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In general, the 1933 Act applies to all Securities offerings in the U.S., and all Issuers of Securities in the U.S. (including Privately-Held Companies and Public Companies) must either

In general, the 1934 Act applies to all Public Companies in the U.S., and all Public Companies are subject to ongoing and periodic reporting requirements pursuant

"401(k) Plan" is a retirement savings plan sponsored by an Employer, which allows eligible Employees to save and invest a portion of their pre-tax salary or wages on a

"403(b) Plan" is a Deferred Compensation plan for the Employees of certain types of Employers (e.g., IRC 501(c)(3) non-profit organizations, public school systems, public charter schools, public universities and colleges, and specified hospitals and religious organizations), which offers pre-tax and optional post-tax retirement savings. Those Employees who...

A 409A valuation is an independent appraisal of a private company's common stock fair market value, done to set option strike prices at or above that value and satisfy Internal Revenue Code Section 409A, which governs nonqualified deferred compensation. Founders care because a defensible 409A valuation...

"457 Plan" is a tax-advantaged, Non-Qualified Deferred Compensation retirement plan that is available for governmental and certain other Employers in the United States. Participating Employees defer compensation by making contributions into a 457 Plan on a pre-tax or after-tax basis. Unlike 401(k) Plans and 403(b) Plans,...

"701" refers to Rule 701 promulgated under the Securities Act of 1933.

An 83(b) election is a short letter you file with the IRS to be taxed on restricted equity at grant, when it is usually worth very little, instead of later as it vests and grows. It is named after Internal Revenue Code Section 83(b). For a...

"Accelerated Vesting" is a contractual provision that accelerates the Vesting of a Stock Option or Restricted Stock when certain conditions occur. For example, a Change of Control (e.g., sale of the company) may result in Accelerated Vesting so that the corresponding Optionee or Stockholder can realize the...

“Acceleration” refers usually to the waiver or lapse of Vesting requirements that would otherwise be applicable to a grant of Equity Compensation. In other words, the Vesting requirements “accelerate” and give to the grantee Vesting “credit,” notwithstanding the fact that the Vesting schedule has not yet...

“Accelerator” is a business acceleration or advancement program aimed at taking a Startup to the next phase of its growth. Similar to an Incubator, an Accelerator provides the Startup with mentorship, resources, and connections to potential Investors. Where an Incubator is a longer-term program that primarily focuses...

“Accounts Payable” or “AP” is a financial term that refers to a company’s outstanding payables, Short-Term Debt and other payment obligations for goods or services that it has received, but not yet paid for.  In addition to being an important Due Diligence item for prospective Investors and...

“Accounts Receivable” or “AR” is a financial term that refers to a company’s outstanding receivables, short-term money owed and other rights to payment for services or goods that it has provided, but for which it has not yet received payment. In addition to being an important...

An accredited investor is a person or entity that satisfies one of the income, net worth, or professional-credential tests in SEC Rule 501(a) of Regulation D (17 CFR 230.501(a)), which lets a startup sell securities to that investor without registering the offering. This definition sits at...

“Accredited Investor Questionnaire” is an instrument of self-certification that a company may utilize to verify reasonably that an Investor is an Accredited Investor as defined by Rule 501 of Regulation D to the Securities Act of 1933, as amended. It is important to remember that, pursuant to...

“Accrued Interest” is the total amount of Interest that has been earned on, but not yet paid, on a secured Loan, Convertible Promissory Note or another Debt Security or Debt instrument.  The payment terms applicable to Accrued Interest depend on the nature of the Debt transaction....

“Accumulated Depreciation” is an accounting term that refers to the total accumulated decrease in value (or Depreciation) of an Asset over time as reflected on a company’s Balance Sheet. Although Depreciation is a “non-cash” expense, the IRS allows a company to account for Depreciation as an...

“Accumulated Dividend” is a Dividend owed to the holder of a share of Cumulative Preferred Stock, which Dividend has not yet been paid and is carried over to the next accounting period. Accumulated Dividends must be paid to holders of Cumulative Preferred Stock before Dividends are...

“Acquihire” or “Acqui-Hire” refers to an Acquisition where the Buyer’s interest in the transaction is primarily to acquire the target’s Employees (often engineers and others with technical skills) and their expertise, as opposed to the target’s other business operations and Assets.   An Acqui-Hire can be an expeditious way...

“Acquirer” (also known as a Purchaser or Buyer) typically refers to an individual or legal entity that acquires, purchases or buys all, or at least a majority of, a company’s Issued and Outstanding Shares or all (or substantially all) of its Assets, whether through a Merger,...

“Acquisition” refers simply to when one business purchases, or acquires, all or a portion of another business. For most Entrepreneurs, an Acquisition is the most common way to achieve a successful Exit from the business. An Acquisition can be a Stock Acquisition or an Asset Acquisition....

