Glossary

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  • 4

  • 409A
    Section 409A of the Internal Revenue Code is a complex and often counterintuitive set of tax rules applicable to deferred compensation.  Deferred compensation exists when an employee, consultant or board member has a contractual right to compensation that may be paid in later taxable years and(...)
  • 8

  • 83(b) Election
    If you earn shares through vesting by remaining with a company, the Internal Revenue Service treats that equity as taxable income as it vests if it is worth more than you initially paid for it. If you exercise options prior to full vesting, or if you receive shares of restricted stock, you can(...)
  • a

  • Acceleration
    Some founders and key executive negotiate into their equity arrangements that they will be entitled to some form of acceleration of the vesting of their equity upon the occurrence of a triggering event. Typically, the triggering event is the sale of the Company, but can also be an involuntary(...)
  • Acquihire
    An "acquihire" is a transaction in which a company is being bought predominantly for the employees working there and not for the product/service it is bringing to market or its technology. The hope is that in purchasing teams of smart people who have a history of working together, purchasers(...)
  • Aggregate Purchase Price
    Aggregate purchase price takes into account any assumed debt, certain assumed liabilities, transaction bonuses or transaction fees that may deduct value from a non-aggregate purchase price. If this is an offer to acquire a company, you will want to make sure you understand what exactly is(...)
  • Angel Investors
    Angel investment is a fairly common source of financing for young startups, as angel investors can bridge the gap between a"friends and family" seed funding and larger venture capital funding. Many angel investors have some experience in the startup community and can be a useful resource for(...)
  • Antitrust
    Antitrust laws, also known as competition laws, are statutes developed in order to protect consumers through fair competition and an open market. There are a variety of business activities that may fall under antitrust laws, such as market allocation, price fixing, and bid rigging. The US(...)
  • Appraisal Right
    Often, a bare majority of a Company's shareholders can approve a merger or acquisition, but minority shareholders who are against the potential merger may not believe they are getting paid a fair price for their shares. In order to protect these minority shareholders, many states provide for a(...)
  • Assignment of IP
    The assignment of intellectual property (IP) refers to the process by which ownership of work product created for a company by an employee or consultant is transferred to the entity. This is usually achieved by having an employee or consultant sign an agreement that includes an explicit(...)
  • Audit
    Official inspections by an independent auditor help to provide investors with an accurate sense of a Company's financial health, and many venture investors require their portfolio companies to conduct annual audits to help ensure that they receive reliable financial reporting. In the United(...)
  • Audit Committee
    An audit committee is a committee of board members to whom the board has delegated the responsibility of supervising accounting practices, financial reporting, engagement of external auditors, risk management policies, and regulatory compliance. U.S. companies are required to have an audit(...)
  • Authorized Share Method
    The "authorized share method" is Delaware's default method of calculating annual franchise tax, based only on how many shares a Company has authorized in its charter. This method can be prohibitively expensive for a young startup with a lot of authorized shares and result in initial tax bills(...)
  • Authorized Shares
    A corporation's certificate of incorporation sets forth the maximum number of shares a corporation may issue of each class and series of stock, or authorized shares. The authorized number of shares available to issue can be increased by amending the corporation's charter.
  • b

