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.
1x means “one times original purchase price” in conjunction with a liquidation preference. Liquidation preferences can be participating or non-participating.
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).
A 409A Valuation is used to determine fair market value of a startup’s options. Section 409A of the Internal Revenue Code regulates the treatment of nonqualified 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.
We have to get our 409A valuation completed before we can issue the next round of options.
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.
More Information:Questions from Last Night’s TeXchange Q&A
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.
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.
More Information:Texas Series LLCs and Your Due on Sale Clause
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.
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.
More Information:Where Can A Startup Get Started?
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 is the acquisition of a company primarily for the talent or employees, and not necessarily the product or service offerings.
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.
More Information:Free Startup Docs: How Much Equity Should Advisors Get?
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.
More Information:Free Startup Docs: How Much Equity Should Advisors Get?
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 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.
More Information:Are You Ready to Talk to Angel Investors?
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.
More Information:The Shifting Landscape of Angel Investing
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 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 refers to the calculation of securities assuming conversion of all stock.
This shall require the consent of a majority of the Common Stock shareholders, determined on an as-converted basis.
An Asset Acquisition is a transaction whereby an acquirer purchases the assets of the company, rather than the ownership interests.
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.
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 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.
More Information:Don’t Have Enough Authorized Shares? There’s a Fix for That.
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).
Our convertible notes call for the principal plus interest to automatically convert into the next round whereby the company raises at least $1M.
B-Corporations are for-profit organizations that use their business to address social and environmental problems. They are not separate legal entities, nor do they have different tax treatment from the basic corporation. Rather, they must comply with extensive certification requirements put in place by the non-profit organization B Lab. After obtaining certification, “B” businesses can differentiate themselves from other businesses and enjoy the marketing advantages and investment opportunities that come with being recognized as a company prioritizing the community and the environment in their daily operations.
More Information:Doing Well, Doing Good: B Corps & Public Benefit Corporations
A Backup Certificate is a certificate delivered by a company to the lawyer or law firm in order to provide factual support for an opinion by the law firm.
We had to deliver a backup certificate to our lawyers in support of the opinion they wrote about our company to the VC fund.
A Balance Sheet is one of the four main financial statements that provides a summary of a company’s finances at a specific point in time. All balance sheets include a company’s assets, liabilities, and equity. Unlike other financial statements, the balance sheet provides an accurate summary only at the time it is created.
Bankruptcy is a judicial process undertaken when a company is unable to repay its debts. Bankruptcy proceedings are filed under different chapters of the bankruptcy code depending on the the various solutions and outcomes the company hopes to achieve. Some bankruptcies are involuntary actions brought against debtors by creditors.
Best Alternative to Negotiated Agreement (BATNA)
A Best Alternative to Negotiated Agreement (BATNA) is a backup plan if no agreement is reached between two parties.
Beta Testing refers to testing performed by the intended customer, with the goal of getting user feedback on the product.
Blanket Lien is a lien over all of a debtor’s assets, which means a creditor can seize any of a company’s assets if the debtor defaults.
Bleeding Edge is a term used to refer to a product, service, or technology that is so new and innovative that it is too cutting edge for the term “cutting edge.”
More Information:Behind the Bleeding Edge (The Economist)
Blended Preferences are when a startup has multiple classes of preferred stock and each class has the same rights in the event of a liquidation. When classes or shareholders have equal rights, the equal rights are often called pari passu rights.
A Blind Pool is a fund where the investor’s funds are committed and delivered up front. Contrast this with a Capital Call fund structure.
Blue Sky Laws
Blue Sky Laws are securities restrictions enacted at the state level, established to protect a state’s investors. These regulations prohibit brokers and investment advisors from recommending, soliciting, or discussing any security with a client unless that security is compliant with the Blue Sky laws of the state that the investor resides in. With startups, the more states they plan to raise money in, the more sets of Blue Sky laws they will have to comply with.
Board Consent is the consent to some company action by the board of directors for actions or transactions that need director approval. Board consent can be effected at a meeting or in writing.
We have to get board consent before we can move forward with the capital raise.
A Board Observer has the right to observe or be present at the board of directors’ meetings but cannot vote on matters before the board of directors. It can be valuable to be at board meetings when decisions are made.