“Acquisition Agreement” is a definitive contract governing a Merger, Stock Acquisition or Asset Acquisition. An Acquisition Agreement typically includes, among others and as applicable, provisions for the sale and transfer of Stock or Assets, a description of assumed and retained Assets and Liabilities, the purchase price, a discussion of any Escrow, Earnout...

“Action by Incorporator” is a document executed by the Incorporator of a Corporation, which is typically executed and effective immediately following the filing of the Corporation’s Articles of Incorporation or Certificate of Incorporation with the applicable Secretary of State. In a customary Action by Incorporator, the Incorporator...

“Advisor” is an individual appointed to a company’s Advisory Board usually by its Chief Executive Officer or Board of Directors. The Advisor often is expected to provide advice, connections and sometimes recognition to the company based on the Advisor’s experience, technical expertise and/or influence.  The relationship...

“Advisory Board” is a group of Advisors appointed by the Board of Directors or Chief Executive Officer to provide advice, connections and sometimes recognition to a company based on the Advisors’ experience, technical expertise and/or influence. An Advisory Board differs from a Board of Directors in that...

“Advisory Board Member Agreement” is an agreement that defines the relationship between a company and an Advisor, including confidentiality and Invention Assignment obligations, as well as the specific services to be provided by the Advisor and the compensation that the Advisor will receive.

“Affiliate” is a person or legal entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the person specified. Accordingly, two companies still can be Affiliates, even if one company owns less than a majority ownership...

“Affirmative Covenant” is a contractual provision wherein one party agrees to complete a specific action.  For example, an Investor Rights Agreement might require a company to provide annual unaudited Financial Statements to an Investor.  See also Negative Covenant.

“Agent for Service of Process” (or "Registered Agent") is an individual or company designated to receive official notices (e.g., communications with the state or documents related to lawsuits) on behalf of a company. The company may designate an individual (such as an executive of the company)...

“Aggregate Purchase Price” is the final calculation of the purchase price for a company in a Mergers and Acquisitions transaction, once all items that are deducted from its value have been accounted for, such as transaction fees and assumed Debts and Liabilities.

“Alpha Test” is the initial testing conducted by a company on a Prototype of a product in order to identify any deficiencies or design flaws before it goes into production. Documentation of a successful Alpha Test can assist in garnering investor interest in a company. See...

“Amended and Restated Certificate of Incorporation” is a legal document filed with the applicable Secretary of State for a Corporation, which amends and restates the original Certificate of Incorporation. Typical reasons to file an Amended and Restated Certificate of Incorporation include a change in the corporate name,...

“Amortization” is the process of expensing the cost of an Intangible Asset, such as Intellectual Property or Goodwill, incrementally over its useful life for accounting and tax purposes. Amortization is similar to Depreciation, which relates to the incremental expensing of Tangible Assets. With Amortization, your company...

“Angel Financing” is a round of Financing involving an Angel Investor or Angel Group, which typically occurs after initial Seed Funding from Friends and Family and before larger Financing from Venture Capitalists or other Institutional Investors. For more information about Angel Financing, please see the related resources...

“Angel Fund” is an investment fund created by a group of Angel Investors. An Angel Fund can be either (i) informally structured and managed by one of the Angel Investors in the Angel Group who coordinates individual investment decisions, or (ii) a fund formally managed by...

“Angel Group” is a formal group of Angel Investors who invest together in Early-Stage Companies and Startups, typically between initial Seed Funding from Friends and Family and larger Financings from Venture Capitalists and other Institutional Investors.

“Angel Investor” is a wealthy individual, typically an Accredited Investor, who invests in Early-Stage Companies and Startups. Angel Investors invest in Angel Rounds that usually occur between initial Seed Funding from Friends and Family and larger Financings from Venture Capitalists and other Institutional Investors. Angel Investors can be an...

“Angel Round” or Angel Financing is a round of Financing involving an Angel Investor or Angel Group, which typically occurs after the initial Seed Funding from the Founders and their Friends and Family, and before a larger Financing round from Venture Capitalists and other Institutional Investors. An Angel...

“Annual Corporate Maintenance” refers to certain annual legal requirements that a Corporation must comply with so that the Stockholders may maintain the full benefits of doing business as a Corporation. If the Corporation fails to implement an effective Annual Corporate Maintenance process, then the Stockholders, including...

“Annual Meeting” must be held each year for the Directors and Stockholders of your company.  The primary purpose of the Annual Meetings is for the Directors to appoint the Corporate Officers (i.e., Chief Executive Officer, Chief Financial Officer, and Corporate Secretary), and the Stockholders to elect the...

