposes rules for the regulation of securities, and regulates the nation’s stock and option exchanges. The SEC works to maintain fair, orderly, and efficient markets, protect investors, and facilitate capital formation.

Securities Exchange Act of 1934

The Securities Exchange Act of 1934 regulates the sale of securities on secondary markets. The Act created the SEC and tasked it with regulating the securities markets. In order to protect investors and to provide transparency, stock exchange markets, brokerage companies and broker dealers, transfer agents, and companies wishing to sell securities all must register with the SEC.

Security

A Security is used to describe a tradable asset of any kind and generally represents an interest of equity in a company. Stock, membership units, and convertible notes are all forms of a security.

Security Interest

A Security Interest is a legal right in collateral given to a creditor. If the debtor fails to fulfill its obligations to the creditor, the creditor can force the sale of the collateral and collect what it is owed from the debtor.

Seed Capital

Seed Capital is very early-stage financing for a startup with a business venture or idea that has not yet been established. Capital is usually provided by angels and/or friends and family, though a small number of venture capitalists do provide seed capital.

Seed Preferred

Seed Preferred is a round of financing before a series seed that is not quite as large as a true seed round, and therefore the investors do not receive the same rights as seed investors.

Seed Stage

The Seed Stage is the initial stage in the life of a startup where a startup looks to establish its business venture or idea using seed capital. A Seed Stage round is sometimes referred to as a Series AA round.

Senior Debt

Senior Debt is debt that will be paid back before any other debt. It is said to be “senior” to other junior debt that has a lower priority in regard to proceed distributions from a liquidation event.

Senior Securities

Senior Securities are securities that receive proceeds from a liquidation event before other of the company’s securities.

Seniority

Seniority means a senior interest or debt has a higher priority than a junior interest or debt.

Series A Preferred Stock

Series A Preferred Stock is the class of stock that is issued to investors in a Series A round. The stock is preferred because it contains certain rights superior to the company’s common stock, commonly liquidation preference, anti-dilution protection, and control rights.

Series A Round

A Series A Round is generally the first significant capital funding event taken on by a startup, usually after that startup has raised some initial capital through a Friends and Family round, Seed round, or both. In a Series A round, the stock issued will typically be preferred stock designated as Series A stock. You may also hear this financing event referred to simply as an “A Round.”

Series AA Round

A Series AA Round is a round of startup financing using a class of preferred stock called the “Series AA Preferred Shares.” Series AA is also known as “Seed” because it comes before Series A. Series AA terms are usually not as onerous as Series A terms, and the valuation is typically lower.

Series B Round

A Series B Round comes after a Series A round of financing. The Series B round financing can be done at a valuation higher, lower, or equal to the Series A valuation, but hopefully much higher.

Series LLC

A Series LLC is a type of limited liability company that provides liability protection and tax advantages across a series of LLCs, each of which is protected from the liabilities arising from the other LLCs within the same series.

Shareholders’ Agreement (SHA)

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.

Shell Corporation

A Shell Corporation is a corporation that does not have any significant assets or ongoing business. Most commonly, shell corporations are tools utilized to effect mergers, raise funds, or even conduct a hostile takeover. Additionally, although not illegal, shell corporations are sometimes used to disguise business ownership in illegitimate ways.

Side Letter

A Side Letter is an agreement between a company and a specific investor that alters the terms of the offering documents for that investor only, typically by providing the investor with additional rights or excluding the investor from certain obligations.

Simple Majority

A Simple Majority means more than 50% of shares or members who can vote to make a decision.

Single Trigger Acceleration

Single Trigger Acceleration is the partial or full acceleration of vesting of an employee’s options or stock based on the occurrence of a single, specified event, typically a change of control of the company.

Slack

Slack is the go-to communications tool for startups. We highly recommend it.