  • Basis Point
    Basis points measure the variation in financial instruments that often fluctuate in very small increments. One basis point is equal to .01%; therefore, 100 basis points are equal to 1%.For example, a yield that has increased from 3.33% to 3.46% has increased 13 basis points.
  • Benefit Corporation
    A benefit corporation, sometimes called a "B Corp," is a type of for-profit entity that also includes a positive impact on society as part of its legally defined goals. A majority of US states, including Delaware and California, have authorized the creation of this new form of corporation as a(...)
  • Bill of Materials
    The bill of materials, or BOM, is a list of components to be used in fabricating a product. Including a precise BOM as a part of the supply agreement is a must when you plan to rely on a Contract Manufacturer to procure raw materials and product components. This will help prevent the(...)
  • BM
    The bill of materials, or BOM, is a list of components to be used in fabricating a product. Including a precise BOM as a part of the supply agreement is a must when you plan to rely on a Contract Manufacturer to procure raw materials and product components. This will help prevent the(...)
  • Board Minutes
    Board minutes are a product of each meeting of a company's Board of Directors, where one individual will be designated secretary of the meeting, and will be responsible for preparing minutes, essentially written notes, memorializing the discussions by the Board and setting forth any formal(...)
  • Board of Directors
    Although the executive officers, such as the Chief Executive Officer and Chief Financial Officer, generally handle the day-to-day operations of the business, the board of directors is ultimately responsible for the management and oversight of a corporation. The board of directors should meet(...)
  • Bridge financing
    Sometimes companies need a short term cash infusion to get them enough operating capital to get to a point where they can raise a successful financing round or sell the company on more favorable terms. Some companies will raise a "bridge financing" that provides a "bridge" between their(...)
  • Broad-Based Weighted-Average Anti-Dilution Protection
    Broad-based weighted-average anti-dilution protection results in shares of preferred stock being convertible into additional shares of common stock, but unlike a ratchet provision, the size of the adjustment depends on the number of shares sold relative to the company's existing stock as well(...)
  • Burn Rate
    A burn rate is the rate at which a company goes through, or burns, cash to keep the business running. This gives a company an idea of how long it can survive without additional funding. Companies with a high burn rate are more dependent on their ability to obtain additional funding and more(...)
  • Business Plan
    A business plan is a written description of the company's future; it is a formal statement of the business's goals, reasons they are attainable, and plan for reaching these goals. A business plan should include a business model, detailed information on your target market, financial projections(...)
  • Buy-out
    A buy-out is a contractual clause in which the company or other investors can buy out the equity of another stock holder. Usually this is triggered by a specified event, such as termination, death, or disability. The buy-out clause usually specifies a fixed price fot the buyout, a formula to(...)
  • Bylaws
    The Certificate of Incorporation establishes the corporate entity, and corporate bylaws exist to provide more detail about the manner in which the business is governed and run on a day-to-day basis. The bylaws are subordinate to and must be consistent with the Certificate of Incorporation.(...)
  • c

  • C Corporation
    Most major companies and many smaller companies are treated as C Corporations (or C-Corps) for US federal income tax purposes. These are distinguished from S corporations or Limited Liability Companies, or LLCs, because those corporate entities are not taxed and the shareholders or members(...)
  • C-Corp
    Most major companies and many smaller companies are treated as C Corporations (or C-Corps) for US federal income tax purposes. These are distinguished from S corporations or Limited Liability Companies, or LLCs, because those corporate entities are not taxed and the shareholders or members(...)
  • Cap Table
    A cap table tells you "who owns what." They can be summary in nature by grouping all holders into simplified buckets such as "founders" and "investors" and/or just identifying how many shares of a give class or series of stock is outstanding without identifying individual holders. Or they can(...)
  • Capital Gains
    A capital gain is income earned from the sale of a capital asset, such as stock or real estate, in excess of the original purchase price. Capital gains are distinct from "ordinary income", which is income earned from other means, such as for services. There are also different tax rates for(...)
  • Carve-Outs
    Many legal contracts contain blanket statements but then provide for carve-outs that serve as exceptions and exemptions to general rules. For example, employees will usually sign CIIAAs prior to starting their employment, but can list as "carve-outs" the inventions or intellectual property(...)
  • Certificate of Incorporation
    Also known as the Articles of Incorporation or a "charter," this is the founding document that establishes and organizes a corporation. It must be filed with the Secretary of State in whichever state the corporation is incorporated, which need not be the state of its principal headquarters.(...)
  • CFO
    A Chief Financial Officer (CFO) is the senior offer responsible for overseeing the financial activities of the entire company. Some of the most important duties of the CFO include implementing and supervising internal controls, monitoring cash flow, planning strategic financial decisions, and(...)
  • Chief Financial Officer
    A Chief Financial Officer (CFO) is the senior offer responsible for overseeing the financial activities of the entire company. Some of the most important duties of the CFO include implementing and supervising internal controls, monitoring cash flow, planning strategic financial decisions, and(...)
  • CIIAA
    Also known as Proprietary Information and Inventions Assignment Agreements (or PIIAAs), Confidential Information and Inventions Assignment Agreements ensure that intellectual property and other proprietary rights created by employees during the course of their employment are assigned to the(...)
  • Class F Stock
    Class F Stock is a founder-friendly form of common stock that generally has super-voting rights. Many public corporations have dual class stock structures in which one form of stock has 10 to 1 voting superiority over the common stock, as well as other protective provisions. Typically, these(...)
  • Co-Inventor
    Joint inventor or co-inventor means any one of the individuals who invented or discovered the subject matter of a joint invention or discovery. More than one inventor can be named on a United States patent, and the concept is explicitly recognized in the U.S. Code (U.S.C.). In the case of(...)
  • Common Law Rights
    Most English-speaking nations have a common law based legal system, meaning that laws can evolve over time as judges issue opinions and make decisions that interpret the law. Common law rights are individual rights that come from this "judge-made" law and are not formally passed by the(...)
  • Common Stock
    Common stock is a security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy, as outlined in the corporation's charter. Common stockholders are on the bottom of the priority ladder for ownership(...)
  • Company-Sponsored Liquidity Transaction
    A company-sponsored liquidity transaction occurs when a private company buys its employees' equity in the company, which has become more common in recent years. Company-sponsored liquidity transactions are often structured as a buyback of shares by the company, funded either with balance sheet(...)
  • Confidential Information and Inventions Assignment Agreements
    Also known as Proprietary Information and Inventions Assignment Agreements (or PIIAAs), Confidential Information and Inventions Assignment Agreements ensure that intellectual property and other proprietary rights created by employees during the course of their employment are assigned to the(...)
  • Conflict of Interest
    A conflict of interest is a situation in which a person is in a position to derive personal benefit from actions or decisions made in their official capacity. Directors of companies have fiduciary duties of loyalty and care to the company and its stockholders. Directors must put the interests(...)
  • Contract Manufacturer
    A contract manufacturer (CM) is a third-party manufacturer of components or products for a company. This is a form of outsourcing. A company generally approaches a CM with a design or product and ask for pricing to manfacture based upon variables like processes, labor, tooling, and material(...)
  • Conversion Price Cap
    A conversion price cap is the maximum valuation at which convertible debt or SAFEs convert at the time of the financing resulting in the conversion, regardless of the valuation agreed to by the company and the new equity investors. New investors sometimes look at the cap amount as a proxy for(...)
  • Convertible Note
    A convertible note is an investment vehicle often u to facilitate investing in a company establishing a valuation. This may be desirable for many reasons, including efficiency or the particular business stage (too early to attract money at an acceptable valuation or a need for cash at a point(...)
  • Corporate Veil
    Corporations are created, in part, because they allow stockholders to separate their own assets from the corporation's assets. Shareholders know they are only at risk of losing the money or assets they have invested in the corporation, and nothing more. If stockholders worried that they might(...)
  • Covenant
    A covenant is an agreement by to do or not do something in the future. Affirmative covenants are acts the agreeing party agrees to do (e.g., purchase insurance within a specified time frame) and negative covenants are acts that the agreeing party agrees not to do (e.g., not to engage in a(...)
  • d