“Annual Recurring Revenue” or “ARR” represents the annualized recurring revenue that a company receives from a subscription-based agreement of a defined length of time. For example, a subscription of $1,000 per month represents Annual Recurring Revenue of $12,000. ARR typically is used as a key metric...

“Annual Report” is a comprehensive report that a Public Company issues once a year to its Stockholders and other potential Investors. The Annual Report documents in detail the Public Company’s financial performance, market segment information, new product research and development plans and other material information relevant...

An “Anti-Dilution Adjustment” is a formula set forth in an Anti-Dilution Protection provision of a financing instrument, which adjusts the price of an existing Equity Security in order to prevent dilution of its original value.  It typically is triggered when later shares of Capital Stock are...

Anti-dilution protection adjusts an investor's conversion terms if the company later sells stock at a lower price than the investor paid. It cushions the investor against a down round. Founders meet this term in the priced round. It does not stop dilution from new shares. It...

“Appraisal Right” is a legal right provided to Minority Stockholders in many states, which, when invoked, requires the independent valuation of the fair market value of the current stock price in order to prevent corporations from selling their shares for less than they currently are worth....

“Articles of Incorporation” are a core charter document filed with the Secretary of State of the corresponding state of Incorporation, which establishes the formation and existence of a Corporation. This charter is referred to as the Articles of Incorporation in some states, such as California, and...

“Articles of Organization” are a core charter document typically filed with the Secretary of State which establishes the formation and existence of a Limited Liability Company (LLC). In some states, this charter document may have a different name (e.g., Certificate of Formation). Although it may vary...

“As Converted to Common Stock Basis” is a stock ownership concept that determines the rights and/or benefits of holders of Preferred Stock based on the assumption that all shares of Preferred Stock have converted into shares of Common Stock. The issued and outstanding shares on an...

“Asset” is every economic resource that a company owns, controls, or benefits from. An Asset can be physical (e.g., cash, Inventory, equipment, etc.), an enforceable claim (e.g., Accounts Receivable), Intellectual Property or other rights (e.g., Patent, Trademark or Copyright), or an assumption such as Goodwill. Assets...

“Asset Acquisition” is a transaction involving only the targeted purchase of the Assets of a company and not its Capital Stock. This buyout strategy allows the Acquirer to selectively choose the Assets that it will acquire and the Liabilities that it will assume, making it a popular option...

"At-Will Employee" is an Employee who can be terminated or leave his or her employment at any time, with or without Cause or prior notice, and for any reason (or no reason). The termination of an At-Will Employee obviously must be lawful and therefore cannot violate...

“Attorney-Client Privilege” protects the confidentiality of communications between an attorney and his or her client. The Attorney-Client Privilege prevents the attorney from disclosing to the court or any other party any private communications between client and attorney. The Attorney-Client Privilege also may apply to communications between...

"Audit" is an inspection conducted by an independent auditor to ensure the accuracy of your company’s financial records. For example, an Audit conducted by an independent auditor can provide investors with an objective evaluation of your company’s Financial Statements, in order to ensure that they provide...

"Audit Committee" is a committee of the Board of Directors, which is responsible for the oversight of your company’s financial disclosures and reporting. A Public Company in the United States is required to have an Audit Committee, which must be made up of independent outside Directors...

“Authorized Shares” represent the total inventory of shares that are available for issuance by a Corporation as set forth in its principal charter document (i.e., Certificate of Incorporation in Delaware or Articles of Incorporation in California). Issued and Outstanding Shares, on the other hand, represent the...

"Authorized Shares Method" is one of two methods that a Delaware Corporation can use to calculate its annual franchise tax. The Authorized Shares Method calculation is based solely on the number of Authorized Shares initially authorized by the Delaware Corporation in its Certificate of Incorporation. Under...

“Backup Certificate” is a document executed by a Corporate Officer certifying the facts provided to its legal counsel, which form the basis for a Legal Opinion prepared in conjunction with the Closing of a Loan or other Financing transaction.

“Bad Actor” is an Issuer or any person associated with raising capital through a Private Placement, who has, among other things, been convicted of or been the subject of court injunctions or restraining orders related to Securities transactions as outlined in SEC Rule 506. Pursuant to Rule...

“Balance Sheet” is a Financial Statement that refers to a company’s Valuation or financial position on a specific date by reporting its Assets, Liabilities, and Stockholders’ Equity. In a Balance Sheet, the company’s Assets should equal the sum of its Liabilities and Stockholders’ Equity. The Balance...

"Bank Loan" is a common form of Debt Financing where a company raises money by borrowing money from a bank with a promise to pay back the Principal and related Interest. A Bank Loan can be secured or unsecured. A secured Bank Loan requires the company to...