Board of Directors
A Board of Directors is a group of people from outside or inside the company who are elected by shareholders to make long-term, strategic, and broad company policy decisions. Boards can be almost any size, but the most effective boards in startups are often 3-5 people.
A Boilerplate is a standard provision that appears in every legal document and effectively means the same thing in every document. The provision may be worded differently, but the provision achieves the same result.
Book Value is the total assets minus the total liabilities of a company. The book value of an asset, as shown on a balance sheet, is typically based on its original cost minus accumulated depreciation. The book value is used for both accounting and tax purposes.
Bootstrapping is when co-founders self-fund the startup through their own capital or through sales. The intent is to minimize dilution associated with raising capital from investors.
Mailchimp and 37Signals are examples of startups that were bootstrapped.
A Break-up Fee is a penalty paid by a potential acquirer to a startup if the potential acquirer backs out of an acquisition. In rare instances, this can also apply in financing rounds.
Bridge Financing is temporary funding for when a startup is running out of cash and needs an infusion of capital to operate the company until the company can raise permanent capital in the form of equity or debt. Bridge financing is typically a six to twelve-month promissory note that converts to preferred stock. The notes usually give an option to the lender to convert the note at a twenty to twenty-five percent discount from the permanent capital.
A Bridge Round is a round of funding that comes between rounds. Typically, a bridge round can be used to extend a startup’s financial runway as it prepares for a larger round. For example, a startup may not be ready for a Series A round from a product development or valuation standpoint, so a bridge round can be used to bring in capital to get the startup ready for Series A.
Bring Down Certificate
A Bring Down Certificate is a signed certificate certifying the company’s representation and warranties are still true as of the date of the certificate. Bring Down Certificates are often used to certify that the representations and warranties made in an agreement are still true at a later closing date.
Because so much time had passed since the first close, the investor asked for a bring down certificate.
Broad-Based Weighted Average
Broad-Based Weighted Average is an anti-dilution method 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. The new conversion price is calculated by multiplying the conversion price by a weighted average rate of the previously issued stock and the new preferred shares. The broad-based formula, as opposed to narrow-based weighted average, includes in the calculation all outstanding common stock on a fully-diluted basis, including convertible securities, warrants, and options.
Brogrammer (“bro” + “programmer”) is the satirical term for a male software programmer who acts like a frat boy. Stereotypically, a brogrammer, unlike his “nerd” counterpart, is cool, loud, sexist, and likes to party.
More Information:How Well Do You Know the Language of Startups?
A Broker-Dealer is an individual or firm that buys and sells securities or acts as an intermediary for such sales.
Burn Rate is calculated as monthly revenues less expenses. It is typically negative because expenses are so high for a startup relative to revenues. Burn rates are helpful in measuring how quickly a startup will go through all of its cash.
Monthly Burn = (cash balance at the beginning of the year minus cash balance at the end of the year)/12
More Information:Raising 12 months of burn is not enough
A Business Plan is a long document developed by a startup which lays out the blueprint for the startup – including the revenue model, growth plans, market information, and other relevant data. Business plans are not typically requested by investors, but the process of creating one can be useful.
B2B is an abbreviation of “Business-to-Business.” B2B describes a sales strategy with businesses as the primary customer.
The software developer found that selling directly to consumers would not be as lucrative as a B2B strategy of licensing his software to telephone companies.
B2C is an abbreviation of “Business-to-Consumer.” B2C describes a sales strategy with consumers as the primary customer.
The leather manufacturing company supplemented their B2B strategy with a B2C strategy by opening leather boot stores in rural shopping centers.
A Buy-Sell Agreement is an agreement between co-owners that governs the purchase of one party’s entire ownership share in a business. A buy-sell is typically used in a 50/50 ownership situation as a mechanism to avoid the dreaded deadlock.
A Buyout is a takeover action by an outside investor. The investor purchases a controlling interest in the company, “buying out” the current ownership.
The Bylaws of a corporation set forth the rules for governing corporate matters.
More Information:What’s a Company Record Book Anyway?
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
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.