  • Data Room
    A data room is a space used for storing information such as contracts or corporate documents typically with the intent to share that information in a secure and/or confidential fashion with others (such as with a potential acquiror). A data room can be physical or virtual. Data rooms are often(...)
  • Delaware Annual Report
    The Delaware Annual Report must be filed online and consists of entering the Federal Employee ID Number, the corporation's physical address, names and addresses of officers, names and addresses of directors, and the name, title, and address of the person completing the filing. The franchise(...)
  • Delaware Franchise Tax
    The Delaware Franchise Tax is an annual tax paid to the Delaware Department of State by limited partnerships, limited liability companies, or corporations formed under Delaware law. For Corporations, the tax is a minimum of $175 and a maximum of $180,000, and by default it is calculated based(...)
  • Dilution
    Dilution is a reduction in the ownership percentage of a share of stock caused by the issuance of new stock. Dilution can also occur when holders of stock options (such as company employees) or holders of other optionable securities exercise their options. When the number of shares outstanding(...)
  • Discount Shares
    When a convertible note or SAFE with a discount rate/conversion price discount (including a conversion price cap) is converted into equity, the resulting shares attributable to the discount are sometimes referred to as "discount shares."The discount shares may be the same class/series as the(...)
  • Distribution In Kind
    A distribution in kind (sometimes referred to as an "in-kind" distribution) is a distribution from a company in the form of property other than cash, such as securities or assets. While property may have the same value as cash, taxes may be triggered by an in kind distribution that would not(...)
  • Dollars-Invested Method
    In a preferred stock financing, there are three typical methods by which the price per share of the new preferred stock is determined, the "pre-money method," the "percentage-ownership method" and the "dollars-invested method". They yield different results if convertible notes are converting(...)
  • Drag-along Rights
    Drag-along rights enable majority shareholders to "drag along" minority shareholder shares in an acquisition. This right is often negotiated by investors so that they can sell a company through a stock acquisition even when minority shareholders do not want to sell their shares. Founders, who(...)
  • Due Diligence
    Due diligence is a process where parties to a transaction, as well as their lawyers and accountants, review legal and financial documents relevant to the transaction prior to the finalization of a deal. For example, in the sale of a company, the seller will make pre-signing representations and(...)
  • Duly Incorporated
    A "duly incorporated" company has properly filed for incorporation, has followed requirements for incorporated companies, and has documentation to evidence those activities. By contrast, a company could be defectively incorporated or organized if it has filed for incorporation but has failed(...)
  • Duty of Care
    The duty of care is one of the fiduciary duties and it is violated when an action is taken or not taken on the basis of inadequate information or without following a reasonable process.For example, if a board of directors of a corporation were to vote on a merger without performing any due(...)
  • Duty of Loyalty
    The duty of loyalty requires that the interests of the company and stockholders be placed before personal interests. The duty of loyalty can be violated by actions that divert corporate assets, opportunities, or information for personal gain. In addition, the duty of loyalty can be violated if(...)
  • e