“Bankruptcy” is a legal process for a company that becomes unable to pay off its Debts or pay back its Creditors. Title 11 of the United States Code, or the Bankruptcy Code, governs the Bankruptcy process while the U.S. Bankruptcy Courts oversee the company’s compliance with...

“Bankruptcy Code” refers to Title 11 of the United States Code which governs the Bankruptcy process, including the two common forms of relief for a company declaring Bankruptcy – liquidation and reorganization. Chapter Seven of the Bankruptcy Code details the liquidation process whereby the company’s Assets...

“Beta Test” is the second round of testing conducted by a company on a Prototype of its product to a limited group of consumers to resolve any design flaws or problems that the Alpha Test did not identify. See also Alpha Test.

“Blind Pool” (also known as a “Blank Check Offering”) is a fund or limited partnership (LP) with no specific investment target or objective, which accepts capital from Investors. In turn, the Investors give broad discretion to the fund or LP manager(s) to make prudent investments, often...

“Blue Sky Laws” refer to state laws and regulations that govern the offering, issuance, and transfer of Securities. A Startup must determine the state of residence of each Investor at the time of a Financing, in order to evaluate the need to comply with applicable state...

“Board” is the shortened and often used term for the Board of Directors.

“Board Consent” is the approval by the Board of Directors of specific corporate actions or transactions (e.g., issuing, selling or granting Securities, engaging in Financing transactions, amending key corporate governance documents such as the Certificate of Incorporation, etc.), which otherwise could be accomplished with a formal...

“Board Meeting” is a formal meeting of the Board of Directors. A Board Meeting can be a required regularly scheduled meeting as set forth in the Bylaws, such as an Annual Meeting to complete Annual Corporate Maintenance or a special meeting to address and approve specific corporate...

“Board Minutes” are a written summary prepared in conjunction with every Board Meeting held by the Board of Directors. The Board Minutes document the attendees at the Board Meeting, topics discussed and any resolutions adopted by the Board. The Board Minutes are approved by the Board...

“Board Observer” is a person who has the contractual right to attend Board Meetings and receive Board Consents and other Board materials and information. A Board Observer does not vote on matters presented to the Board and does not have Fiduciary Duties to the Corporation. The...

“Board Observer Rights” refer to contractual rights required by an Investor in a Financing, which allows the Investor to attend Board Meetings and receive Board Consents and other Board materials and information as a Board Observer.  Board Observer Rights typically are documented in an agreement or...

“Board of Directors” is the governing body of a Corporation and oversees its general management. The Directors are elected by the Stockholders of the Corporation and the Board of Directors elects the Corporate Officers of the Corporation who are responsible for its day-to-day operations. In order...

Protective provisions are investor veto rights over a defined list of major corporate actions, so the company cannot take those actions without the approval of a specified percentage of the preferred stock. They usually live in the charter and function as a consent gate, not day-to-day...

“Boilerplate” refers to either a form legal document or standard contractual language that often times does not require substantial revision.  However, a company’s internal or external legal advisors should review these Boilerplate provisions as they may not apply to every situation and often vary from company...

A “Bond” is one method how a company can raise money.  A Bond is a debt instrument through which an Investor loans to a company a certain amount of money for a specific amount of time. The company is obligated to either pay Interest or the...

“Book Entry” is a paperless Capitalization system utilized by a Corporation to track the ownership of its Equity Securities without the issuance of Stock Certificates. A Book Entry system serves as the Corporation’s official record of its Equity Ownership.

“Book Value” is the monetary value of an Asset as set forth on the Balance Sheet of a company, which is determined by subtracting its Accumulated Depreciation from its original cost. The Book Value also is the calculation of a company's total Assets less its total Liabilities.

“Bookkeeping” is the day-to-day accounting of a company’s financial transactions.

“Books and Records” refer to a company’s compilation of its corporate documents in one centralized location. State laws vary on the related requirements for the maintenance of Books and Records. From a corporate law perspective, a company typically must maintain as part of the Books and...

“Bootstrapping” refers to a Startup “pulling itself up by its own bootstraps” by utilizing its own money and revenue or Seed Funding from the Founders and Friends and Family in order to get the Startup off the ground and up and running before, as necessary, seeking Financing...

“Bottom Line” refers to the last (or bottom) line of an Income Statement for a company, which reflects its Net Income – the total Gross Sales less the Returns and Allowances, Cost of Goods Sold, Operating Expenses and other accounting adjustments.

“Break-Even Point” is the point at which a company’s total fixed and variable Expenses for a specified operating period are equal to its total Revenues, reflecting neither a profit or loss. See also Cash Flow Break Even.