A Capital Account is a ledger in an LLC which tracks the contributions and distributions to members. Each member’s capital account is oftentimes adjusted by allocations and distributions of the company’s profits and losses.
A 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.
A Capital Commitment is a member or shareholder agreeing to contribute some form of capital to the company.
More Information:Drafting LLC Company Agreements: What is a Capital Contribution?
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.
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 is the layers of financing in a company or project.
The Series B preferred shares will be a the top of the company’s capital stack.
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, 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.
A Carveout is an exception from a stated provision in a contract.
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.
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.
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 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.”
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.
More Information:Silicon Valley Review – Season 3, Episode 1: Are You the Right CEO?
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
Our churn rate has dropped considerably ever since we hired that fancy account manager.
More Information:How to control SaaS CHURN
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.
Our Class F Common Stock allows us to maintain voting control because the founders get 10 votes for each share we own.
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.
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.
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.
More Information:Employment Contract Considerations for Small Businesses and Startups
A Closing is the date, sometimes specific time, and process by which a transaction will be completed.
Co-Investment is when both limited and general partners circumvent the fund and invest in an operating company in the fund’s portfolio rather than investing in a holding company through the private equity fund.
Co-Sale is a contractual right allowing a shareholder to sell his shares at the same time as a majority shareholder. The shareholder with the right receives the same terms as the majority holder. Often called a Tag Along Right.
A Cockroach is a startup that builds slowly and spends carefully, minimizing risk so that it can survive doomsday scenarios and live to fight another day. A Cockroach isn’t as attractive as a Unicorn, but it is more likely to survive lean times, and it sees lack of resources as a challenge to find creative solutions.
More Information:The Age of the Cockroach (Medium)
Cohort is a term used by VCs when analyzing customer data. A group of customers (i.e. customers acquired in a certain month) comprise a cohort and are then tracked against other cohorts.
Our December 2015 cohort is spending much more per month than our December 2016 cohort. We should drill in on why.
A Cold Introduction is a self-made introduction. While less optimal than a warm introduction, anyone seeking to raise venture capital will have to master the art of the cold introduction.
A cold introduction can take the form of a carefully crafted LinkedIn message or email, a phone call, or an in-person attempt to initiate a conversation.
Collateral is a debtor’s asset that the debtor allows a creditor to have rights to until the debtor’s obligations are satisfied. A company can grant collateral in any of its assets, but most often collateral is granted in inventory or equipment.
A Commitment Period is the length of time a VC fund has to find and invest in new companies, usually five years.
A venture fund that collects all investments from its investors (oftentimes referred to as “limited partners” or “LPs”) up front, as opposed to a one deal at a time or capital call structure.
Common Stock is an equity ownership in a company. Common stock is typically issued before any other type of equity. Once a company has raised capital, common stock typically has junior liquidation and distribution rights to other stockholders and creditors.
More Information:See how common stock plays in the grand scheme of things
A Company Agreement is an internal document for an LLC that provides the framework for how a limited liability company operates. According to the TBOC, “It governs the relations among members, managers, and officers of the company, assignees of membership interests in the company, and the company itself; and other internal affairs of the company.”
Company Record Book
A Company Record Book is also called a Corporate Record Book. Simply, it is a book that houses your important company documents. In the old days, companies kept a three-ring binder with this important information. Today, it’s common to house this information electronically. It’s imperative to keep your corporate records in one place to share with your legal and tax advisors, as well as with investors from time to time.
Compounded Monthly Growth Rate (CMGR)
Compounded Monthly Growth Rate (CMGR) is a calculation that helps investors measure the periodic growth on an investment over a certain period of time. The calculation for CMGR = (Latest Month/ First Month)^(1/# of Months) -1].
Conditions Precedent are conditions that must be satisfied prior to a financing or closing.
Conditions Subsequent are conditions that must be satisfied after a financing or closing.
Consideration is the benefit that both parties get in a contract. In order for a contract to be binding, there must be consideration on both sides. Consideration can be something you will do, or something you will not do.
Consumer-to-Business (C2B) is a business model where consumer input dictates the terms of the deal they receive from a business. This can come in the form of consumers giving feedback on a product or bidding for their desired price.