  • EEA
    The European Economic Area (EEA) is made up of the countries that have agreed to the free movement of goods, persons, services, and capital with the other countries participating in the EEA Agreement, effectively creating a single European market that includes the countries of the European(...)
  • Equity
    Equity is an ownership interest in the net value of a company. In accounting parlance, equity is the value of a company's net assets minus liabilities. In a corporation, equity is typically represented by different classes of stock. While equity is subordinate to debt, equity has unlimited(...)
  • European Economic Area
    The European Economic Area (EEA) is made up of the countries that have agreed to the free movement of goods, persons, services, and capital with the other countries participating in the EEA Agreement, effectively creating a single European market that includes the countries of the European(...)
  • Exclusivity
    In a term sheet for a private placement, M&A transaction or other transaction, there is commonly a requirement for temporary exclusivity that requires one or both parties to negotiate exclusively with the other for a limited time or under certain conditions so that the investment of resources(...)
  • Executive Session
    A Board of Directors can hold a meeting or a portion of the meeting with only non-employee directors, called an executive session. Because these sessions leave employee directors, including the CEO if the CEO is also a director, out of the discussion, they are typically used only to discuss(...)
  • Executive Summary
    An executive summary is a one to two-page summary of a business plan that will help potential investors understand a business. An executive summary, along with a business plan and a presentation (or "pitch deck"), will serve as the introduction to a business for investors deciding whether to(...)
  • Exercise Price
    Every stock option has an exercise price, also called the strike price, which is the price at which a share can be bought. Tax law limits the exercise price that can be assigned to stock options to the fair market value of the underlying share on the day the option is issued to prevent abuse(...)
  • f

  • Federal Trade Commission
    The Federal Trade Commission (FTC) is an independent regulatory agency authorized by the Federal Trade Commission Act to protect consumers from anti-competitive business practices including but not limited to false advertising, predatory pricing, and monopolies.In addition, the FTC and the(...)
  • Fiduciary Duties
    A person owes another fiduciary duties, the duty of care and the duty of loyalty, when that person has control over a financial interest of the other. For example, the board of directors of a corporation owe stockholders of that corporation fiduciary duties because their decisions affect the(...)
  • Fiduciary Duty of Due Care
    The duty of care is one of the fiduciary duties and it is violated when an action is taken or not taken on the basis of inadequate information or without following a reasonable process.For example, if a board of directors of a corporation were to vote on a merger without performing any due(...)
  • Fiduciary Duty of Loyalty
    The duty of loyalty requires that the interests of the company and stockholders be placed before personal interests. The duty of loyalty can be violated by actions that divert corporate assets, opportunities, or information for personal gain. In addition, the duty of loyalty can be violated if(...)
  • Flow Through Taxation
    Pass-through taxation (or "flow thru taxation") exists when the owners of sole proprietorships, partnership, limited liability companies and S-corporations pay taxes on all the business profits via their individual tax return forms. This is in contrast to a corporation, where the corporate(...)
  • Foreign Corporation
    A foreign corporation is a corporation formed under the laws of another country or another state. To do business in a state that is not the state in which the corporation incorporated, the business must register and pay the applicable fees and taxes in the state it is doing business.For(...)
  • FTC
    The Federal Trade Commission (FTC) is an independent regulatory agency authorized by the Federal Trade Commission Act to protect consumers from anti-competitive business practices including but not limited to false advertising, predatory pricing, and monopolies.In addition, the FTC and the(...)
  • Full Ratchet
    "Full ratchet" refers to a type of anti-dilution protection for preferred stock in the event of a down round of series financing that adjusts the number of common shares the preferred shares can be converted into based on the new share price.This method recalculates the number of common shares(...)
  • Fully Diluted Shares
    "Fully diluted" shares are the total common shares of a company counting not only shares that are currently issued or outstanding but also shares that could be claimed through the conversion of convertible preferred stock or through the exercise of outstanding options and warrants.The(...)
  • g