“Breakup Fee” (or Termination Fee) is set forth in a Takeover, Merger, or Acquisition agreement (or related Letter of Intent or Term Sheet) as a penalty paid by the Seller should it back out of the deal with the Purchaser or Acquirer. The Breakup Fee is intended...

“Bridge Financing” (or Bridge Loan) typically is short-term Debt Financing, such as a Convertible Debt Financing, which is used in a “bridge” situation where the money to be raised with the Bridge Financing will help fund the operations of the company until its next Equity Financing....

“Bridge Loan” is a short-term Loan that bridges the gap between a company's larger, long-term Financings. See also Bridge Financing.

“Bridge Note” is a type of Promissory Note, such as a Convertible Promissory Note, issued to an Investor in a Bridge Financing.

“Bring Down” is a Closing Condition in an M&A or Financing agreement, which requires that the Representations and Warranties made by a party at the signing of such agreement also be made again at the Closing of the applicable transaction, which could be days, weeks or...

“Bring-Down Representation” typically is tied to the representing party’s Financial Statements and covers the time period between the applicable date of the Balance Sheet and the date on which the representation is made. A Bring-Down Representation usually starts with language such as “Since the most recent...

“Broad-Based Weighted-Average Anti-Dilution Protection” is the most common type of Anti-Dilution Protection given to a Preferred Stock Investor to protect it from Equity Ownership Dilution in connection with the issuance of additional shares of Capital Stock in future financings. The formula for Broad-Based Weighted-Average Anti-Dilution Protection...

“Broker” refers to an individual or company that buys or sells a Security as an agent for a third party for a commission or set fee. A Broker may also act as a Dealer by purchasing or selling a Security on its own behalf. In either...

“Broker-Dealer” is a person or company that is engaged in the business of buying and selling Securities for itself (i.e., as a Broker) or its clients (i.e., as a Dealer). A Broker-Dealer is required to register with the SEC and its activities are regulated by, among...

“Budget” is an estimate of a company’s Revenues and a plan of its Expenses over a set period of time such as a year. A Budget is an important internal management tool that is used to assess a company’s current financial status, establish a measure of...

"Burden of Proof" is a legal term that indicates which party in a lawsuit must bring forth evidence to support its claims and facts in the lawsuit. Typically, the plaintiff, the party bringing the lawsuit, bears the Burden of Proof, although the Burden of Proof may shift...

“Burn Rate” measures how quickly a company uses its net cash (i.e., cash generated by the business less all Expenses paid out in cash) over a set period of time. The Burn Rate helps determine the length of time that a company can continue operating before...

“Business Combination” is a transaction that involves one business taking control of another business, typically as the result of a Merger or Acquisition.

“Business Development Company” or “BDC” is a publicly registered investment company that typically finances small and mid-sized companies in order to meet their capital objectives for future growth. Unlike a Venture Capital Fund that is open only to Accredited Investors, a Business Development Company is open...

“Business Judgment Rule” is the presumptive legal standard of almost all individual state corporate laws in the United States providing that a company’s Board of Directors acted in the best interests of its Stockholders when evaluating a claim of breach of Fiduciary Duty. Under the Business...

“Business Plan” is a written description of a company’s future financial and operational plans and goals and how it intends to accomplish these plans and goals. The Business Plan typically includes a market analysis of the company’s industry, marketing and promotional strategies, pro forma financial statements,...

“Business to Business” or “B2B” is a type of transaction where one business supplies goods or services to another business as its customer.

“Business to Consumer” or “B2C” is a type of transaction where a business sells its goods or services directly to an individual customer.

“Buy-Sell Agreement” is a contract between the co-owners of a company, which outlines how and at what price an owner can sell its ownership interest in the company should it wish to sell its ownership interest or leave the company for any reason (e.g., due to...

"Buyer" (also known as an Acquirer or Purchaser) refers typically to an individual or legal entity that buys, acquires or purchases all, or at least a majority of, a company’s Issued and Outstanding Shares or all (or substantially all) of its Assets, whether through a Merger, Stock...

“Buyout” is the purchase or Acquisition of a controlling interest in a company by buying a majority of the shares of its present Stockholders. A Buyout also can refer to a contractual provision in a Stock Restriction Agreement, which allows a company to buy back the...

“Bylaws” are a core corporate document that sets forth various rules, regulations, and procedures for certain corporate governance and operational activities of a Corporation. Topics addressed in the Bylaws include: the composition, election, powers, and duties of the Board of Directors (and its committees); the appointment, authority, and terms...

A C corporation is a corporation taxed as a separate taxpayer under the Internal Revenue Code. The company pays entity-level tax on its profits under IRC Section 11, and its shareholders pay tax again when those profits are distributed as dividends. Lawyers and founders often call...