More Information:
www.slack.com
Small Business Administration (SBA)

The Small Business Administration (SBA) is a government agency that provides support to small businesses. The mission of the SBA is “to maintain and strengthen the nation’s economy by enabling the establishment and viability of small businesses and by assisting in the economic recovery of communities after disasters.”

Small Business Innovation Research Program

The Small Business Innovation Research Program, run by the Small Business Administration, encourages domestic small businesses to engage in Federal Research/Research and Development (R/R&D) that has the potential for commercialization. Each year, federal agencies with extramural R&D budgets that exceed $100 million are required to allocate 2.8 percent of their R&D budget to these programs.

Small Business Investment Company (SBIC)

A Small Business Investment Company (SBIC) is a private company that is licensed by the Small Business Administration to invest in small businesses’ debt and equity offerings. As part of the SBIC program and through the SBA, SBICs often receive some government funding to foster long-term capital flow into America’s small businesses.

Smart Money

Smart Money is investment dollars from professional investors – i.e. venture funds or experienced angel investors.

Soft Launch

A Soft Launch is a launch that, rather than focusing on a flashy one-time event, unfolds gradually. A Soft Launch may have multiple phases in order to build buzz or beat the competition to market.

Sole Proprietor and Sole Proprietorship

A Sole Proprietor is an individual who undertakes to engage in business without partners and without organizational forethought. This does not mean that you have one person, but that you have one owner. There is almost never a reason to operate as a sole proprietorship, as a sole proprietorship does not offer the liability protection that an entity does. Please consult with an attorney.

Example:

Dude, your startup is a sole proprietorship. No bueno. See an attorney at Vela Wood ASAP.

Sophisticated Investor

Sophisticated Investors are, in essence, investors who are capable of fending for themselves in a prospective transaction. The term is most often used in the context of discussions about whether a private securities offering qualifies for an exemption from registration under federal and state securities law.

In order to qualify for the Rule 506(b) exemption, for instance, the SEC requires all non-accredited investors to be sophisticated. For the purposes of Rule 506(b), the SEC defines a sophisticated investor as an investor possessing sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment. 

Special Purpose Vehicle (SPV)

A Special Purpose Vehicle (SPV) is generally a subsidiary of a larger corporation with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt. An SPV may also be formed for the purpose of a specific investment or acquisition. SPVs may also be referred to as “Single Purpose Entities” or “SPEs.”

Spinoff

A Spinoff is a type of divestiture in which a division or subsidiary is separated from its parent firm to create a new corporate entity by issuing new shares. These shares are distributed to the current stockholders (shareholders) in proportion to their current shareholdings and may also be sold to the public.

Stacked Preference

A Stacked Preference is when a company has raised several series of financing each and one or more series has greater liquidation preference rights than another series.

Staggered Board

A Staggered Board refers to a board of directors whereby the individual terms to not end coterminously with the others, but rather the directors are “staggered” such that a fraction of them are changing each year.

More Information:
Learn More
Startup

A Startup is a newly formed company. The term can refer to any entity structure and references the company’s life cycle. A startup will generally seek outside capital and plan for a rapid growth trajectory.

Stock Options

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

More Information:
Learn More
Stock Plan

A Stock Plan is a company’s equity compensation plan. The company issues equity through Incentive Stock Options, Non-Qualified Stock Options, or Restricted Stock Agreements. The incentives are usually tied to achieving a goal or staying with the company for some period of time.

Stock Purchase Agreement

A Stock Purchase Agreement is a legally binding contract whereby a purchaser (oftentimes an investor) agrees to purchase shares of a company in exchange for consideration. The consideration is almost always cash, but it could be services or a promissory note, or an exchange of some kind.

Example:

We’re just waiting for the investor to sign the SPA and then wire funds to us.

Stock Split

A Stock Split is when a company divides its shares into additional shares. The total value of the shares remains the same, but each shareholder will own two or three times more shares.