  • Generic top-level domains
    Generic top-level domains (gTLDs) are the non-country-specific top level domains maintained by the Internet Corporation for Assigned Names and Numbers (ICANN), and the most popular include .com, .info, .net, and .org.ICANN is responsible for ensuring a stable and unified global internet, and(...)
  • Good Reason
    "Good reason" is often defined in a double trigger vesting provision that accelerates an employee's vesting if the company is acquired and the acquiring company does something that gives the employee "good reason" to leave and to receive the accelerated vesting of unvested shares.A "good(...)
  • gTLDs
    Generic top-level domains (gTLDs) are the non-country-specific top level domains maintained by the Internet Corporation for Assigned Names and Numbers (ICANN), and the most popular include .com, .info, .net, and .org.ICANN is responsible for ensuring a stable and unified global internet, and(...)
  • i

  • ICANN
    The Internet Corporation for Assigned Names and Numbers (ICANN) is a nonprofit organization with oversight by the United States Department of Commerce that administers registries of internet protocol identifiers and domain name system (DNS) root registries. ICANN operates part of the DNS,(...)
  • Illiquid stock
    Illiquid stock cannot be sold for cash easily because it is not traded on a public market or in demand by other private investors. Often this means the stock can still be sold or traded but only with a significant discount compared to the potential value it may represent.Stock in early stage(...)
  • In-Kind Distributions
    A distribution in kind (sometimes referred to as an "in-kind" distribution) is a distribution from a company in the form of property other than cash, such as securities or assets. While property may have the same value as cash, taxes may be triggered by an in kind distribution that would not(...)
  • Incident Response Plan
    An "incident response plan", or IRP, is an in-house plan consisting of a pre-made list of relevant contacts and tasks that need to be completed when there is a major incident, such as a data breach. An incident response plan needs to include the contact information for legal and other relevant(...)
  • Independent Contractor
    An independent contractor is a person or business engaged to provide goods or services to another person or business. Individuals acting as independent contractors are treated differently than employees for tax and labor law purposes.A worker might be appropriately classified as an independent(...)
  • Infringement
    Infringement is the act of violating a law or right, and with respect to intellectual property, it is the act of using another's protected intellectual property without permission. Infringement does not have to be intentional to create liability. Someone can be liable for infringing on(...)
  • Initial Public Offering
    An Initial Public Offering (IPO) is the first listing of a security on a public exchange. Companies making an IPO need to comply with the registration requirements of the 1933 Act (pdf) as well as the public reporting requirements of the 1934 Act (pdf).To complete an IPO a company must engage(...)
  • Intellectual Property
    Intellectual property includes inventions, art, and other works of "intellect." Intellectual property can be protected under rights including but not limited to patent, copyright, trademark, and trade secret.The purpose of intellectual property law is to give the creator of the intellectual(...)
  • Intellectual Property Assignment
    The assignment of intellectual property (IP) refers to the process by which ownership of work product created for a company by an employee or consultant is transferred to the entity. This is usually achieved by having an employee or consultant sign an agreement that includes an explicit(...)
  • Intentional radiators
    Intentional radiators are devices that emit radio frequencies, including radios and wireless routers, and are regulated by the Federal Communications Commission (FCC).
  • Inter partes review
    Inter partes review is a way to challenge the validity of an issued US patent based on prior art patents or printed publications. This type of review became available in 2012, replacing a previous process called inter partes reexamination. Inter partes review is considered a cheaper(...)
  • Interest rate
    This is the annual rate at which interest accrues on a promissory note or other indebtedness, as long as it is outstanding. The interest rate might be fixed at a certain percentage, or adjustable based on fluctuations in a benchmark interest rate index such as the London Interbank Offered Rate(...)
  • International Search Authority
    Once a Patent Cooperation Treaty (PCT) application is filed, the applicant needs to select an International Search Authority (ISA) to perform a search of prior art and to issue a Written Opinion giving its opinion on the patentability of the claim as filed.Patent offices including the United(...)
  • Internet Corporation for Assigned Names and Numbers
    The Internet Corporation for Assigned Names and Numbers (ICANN) is a nonprofit organization with oversight by the United States Department of Commerce that administers registries of internet protocol identifiers and domain name system (DNS) root registries. ICANN operates part of the DNS,(...)
  • Inventions Assignment Agreement
    An inventions assignment agreement is a typical feature of an independent contractor or employee agreement where the worker agrees to assign any intellectual property rights arising from the worker's services to the company.Employees typically see these provisions in a Confidential Information(...)
  • IP
    Intellectual property includes inventions, art, and other works of "intellect." Intellectual property can be protected under rights including but not limited to patent, copyright, trademark, and trade secret.The purpose of intellectual property law is to give the creator of the intellectual(...)
  • IP Assignment
    The assignment of intellectual property (IP) refers to the process by which ownership of work product created for a company by an employee or consultant is transferred to the entity. This is usually achieved by having an employee or consultant sign an agreement that includes an explicit(...)
  • IPO
    An Initial Public Offering (IPO) is the first listing of a security on a public exchange. Companies making an IPO need to comply with the registration requirements of the 1933 Act (pdf) as well as the public reporting requirements of the 1934 Act (pdf).To complete an IPO a company must engage(...)
  • IRP
    An "incident response plan", or IRP, is an in-house plan consisting of a pre-made list of relevant contacts and tasks that need to be completed when there is a major incident, such as a data breach. An incident response plan needs to include the contact information for legal and other relevant(...)
  • ISA
    Once a Patent Cooperation Treaty (PCT) application is filed, the applicant needs to select an International Search Authority (ISA) to perform a search of prior art and to issue a Written Opinion giving its opinion on the patentability of the claim as filed.Patent offices including the United(...)
  • Issued Shares
    Outstanding shares (also referred to as issued shares) refers to the number of shares that have been issued and are outstanding at a given time. This number cannot be greater than the number of authorized shares. Practices vary, but we typically issue between 5 and 10 million shares to the(...)
  • j