“California Corporate Law” refers to Title 1 of the California Corporations Code. Although many Corporations are incorporated in Delaware (or other states not California), those Corporations with significant operations in California must effect a Foreign Qualification in California and are subject to California Corporate Law as...

“California Department of Business Oversight” or “DBO” serves as California’s primary regulator of financial services, products, and professionals. From a corporate standpoint, the California Department of Business Oversight oversees financial transactions, including those involving the sale and issuance of Securities. For example, when a company issues Securities...

A cap table, short for capitalization table, is the ledger that records who owns every share, option, warrant, and convertible security in your company and what percentage of the company each holder owns. Your cap table is the single source of truth for ownership. Every financing,...

“Capital Gains” refers to the income or positive difference between the value of a capital Asset (e.g., an investment or Stock) when it was purchased and its value when it is sold. A Capital Gain can be either short-term or long-term. A short-term Capital Gain relates...

“Capital Stock” typically refers to the type and number of shares of Equity Securities (e.g., Common Stock and Preferred Stock) that a Corporation may issue, as determined by its Certificate of Incorporation. The term Capital Stock may indicate the number of Authorized Shares or the Issued...

“Capitalization” is a financial term that refers to a company’s capital structure, including both its outstanding Debt Securities and Equity Securities. A company tracks its Capitalization with a Cap Table that records the company’s outstanding Securities, including its shares of Capital Stock, Stock Options, Warrants, and Convertible...

“Cash Flow Break Even” occurs at the point when a company’s cash flow is neither positive nor negative, such that its incoming cash (e.g., Revenues) is equal to its outgoing cash (e.g., Expenses, both fixed and variable). It is crucial for a company to calculate its point of...

“Cash Flow Positive” refers to when the amount of cash flowing into a company (e.g., Revenues) is more than the amount of cash flowing out (e.g., Expenses) of the company over a specified operating period. The ability of a Startup to operate in a Cash Flow...

Co-sale rights let investors sell a proportional slice of their own shares alongside a founder or major holder who is selling to an outside buyer, on the same price and terms. Co-sale rights are the investor-side name for tag-along protection, and they live in a contract,...

Common stock is the basic class of company ownership held by founders and employees, carrying a residual claim on value that ranks behind preferred stock. It is usually what stock options exercise into. Common is the foundation of the cap table. Founders care because common stock...

The conversion ratio is the number of common shares that each share of preferred stock turns into when it converts, and it starts at one-to-one but adjusts for events like down rounds and stock splits. It sets how much common each preferred share becomes. Founders care...

A convertible note is a short-term loan to a startup that is designed to convert into equity instead of being repaid in cash, usually when the company raises its next priced round. It is debt that wants to become stock. Founders use convertible notes for the...

“Corporation” is a legal entity that is separate and distinct from its owners. A Corporation is formed by filing the Certificate of Incorporation or Articles of Incorporation with the Secretary of State of the state of Incorporation. A Corporation is owned by its Stockholders, governed by...

“Cost of Goods Sold” or “COGS” is the direct costs associated with the sale of a company’s products or goods. Cost of Goods Sold includes direct labor and material costs but excludes indirect costs such as marketing and distribution costs. The general formula for calculating COGS for...

“Coupon” is the interest rate paid on a Bond, usually expressed as a percentage of the face value of the Bond or as a stated margin over a well-known financial index. For example, a company that issues a $1,000 Bond with a ten percent (10%) Coupon rate...

“Current Liabilities” are the Debts that a company owes and which must be paid within one year. Current Liabilities include items such as: Accounts Payable; Dividends and Interest payments; Short-term Bank Loans and other Short-Term Debt; Current portion of any Long-Term Debt; and Payroll.

“Debt Financing” is when a company raises money by issuing Debt to Investors in addition to or instead of selling shares of its Capital Stock (i.e., an Equity Financing). A company may elect to raise money through a Debt Financing when, among other things, (i) the...

“Deferred Compensation” is an arrangement where an Employer holds part of an Employee’s income or compensation until a later date. Deferred Compensation plans are considered either Qualified Deferred Compensation or Non-Qualified Deferred Compensation. A company with a Qualified Deferred Compensation plan must offer the plan to...

“Definitions” are capitalized words or phrases that have specific, defined meanings in an agreement or another document. Typical drafting conventions provide that Definitions be defined as capitalized terms within a particular agreement or document or by reference to another agreement or document. Larger agreements often contain...

“Delaware Corporate Law” is considered the gold standard when it comes to corporate law. Delaware Corporate Law is referred to specifically as the Delaware General Corporation Law (Title 8, Chapter 1 of the Delaware Code). Over half of the Fortune 500 and U.S. Public Companies are...