Everlane, an online clothing company, supplements its traditional B2C model with a C2B opportunity for its customers to name the price that they pay on certain items. In addition, Instagram influencers provide C2B services by leveraging their popularity and great photographs for the benefit of large corporate sponsors.
Contingent Liability is a liability that is not certain, but could arise based on certain events. For example, if a startup is seeking capital during an ongoing lawsuit, the startup would need to disclose the lawsuit as a contingent liability in financing docs.
Control terms are terms that allow a VC to exert positive or veto control in a deal.
A Conversion Discount is when the holder of a convertible note has a right to convert into a subsequent financing round or transaction at a “discount” to the price per share of that round.
Conversion Price Adjustment
A Conversion Price Adjustment is the adjustment to the conversion price of a preferred series of shares upon the occurrence of certain events. It is typically an anti-dilution right.
Conversion Rights are the rights of a preferred stockholder to convert preferred stock into common stock.
Convertible Debt is an alternative to equity fundraising. The investor “lends” the startup money at a reasonable interest rate and with a maturity date in the 12-24 month range (usually). The understanding and intent of the investor and company is not for the startup to repay the debt, but rather for that debt to convert into equity at a discount to the next round. A convertible debt round typically includes a Convertible Note and a Convertible Note Purchase Agreement.
A Convertible Note is short-term debt that converts into equity, typically in conjunction with a financing round. By using a convertible note, the investor would be loaning money to a startup, and instead of a return in the form of principal with interest, the investor would receive equity in the startup.
Convertible Promissory Note
See Convertible Note.
A Convertible Security is a security that may convert into another kind of security in a company. See Convertible Note.
Convertible Stock is stock that converts into another class or series of stock, typically preferred stock that converts into common stock.
Corporate Governance is the manner in which an entity is governed and regulated. The term is used across all entity types – corporations, LLCs, and partnerships. Corporate governance documents include the certificate of formation/incorporation and bylaws for a corporation, and the certificate of formation and company agreement (or operating agreement) for an LLC.
A Corporate Resolution is a document that sets forth the actions of a corporation’s board or shareholders. In the context of an LLC, it may simply be called a “resolution.” A certain level of consent is required for a resolution to be approved.
A Corporate VC is the VC arm of an operating company. Google Ventures is a well known Corporate VC. Their investments are typically strategic in nature and can act as early-stage R&D.
A Covenant is a binding agreement to act, or refrain from acting, on some legal right. If a company agrees to refrain from acting on its legal right, the covenant is called a negative covenant. Companies can be faced with civil penalties for breaking a covenant.
Coworking is when you are working out of a shared office space with other startups. Examples include The DEC, Common Desk, WeWork, The Grove, and WERX.
More Information:Nic’s First Week Working in Lisbon, Portugal
Cram Down Round
A Cram Down Round is a financing round where new investors receive favorable contractual terms that significantly reduce (dilute) previous investors ownership percentages and rights. Typically, to receive these terms, the new investors must invest substantial amounts of money.
A Cross-Fund Investment is when a venture capital firm operates more than one fund and more than one fund invests in the same company.
Crowdfunding is funding projects through the collective efforts of a number of unrelated individuals. Crowdfunding can be reward-based, equity-based, or debt-based.
Startup Co-Founder 1: Do you think people will be interested in our business to the point that we can raise capital through crowdfunding? Startup Co-Founder 2: If Kanye West can raise thousands of dollars online to help him out of a $53 million debt through what was essentially crowdfunding, I’m sure we can manage to raise some capital through it.
More Information:Get the basics down on crowdfunding in a series of posts on our blog
A digital currency built on the blockchain framework that provides a decentralized and transparent ledger of all transactions of the currency. Bitcoin and Ether are examples of cryptocurrencies.
A Cumulative Dividend for a preferred stock is when its holders have a right to accrued dividends before common stockholders are paid any dividends.
Cumulative Voting is a type of voting system that helps strengthen the ability of minority shareholders to elect a director. This method allows shareholders to cast all of their votes for a single nominee for the board of directors when the company has multiple openings on its board.
Current Ratio is a measurement of a company’s ability to pay obligations determined by dividing the company’s current assets by its current liabilities.
Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) is the cost to acquire a new customer. CAC can be calculated by dividing the total costs associated with acquisition by the total new customers, within a specific time period.
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.
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 is the flow of potential deals to an investor.
More Information:Getting to “No.”
Debt Financing is raising money for working capital or capital expenditure through some form of a loan.
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 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.
Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life.
Dilution is the reduction in ownership percentage of a share of stock caused by the issuance of new stock.
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.
More Information:Which insurance does my startup need?
Disruptive Technology is a business that completely changes the way an industry operates, such as Uber and Lyft for taxis and Amazon for retail.
More Information:What is Disruptive Innovation? (Harvard Business Review)
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.
Blockchain is a common application of distributed technology because each computer involved contains a ledger to record and verify every transaction.
Distribution is a payment by a company to its shareholders (or members in the context of an LLC).
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.
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 is a term used to describe VCs who usually just make investments and do not offer other support or guidance.
Dry Powder is the amount of money that a VC or investor has available to make investments.
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.
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.
An Earnout is a portion of a sale agreement whereby the sellers receive certain payments contingent on future events, typically revenue or profit milestones.
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.
More Information:Recommendations for Startup Employee Option Plans
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 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.
More Information:Term Sheets 101: Convertible Debt vs. Equity
Equity Financing is the direct investment by investors in exchange for ownership (equity).
More Information:Term Sheets 101: Convertible Debt vs. Equity
Escrow describes documents, funds, and/or other assets being held by a third party until the parties of the transaction have satisfied certain obligations.
An Escrow Cap is the amount of money in a merger that is set aside to remedy breaches of the merger agreement.
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.
An Executive Summary is a short summary document, normally one to three pages, that describes material facts and strategies of a company.
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.
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.
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.
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.
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 is the legal and ethical duty that an individual has to an entity, which includes the duty of care and the duty of loyalty.
More Information:Business Judgment Rule: Having Poor Business Judgment Isn’t a Tort
A Finder is an individual who facilitates transactions, whether acquisitions or M&A, between companies and other parties.
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.
A Flat Round is a round of financing with the same post-money valuation as that of the previous financing round.
More Information:Silicon Valley Review – Season 2, Episode 1
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 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 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 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.
More Information:Access a Form 2553 on the IRS's official website by clicking here.
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 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 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.
More Information:Access a Form S-1 on the SEC's official website by clicking here.
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 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.
More Information:Access a Form S-3 on the official SEC website by clicking here.
Form S-4 is an SEC registration form designed to provide disclosures after companies merge with, acquire, or are acquired by another company.
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 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 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.
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.
More Information:Lending Alternatives For Startups And Small Businesses
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 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.
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.
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.
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 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.
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 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.
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 is the profit a company makes after deducting the costs associated with making and selling products and/or providing services.
A Growth Hacker is someone whose job is to figure out ways to grow the company.
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.
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.
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.
More Information:The difference between a soft launch and a hard launch (cahootsblog)
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.
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.
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.
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.
A Holding Company is an entity created for the purpose of owning entities and assets.
A Holding Period is the amount of time that a person or entity owns an asset or security.
A Home Run is when a business has an exit that returns 20 or more times what its investors initially put in.
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.
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.
The Hurdle Rate is the minimum rate of return required by an investor in order for a fund manager to collect management fees.
A security or asset is Illiquid if there is not a ready market to sell the security for cash.
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 is the act of incorporating a company through filing a required document with the secretary of state and paying an incorporation fee.
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.
More Information:Where Can A Startup Get Started?
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.
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 is a company’s agreement to pay another party’s losses under a contract regardless of whether the company caused the losses.
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.
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 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.
More Information:Regulation A+ Creates Excitement For Early Stage Ventures and Investors
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 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.
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.
More Information:Here’s Why Dallas is Primed For ‘Series A’ Funding
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 is intangible property such as a process, a design, a code, company secrets, or images that are protected by patent and copyright law.
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.
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.
More Information:Hiring a Developer? Get It in Writing and Signed First.
An Investment Advisor is an individual or entity that is registered to provide investment advice about securities.
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.
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.
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.
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.
The Issue Price is the price at which a company’s securities are sold.