  • Joint inventor
    Joint inventor or co-inventor means any one of the individuals who invented or discovered the subject matter of a joint invention or discovery. More than one inventor can be named on a United States patent, and the concept is explicitly recognized in the U.S. Code (U.S.C.). In the case of(...)
  • k

  • Keep It Simple Security
    KISS ("Keep It Simple Security") is a term used by 500 Startups that describe short "open source" documents that have been drafted for use in early-stage private company financing deals. These documents are the result of multiple discussions with a number of Silicon Valley law firms and(...)
  • KISS
    KISS ("Keep It Simple Security") is a term used by 500 Startups that describe short "open source" documents that have been drafted for use in early-stage private company financing deals. These documents are the result of multiple discussions with a number of Silicon Valley law firms and(...)
  • l

  • Licensing
    Licensing occurs when a person or company authorizes another person or company to make, use, or sell a specific product or item in exchange for money or other consideration (e.g., an inventor licensing her creation to a manufacturer to make and sell the creation in exchange for paying the(...)
  • Limited Liability Company
    A limited liability company (LLC) is a business structure that combines the pass-through taxation of a partnership with the limited liability of a corporation.Although LLCs have some attractive features, they can also present a number of disadvantages to startup company founders in relation to(...)
  • Limited Partnership
    A limited partnership is a partnership consisting of a general partner, who manages the business and has unlimited personal liability for the debts and obligations of the partnership, and one or more limited partners, who have limited liability but cannot participate in management.(...)
  • Liquidation Preference
    A liquidation preference is a right that one class of stockholders may have to be paid ahead of other class(es) of stockholders in the case of a liquidation of the company.For example, in most venture-backed companies, the investors have a liquidation preference that allows the investors to(...)
  • Liquidity Rounds
    Liquidity rounds (also known as secondary sales) are events where private company stockholders can participate in selling a portion or all their shares before the company goes public or is acquired. In the years past, private company stockholders would have been expected to wait until the(...)
  • Liquidity Transaction
    A company-sponsored liquidity transaction occurs when a private company buys its employees' equity in the company, which has become more common in recent years. Company-sponsored liquidity transactions are often structured as a buyback of shares by the company, funded either with balance sheet(...)
  • LLC
    A limited liability company (LLC) is a business structure that combines the pass-through taxation of a partnership with the limited liability of a corporation.Although LLCs have some attractive features, they can also present a number of disadvantages to startup company founders in relation to(...)
  • LP
    A limited partnership is a partnership consisting of a general partner, who manages the business and has unlimited personal liability for the debts and obligations of the partnership, and one or more limited partners, who have limited liability but cannot participate in management.(...)
  • m