“Depreciation” is an accounting term referring to the income tax deduction allowed by the IRS, which represents the applicable loss in value of an Asset. Depreciation is a non-cash expense and appears on a company’s Income Statement.

Dilution is the drop in your ownership percentage that happens when a company issues new shares. Your share count stays the same, but the total number of shares grows, so each share you hold represents a smaller slice of the company. Every priced financing round, option...

“Director” is an individual who is a member of a Corporation’s Board of Directors. The Stockholders of the Corporation appoint the Directors. It is common for a Startup to have a Board consisting of between three and five Directors. A Director’s roles and duties can be modified...

A "Door Lawyer" is a lawyer who takes on any project that comes in the door. If you are serious about building a great company, then you should do the extra work to find an experienced startup attorney who will know how to launch and guide...

Double-trigger acceleration is a vesting term that speeds up an equity holder's unvested shares only when two events both happen, typically a change of control of the company plus an involuntary termination within a set window after that deal. Founders care because acceleration terms decide whether...

Drag-along rights let a specified majority of a company's shareholders force the remaining minority holders to join a sale of the company on the same terms. The right lives in a contract, usually the voting agreement or the charter, not in any statute. Founders care because...

"Earnout" is a deal term used in some M&A transactions. The Earnout determines whether part of the Aggregate Purchase Price will be paid to the Seller if the target company or business achieves certain specified performance criteria after the Closing. One benefit of an Earnout is that...

"Employer Identification Number" or "EIN" is the Federal Employer Identification Number.

Equity compensation is paying people with an ownership stake in the company, through stock options, restricted stock, or restricted stock units, instead of or alongside cash. Founders care because equity compensation is how a cash-poor startup attracts talent it could not otherwise afford, and how it...

"ERISA" refers to the Employee Retirement Income Security Act of 1974, as amended. It is a federal law that regulates voluntarily established health and retirement plans in the private sector. ERISA sets minimum standards and other requirements to protect the individuals who participate in these plans.

"Exchange Act" is the Securities Exchange Act of 1934.

"Federal Employer Identification Number" or "FEIN" is a unique nine-digit number assigned by the Internal Revenue Service to a business entity operating in the United States for the purpose of identifying such business entity.

"Form 2553" (or "Election by a Small Business Corporation") is the form that a Corporation files with the IRS as the election to be treated as an S-Corporation for tax purposes. A Corporation should file the Form 2553 with the IRS within 75 days after its Incorporation.

“Hedge Fund” is an investment fund focused on leveraging sophisticated investment techniques to deliver above-average returns for its Investors. While Hedge Funds often invest in Startups, they are not the same as a Venture Capital Fund or Private Equity fund. One main difference is that Hedge...

A holding period is the length of time you own an asset before you sell it, and it decides whether your gain is taxed as short-term or long-term and whether tax breaks like the qualified small business stock exclusion apply. Founders and early investors care because...

An incentive stock option (ISO) is a stock option that meets the requirements of Internal Revenue Code Section 422 and can qualify for capital gains treatment on the entire gain, while a non-qualified stock option (NSO) does not qualify and is taxed as ordinary income on...

"Internal Revenue Service" or "IRS" is the federal tax collection agency of the United States of America, which administers and enforces the Internal Revenue Code enacted by the United States Congress.

"Invention Assignment" provisions in contracts, such as Contribution and Assignment Agreements and Proprietary Information and Invention Assignment Agreements ("PIA"), are an essential startup tool that protects your company’s intellectual property and helps create more value for your company over time. For example, a PIA includes an Invention Assignment provision...

Investor information rights are a contractual promise, written into your financing documents, that requires the company to deliver financial statements and other reports to certain investors on a fixed schedule. These rights matter because they lock the company into a reporting cadence for years. A founder...

“JOBS Act” (or the “Jumpstart Our Business Startups Act”) was signed into law on April 5, 2012, in order to encourage the funding of small businesses in the U.S. by adjusting and enacting certain Federal Securities Laws and regulations. Among other things, the JOBS Act: Created...

“Kickstarter” is a global Crowdfunding platform where people can back Kickstarter projects financially in exchange for tangible rewards or experiences, but not for equity or other Securities. Kickstarter allows someone with a creative idea to receive funding from backers to help develop that idea. For example,...

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A liquidation preference determines who gets paid first, and how much, when a company is sold, wound down, or has another liquidity event. It is a core economic term of preferred stock. For founders, the liquidation preference decides how exit proceeds are split between investors and...

The “Liquidation Waterfall” refers to how proceeds are allocated following a Liquidity Event. Each class of a company’s debt and equity holders occupies a specific tier of the Liquidation Waterfall. The full payout rights of each tier must be satisfied before the next tier is entitled...