Stockholder

A Stockholder is the same thing as a “shareholder,” or the owner of stock (a.k.a shares) of a corporation. Stockholders can be individuals or entities.

Stockholders’ Consent is when some corporate actions such as the sale of the company require the stockholders to consent to the company taking such action.

Strategic Investor

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.

Strike Price

The Strike Price is a fixed price that option holders must pay when exercising their stock options.

Structure

Structure refers to multiple liquidation preference or participation in a preferred stock. This is often found in late-stage deals.

Subordinated Debt

Subordinated Debt is debt that ranks lower in priority than another particular debt if a company falls into bankruptcy or has to liquidate. You may also see it referred to as “junior debt,” a “junior security,” or a “subordinated loan.”

Subscription Agreement

A Subscription Agreement is the investment agreement for a startup. This is because the investor is “subscribing” into a round. It is similar (sometimes identical) to a stock purchase agreement.

Sunsetting

Sunsetting is the process of discontinuing a product, service, or business.

Super Angel

A Super Angel is a very active and experienced angel investor.

Super Majority

A Super Majority is a designated percentage (usually 67%) required to take certain actions – usually major decisions like selling the company.

Super Pro-Rata Rights

Super Pro-Rata Rights refers to the right of shareholders to purchase shares in a future financing equal to some multiple of the percentage they currently hold at the time of such financings.

Sweat Equity

Sweat Equity is the ownership interest, or increase in value, that is the direct result of hard work by the startup owner(s). For the startups out there – please do not plan to be paid, or repaid, for your sweat equity. Investors hate that.

Syndicate

A Syndicate is a group of unrelated investors who band together for an investment round. The word can also be used as a verb – “syndicate a round.”

Example:

The lead investor was able to syndicate enough angel investors to fill the startup’s financing round.

c

C-Corporation (C-Corp)

A C-Corporation is a legal entity that allows for limited liability. C-Corporations are legally considered separate entities from their owners. Income is taxed at the corporate level and is taxed again when it is distributed to owners, potentially resulting in double taxation. Despite the double taxation, C-Corporations are the preferred entity for a startup because of familiarity and their ability to scale. That said, a C-Corporation is not right for everyone. Consult with your legal and tax advisors regarding the best structure for your startup.

More Information:
The Delaware C Corp Myth
Call Right

A Call Right gives its holder the right to buy a certain number of securities at a certain price before a certain point in time, or upon a certain trigger event.

Capital Account

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.

Capital Call

A Capital Call is a notice from a fund (sometimes a venture fund) to its investors (oftentimes called “LPs” because the investors are frequently limited partners in a partnership structure) that a portion of the investor’s committed capital is due. In a fund with a capital call structure, the investors commit to a certain contribution over time, and the fund “calls” the capital upon certain events. Contrast this with a committed fund.

Capital Commitment

A Capital Commitment is a member or shareholder agreeing to contribute some form of capital to the company.

Capital Gains

Capital Gains is the profit from the sale of an asset or property. Taxes on capital gains are typically much lower than taxes on ordinary income.

Capital Raise

A transaction or series of transactions whereby a startup raises investment dollars (or “capital”) to grow the company. Capital raises can be debt, convertible debt, or equity.

Capital Stack

Capital Stack is the layers of financing in a company or project.

Example:

The Series B preferred shares will be a the top of the company’s capital stack.

Capital Stock

Capital Stock is the shares of stock of a corporation, usually in multiple different classes.

Capital Under Management

Capital Under Management is the amount of money a fund is actively managing. Funds being actively managed are limited to those funds the private equity or venture capital firm is receiving fees for managing. Many firms use the amount of capital under management as an indicator of size of the fund. Also sometimes known as “assets under management.”

Capitalization Table (Cap Table)

A Capitalization Table or Cap Table is a record of the owners of a company and their ownership percentage of the securities issued by the company. It is typically presented in a spreadsheet.