  • Maturity Date
    The maturity date is the date on which the holders of a promissory note or other indebtedness can demand repayment under the promissory note or other indebtedness.
  • n

  • National Venture Capital Association
    The National Venture Capital Association (NVCA) is an organization that represents the US venture capital community. It advocates policies that encourage innovation and reward long-term investment, and is a resource for venture capital forms and data.
  • Net Operating Loss
    Net operating loss (NOL) is a loss taken in a period where a company's allowable tax deductions are greater than its taxable income, resulting in a negative taxable income. This generally occures when a company inccurs more expenses than revenues during that period. If a company has a net(...)
  • NOL
    Net operating loss (NOL) is a loss taken in a period where a company's allowable tax deductions are greater than its taxable income, resulting in a negative taxable income. This generally occures when a company inccurs more expenses than revenues during that period. If a company has a net(...)
  • Non-qualified Stock Options
    Non-qualified Stock Options (NSOs) are stock options that, when exercised, result in ordinary income tax on the difference between the exercise price and the fair market value of the underlying shares.NSOs are somewhat more common than incentive stock options (ISOs) because ISOs can only be(...)
  • Noncompetition Agreement
    A noncompetition agreement provides that an employee cannot engage in business activities that compete against the company at which he or she works or worked. Often times companies require employees to sign an agreement regarding confidentiality and assignment of inventions (oftentimes called(...)
  • Nonsolicitation
    Nonsolicitation is an agreement in which an employee or other party agrees to refrain from encouraging another party's employees or customers to change their relationship with the other party in a way that would disadvantage the other party.Nonsolicitation agreements may contain prohibitions(...)
  • Notice to Employee of Status Change
    This is a form that used by an employer to comply with California law requiring an employer to provide a written notice to employees of their discharge, layoff, leave of absence, or change in employment status.
  • NSO
    Non-qualified Stock Options (NSOs) are stock options that, when exercised, result in ordinary income tax on the difference between the exercise price and the fair market value of the underlying shares.NSOs are somewhat more common than incentive stock options (ISOs) because ISOs can only be(...)
  • NVCA
    The National Venture Capital Association (NVCA) is an organization that represents the US venture capital community. It advocates policies that encourage innovation and reward long-term investment, and is a resource for venture capital forms and data.
  • o

  • Offer Letter
    An offer letter is a letter given by a company to an potential employee that provides key terms of the prospective employee's employment.Key terms should include the position/title, name/position of supervisor, full-time or part-time work schedule, exempt/non-exempt classifications, duties,(...)
  • Officer
    Officers of a company have more formal responsibility and authority than rank-and-file employees and are responsible for the management and day-to-day operations of the company. Officers usually consist of a president, one or more vice presidents, the secretary, and a treasurer. In larger(...)
  • Option grant
    An option grant is a right to acquire a set number of shares of stock of a company at a set price. Typically an option grant can be awarded to an employee, advisor or other individual who performs a service for the company, and the option can be exercised during the term of service to the(...)
  • Option pool
    An option pool is a number of shares of stock reserved for issuance to service providers of a company pursuant to options and other equity incentives. Providing options to service providers is a way to attract talented employees in a startup because the holders of options can share in the(...)
  • Organizational Meeting
    The organizational meeting is an initial meeting in which the basic organizational formalities of the corporation are determined. It is often not held in person but instead documented through unanimous written consent of the company's board of directors, which can occur as soon as the(...)
  • Outstanding Shares
    Outstanding shares (also referred to as issued shares) refers to the number of shares that have been issued and are outstanding at a given time. This number cannot be greater than the number of authorized shares. Practices vary, but we typically issue between 5 and 10 million shares to the(...)
  • p