Issued Shares are the amount of shares the company has sold or granted to shareholders.
An Issuer is an entity that has “issued” or sold its securities.
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.
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.
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.
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 is debt that is a lower priority to senior debt. Junior debt is also known as “subordinated debt.”
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.
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.
More Information:Which Insurance Does My Startup Need?
Key Performance Indicator (KPI)
A key performance indicator is a measurable value that helps a startup measure key business metrics.
Our monthly investor update includes five KPIs – new pipeline customers, closed customers, MRR, ARR, and Burn Rate.
KISS is the acronym for “Keep It Simple Security,” which can be an alternative for either a debt or equity financing.
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.”
Once he left the startup, he only had 180 days to exercise his options before they lapsed.
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.
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.
More Information:How to launch your startup (Venture Beat)
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.
We finally identified a lead investor for our $3M Series A round, so now the other smaller investors are ready to close.
More Information:Why you should tell your investors everything
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).
More Information:Employment Contract Considerations For Small Businesses and Startups
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.
More Information:Protecting Your Intellectual Property
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).
Our CAC is $4, but our LTV is $28.
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
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.
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 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.
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.
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.
A Majority Shareholder is a shareholder who owns more shares in the company than any other shareholder.
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 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 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.
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 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.
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.
This is my boyfriend, Brice. He works in M&A for Globo Bank.
A Micro VC is a venture fund with less than $25M in funds.
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.
More Information:VW Startup Lifecycle Infographic
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.
More Information:MRR is great, but so is one-time revenue
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.
Don’t forget that our seed investors have a MFN clause, so they’ll get the same rights as the Series A investors.
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 Nano VC is a venture fund with less than $100M in funds.
More Information:Nano-Venture funds are all the rage
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.
A Narwhal is a Unicorn based in Canada.
National Venture Capital Association (NVCA)
The National Venture Capital Association (NVCA) is a venture trade association that pools resources and fosters innovation.
More Information:Learn more about the NVCA on their official website by clicking here!
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.
More Information:How do you name Texas Series LLCs?
Next Level is the startup community’s highest acclaim or stamp of approval for new products or developments.
A Ninja is a smart and talented person with a specific set of skills.
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.
More Information:Don’t Have Enough Authorized Shares? There’s a Fix for That.
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.
Our term sheet included a thirty-day no-shop clause.
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.
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, 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 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 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.
More Information:The Company Agreement Explained: What are Classes of Members?
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.
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.
An Option Plan is a plan created by a company to issue stock options to its employees and service providers.
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.
Our accountant set us up to minimize ordinary income taxes.
Outstanding Shares refers to the number of shares that a company has issued to shareholders (including founders, investors, advisors, and option holders).
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 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.
Paid-In Capital is the aggregate amount of capital received in return for the sale of equity in the company.
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 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, 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.
A Partnership is created, without filing anything with the state, when two or more individuals go into business for profit. Partners are personally liable for all of the partnership’s debts and liabilities, but the partners receive the benefit of pass through taxation. Partnerships are rarely intentionally created now because of other limited liability options that exist.
A 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.
More Information:Why your Startup or Small Business Should (likely) Be An LLC
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 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, “Problems Emerge Between Chair and Keyboard,” is a sardonic programmer term for what happens when users are too dumb to use software correctly.
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 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.
A PIK Dividend is a dividend paid in the form of additional stock to a stockholder, usually preferred stock. PIK means payment in kind.
A Pivot is a wholesale change of a startup’s current business model in an attempt to capitalize on a totally different market opportunity.
A Placement Agent is an individual or firm that assists venture capital and private equity fund managers in finding institutional investors.
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.”
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.
We raised $1M on a $5M pre-money valuation, so our post-money valuation is $6M.
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.
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 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 is having a priority over other shareholders, usually regarding distributions in the form of dividends and proceeds from the sale of a company.
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 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 is the payment in full of an obligation before the maturity date of the obligation.
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.
More Information:VW Venture Deals Year in Review 2016
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.
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.
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 is equity capital that is not quoted on a public exchange and refers to investments in private companies.
A Private Offering is a company selling its securities to private-accredited investors without registering the securities with the SEC.