Carried Interest

Carried Interest, also known as “the Carry” and “the Promote” is typically the return to the managers or general partners of a fund. In the context of a venture capital fund, a typical carried interest is 20% with a catch-up provision. What this means is that once the investors’ capital is returned, plus any preferred returns (usually 8-10%), the fund manager then gets all distributable funds until the total distributions are split 80/20 between the investors and managers. Once this hurdle is cleared, funds are typically distributed 80/20 thereafter, meaning for each dollar distributed $.80 goes to the investors and $.20 goes to the managers. The concept of a carry exists in all kinds of fund structures – private equity, real estate, hedge funds – and can vary greatly.

Carveout

A Carveout is an exception from a stated provision in a contract.

Catch-Up

A Catch-Up is the distribution of funds to the managers of an investment entity to “catch-up” on an agreed upon return structure with the fund’s investors. A typical catch-up may be 20% after the investors have been returned 100% of their investment plus some preferred interest. For example, an investor invests $100 with a 10% preferred return. If the manager has a 20% catch-up, the investor would receive the first $110 of proceeds ($100 + $10), and then the manager would receive the next $27.50, so that out of the $137.50 distributed to date, the investor has received 80%, and the manager has received 20%.

Certificate of Formation (COF)

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.

Certificate of Incorporation (COI)

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.

More Information:
Anonymity in Delaware
Change in Control

A Change in Control (or Change of Control) transaction is one whereby the owners of a company prior to a transaction no longer own a majority of the shares after the transaction.

Chapter 11

A Chapter 11 Bankruptcy is also know as a “reorganization” because the company is allowed to restructure its debt with the help of a bankruptcy trustee.

Chapter 7

A Chapter 7 Bankruptcy is when a company ceases operations and winds down under the direction of a trustee who liquidates all assets and pays off creditors in order of priority.

Charter

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.”

Example:

As part of our Series A round, we had to amend and restate our Certificate of Incorporation.

Chief Executive Officer (CEO)

The Chief Executive Officer (CEO) is typically the head-honcho of the company. In the context of a startup, “president” and “CEO” are usually synonymous.

Churn Rate

Churn Rate is the loss of future revenue due to the loss of a customer/subscription. There are two types of churn: Gross Churn and Net Revenue Churn.

Gross Churn: MRR lost in a given month/MRR at the beginning of the month
Net Churn: (MRR lost minus MRR from upsells) in a given month/MRR at the beginning of the month

Example:

Our churn rate has dropped considerably ever since we hired that fancy account manager.

More Information:
How to control SaaS CHURN
CIIAA

A Confidential Information and Inventions Assignment Agreement (CIIAA) is a legal document used to assign all intellectual property (IP) and other proprietary rights created by an employee during the course of their employment to the employer. CIIAAs typically also contain non-disclosure, non-solicitation, and non-competition clauses. CIIAAs are also sometimes known as Proprietary Information and Inventions Assignment Agreements (or PIIAAs). 

Class F Common Stock

Class F Common Stock is a founder-favorable class of common stock that provides founders with greater control over the company due to increased voting power in company decisions. The Class F common stock was created by the Funder Founder Institute within the past decade and is not used frequently.

Example:

Our Class F Common Stock allows us to maintain voting control because the founders get 10 votes for each share we own.

Clawback

A Clawback is when limited partners take management fees back from general partners in private equity arrangements. Most private equity agreements have clawback provisions that allow for this action after a fund has substantial losses and a general partner has already been compensated for previous significant gains. The general partner is not allowed to keep all of her compensation for gains the fund failed to ultimately achieve.

Cliff

A Cliff is a term used to describe the length of time it takes for stock options or other securities on a vesting schedule to partially or fully vest.

Example:

A typical vesting schedule for a startup is monthly over 4 years, with a one-year cliff. This means that the recipient of the equity will receive nothing for the first year, then 25% after the first year, and then the remaining 75% will vest monthly over 36 months.

Closing