  • Pass-Through Taxation
    Pass-through taxation (or "flow thru taxation") exists when the owners of sole proprietorships, partnership, limited liability companies and S-corporations pay taxes on all the business profits via their individual tax return forms. This is in contrast to a corporation, where the corporate(...)
  • PIIAA
    Also known as Proprietary Information and Inventions Assignment Agreements (or PIIAAs), Confidential Information and Inventions Assignment Agreements ensure that intellectual property and other proprietary rights created by employees during the course of their employment are assigned to the(...)
  • Pitch Deck
    A pitch deck is a presentation deck that is used to pitch your idea or company to any number of audiences, generally investors. One of the single most important aspects of an effective pitch deck is to organize it based on the audience and forum to which it is being presented. Several key(...)
  • Post-Money Valuation
    Post-money valuation is a term used widely in private equity and venture capital financing negotiations, and refers to the valuation of the company following a financing transaction. With limited exceptions, the pre-money valuation plus the amount invested in a financing equals the post-money(...)
  • Pre-Money Valuation
    Pre-money valuation is a term used widely in private equity and venture capital financing negotiations, and refers to the valuation of the company prior to a financing transaction. With limited exceptions, the pre-money valuation plus the amount invested in a financing equals the post-money(...)
  • Proprietary Information and Inventions Assignment Agreement
    Also known as Proprietary Information and Inventions Assignment Agreements (or PIIAAs), Confidential Information and Inventions Assignment Agreements ensure that intellectual property and other proprietary rights created by employees during the course of their employment are assigned to the(...)
  • Public Company
    A public company is a company with public ownership and has shares that trade on a public market. Because it is public it is required to meet the Securities and Exchange Commission's strict filing requirements for public companies. A public company's shares typically are initially issued(...)
  • Public Offering
    A public offering is a sale or equity shares or debt securities by an organization to the public in order to raise funds for the company. Public offerings of corporate securities in the US must be registered and approved by the Securities and Exchange Commission (SEC) and are normally(...)
  • Purchase price adjustment
    A purchase price adjustment is a calibration of purchase prices based on metrics (often financial metrics), such as working capital as of the closing. The adjustment is designed to allocate the risk of changes to the metric to one party or the other. Depending on the deal, a purchase price(...)
  • s

  • S Election
    An "S election" is the process by which a company designates itself as an S Corporation (versus, for example, a C Corporation). S Corporations are selected for their tax benefits. S Corporations generally do not pay federal income tax but pass the tax liability for their profits through to(...)
  • Secondary Sale
    A secondary sale is the sale by an existing stockholder of shares in a private company to a third party that does not occur in connection with an acquisition of the company. When a lot of secondary sales happen together as part of the same transaction, it is sometimes referred to as a(...)
  • Secondary Sales
    Liquidity rounds (also known as secondary sales) are events where private company stockholders can participate in selling a portion or all their shares before the company goes public or is acquired. In the years past, private company stockholders would have been expected to wait until the(...)
  • Secretary of State
    The Secretary of State is generally a state's chief elections officer, chief corporations officer, and supervisor of state archives. The Secretary of State works to enhance government transparency and to institute financial safeguards by registering and authenticating business entities. Key(...)
  • Section 83(b) Election
    If you earn shares through vesting by remaining with a company, the Internal Revenue Service treats that equity as taxable income as it vests if it is worth more than you initially paid for it. If you exercise options prior to full vesting, or if you receive shares of restricted stock, you can(...)
  • Securities Exchange Act of 1934
    The Securities Exchange Act of 1934, also known as the Exchange Act of 1934 or the 1934 Act, authorized the formation of the Securities and Exchange Commission (SEC) to regulate the aftermarket for securities through regulation of the securities themselves, markets, and financial(...)
  • Security Interest
    Security interest accompanies secured debt. A security interest is granted in assets of a debtor, and allows the holder of the security interest to take control of or claim ownership in the assets if the debtor fails to meet specified obligations set forth in the agreements governing the debt(...)
  • Series FF Stock
    Series FF Stock is a hybrid between Common Stock and Preferred Stock, and is typically issued to founders at the time of incorporation and is intended to facilitate sales of stock by founders in connection with future equity financings.The shares mostly have the same attributes as common stock(...)
  • Series Financing
    "Series financing" refers to the rounds of equity venture capital financing that startup companies rely upon for investment. The stages of series financing typically include Series Seed Series A; Series B; Series C and so on. A Series Seed or Series A round is typically the first round of(...)
  • Service Agreement
    A service agreement governs the provision of services by an individual (other than an employee) or entity to another party. Organized maintenance of these documents is recommended. Copies of existing service agreements may be requested by potential investors and acquirers.
  • Service Provider
    A service provider is an individual or entity that provides services to another party. The provision of services between a service provider and a company is typically governed by a service agreement.Examples of potential service providers for a company are advisors, individual consultants, law(...)
  • v

  • Vesting (acceleration)
    Some founders and key executive negotiate into their equity arrangements that they will be entitled to some form of acceleration of the vesting of their equity upon the occurrence of a triggering event. Typically, the triggering event is the sale of the Company, but can also be an involuntary(...)