More Information:See our Private Offering Exemptions and a Crowdfunding Chart
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.
More Information:See our Private Placement Exemptions and a Crowdfunding Chart
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 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 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 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.
An ice cream truck at the end of a rigorous but popular hike is an example of a product/market fit.
More Information:Product/Market Fit: What It Means and How to Measure It in 2018
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.
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”).
A Promissory Note is a debt instrument whereby a borrower promises to pay a lender in accordance with terms defined in the note.
See Carried Interest.
Proprietary Rights are property rights that only the owners of the property possess.
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 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 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.
More Information:The Company Agreement Explained: Meetings of the Managers and Members
A Public Company is a corporation whose securities are traded on a public exchange. These securities must be registered with the SEC.
More Information:One of the reasons Uber wants to stay private, and why you should to
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.
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.
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.
A Qualified IPO is an IPO that is being sold at a price and value greater than the contemplated value in the financing documents.
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 is the amount of shareholders whose presence or proxy is necessary at a meeting in order to take corporate action.
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)
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.
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 is the measure of revenue components that are recurring in nature. This excludes one-time (non-recurring) fees and professional service fees.
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.
The VC gave us a great valuation, but he also has a redemption right after five years.
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.
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 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.
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+ 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 is the set of rules and forms that implements crowdfunding.
More Information:Private Offering Exemptions & Crowdfunding Chart
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.
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 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 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 is money that is brought into a company by its business activities (typically from sales).
Founder: “We’re pre-revenue right now.”
Investor: “Call me when you’re post-revenue.”
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 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.
More Information:Silicon Valley Review – Season 2, Episode 1
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.
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 is the level of risk an investor is comfortable with as the investor seeks investments.
A Road Show is a company presenting its pitch deck in many cities attempting to raise capital.
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.
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).
More Information:THE ROLLING CLOSE: RIGHT FOR YOU BUT IS IT RIGHT FOR YOUR INVESTORS?
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.
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.
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 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 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 is an SEC registration exemption which exempts shares acquired in a merger, acquisition, or consolidation from registration prior to the sale.
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.
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.
More Information:Silicon Valley Review S2, Ep1: Runaway Valuations
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.
More Information:VW Startup Lifecycle Infographic
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.
More Information:Why your Startup or Small Business Should (likely) Be An LLC
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 is an acronym for “simple agreement for future equity,” which is an alternative to the issuance of convertible debt.
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.
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 is whether a company’s product and operations can be successful at growing quickly and operating at a much larger scale.
A Scale-Down is when a fund manager’s fee is reduced at a scheduled rate as the fund is reducing its investment activity.
A Scale-Up is when a startup believes it can rapidly accelerate the growth of the company and receive positive returns.
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.
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.
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.
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.”
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 are shares sold by a shareholder to a third party rather than shares sold by a corporation.
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.
More Information:See our blogs regarding SEC rules and regulations
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.
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.
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 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 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.
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 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 are securities that receive proceeds from a liquidation event before other of the company’s securities.
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.
More Information:Here’s Why Dallas is Primed For ‘Series A’ Funding
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.
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.
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.
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.
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.
A Simple Majority means more than 50% of shares or members who can vote to make a decision.
More Information:Drafting LLC Company Agreements: Simple Majority v. Super-Majority
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 is the go-to communications tool for startups. We highly recommend it.
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.”
More Information:Lending Alternatives For Startups And Small Businesses
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 is investment dollars from professional investors – i.e. venture funds or experienced angel investors.
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.
More Information:How to launch your startup (Venture Beat)
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.
Dude, your startup is a sole proprietorship. No bueno. See an attorney at Vela Wood ASAP.
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.”
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.
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.
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.
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 are an option to purchase a fixed amount of shares at a fixed price that typically vest over time.
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.
More Information:Give Options to Every One of your Employees
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.
We’re just waiting for the investor to sign the SPA and then wire funds to us.
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.
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.
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.
More Information:Are Strategic Investors Important?
The Strike Price is a fixed price that option holders must pay when exercising their stock options.
Structure refers to multiple liquidation preference or participation in a preferred stock. This is often found in late-stage deals.
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.”