"Mutual Fund" is an investment vehicle that pools money from various Investors to purchase a diversified portfolio of Stocks, Bonds, or other Securities. A professional portfolio manager typically manages the Mutual Fund and the Securities in which it invests, which allows individual Investors to access more...

An "NDA" is a Non-Disclosure Agreement.

An option pool is the block of company shares set aside to grant as equity to employees, advisors, and other service providers, usually through stock options. It is how a startup pays people in ownership. Founders care about the option pool for two reasons: hiring and...

Participating preferred stock is preferred stock that gets paid twice in an exit. First it takes its liquidation preference off the top. Then it also shares in what is left, alongside the common stock, as if it had converted. This is why founders watch the participation...

“Post-Closing True Up” or “Post-Closing Adjustment” is a type of Purchase Price Adjustment, which occurs after the Closing of an M&A transaction and usually is led by the Buyer after it has assumed control of the Seller’s financial matters. After the Closing, the Buyer typically will...

“Preamble” is the introduction of an agreement and provides certain key information about the agreement, such as: (i) the title of the agreement; (ii) the date of the agreement; and (iii) the identity of the parties to the agreement, including their respective legal names and places...

Preferred stock is a class of company ownership that carries rights senior to common stock, such as priority on payout, and it is the standard instrument investors receive in a priced venture round. Founders and employees hold common; investors hold preferred. Founders care because the terms...

Pro rata rights give an investor the contractual option to invest again in future rounds, enough to maintain their existing ownership percentage. They are the right to keep your slice from shrinking. For investors, this protects against dilution and lets them keep backing winners. For founders,...

“Purchase Price Adjustment” is commonly included in M&A transactions and usually refers to the cumulative effect of various additions and deductions, which (i) must be taken into account when arriving at a final purchase price for a particular transaction and (ii) are calculated as of the...

Qualified Small Business Stock (QSBS) is stock in a U.S. C-corporation that can qualify for a large, and sometimes total, exclusion from federal capital gains tax when you sell it, under Internal Revenue Code Section 1202. For founders and early employees, qualified small business stock is...

"Representations and Warranties" or “Reps and Warranties” are statements of fact made by one or more parties to an agreement, which are to be true regarding the applicable certifying party as of a particular time or times (e.g., at signing and then at the Closing). In...

“Reverse Stock Split” is a decrease in a Corporation’s Issued and Outstanding Shares, which causes a proportional increase in the related price per share. The relative Equity Ownership of the Corporation among the Stockholders would not change given that each Stockholder would own fewer shares of...

A right of first refusal, or ROFR, lets the company or its investors buy shares that a shareholder proposes to sell before any outside buyer can take them. The right sits in a contract and matches a bona fide third-party offer. Founders care because a ROFR...

“S-Corporation” or “S-Corp” is a Corporation where the Stockholders have elected to file a Form 2553 (Election by a Small Business Corporation) with the IRS in order to be taxed as a Pass-Through Entity. Where a C-Corporation is subject to Double Taxation, the Stockholders of an...

SAFE (Simple Agreement for Future Equity) is a financing contract in which an investor gives a startup money now in exchange for the right to receive equity later, usually when the company raises a priced round. A SAFE is not a loan. It carries no interest...

"SEC" is the United States Securities and Exchange Commission. See also Securities and Exchange Commission.

"Shareholder" has the same general meaning as Stockholder. For a California Corporation, the owners are referred to as Shareholders. For a Delaware Corporation, the owners are referred to as Stockholders.

“Stock” is the unit of Equity Ownership in a Corporation. Stock will have varying rights, preferences and privileges depending on whether it is Common Stock or Preferred Stock. A Corporation’s Certificate of Incorporation (or Articles of Incorporation) will indicate the number of Authorized Shares that can...

“Stock Split” is an increase in a Corporation’s Issued and Outstanding Shares, which causes a proportional decrease in the related price per share. For example, if a Corporation has 1,000 shares of Common Stock as its Issued and Outstanding Shares, then a 1,000-to-1 Stock Split would...

Tag-along rights let minority shareholders join a sale that a major shareholder negotiates, selling their shares on the same terms and at the same price. Investors commonly call this a co-sale right, and it lives in a contract rather than in any statute. Founders and early...

"Taxpayer Identification Number" or "Tax ID Number" or "TIN" is an identification number used for tax purposes in the United States. See also Federal Employer Identification Number.

A term sheet is a short summary document that sets out the key economic and control terms of a proposed startup financing before the parties draft and sign the full legal agreements. It functions as the blueprint for the round. Lawyers then turn its bullet points...

A valuation cap is the maximum company valuation used to convert a SAFE or convertible note into equity, which protects the early investor by setting a ceiling on the price they pay per share when the note converts. It rewards investors for taking early risk. Founders...

Vesting is the process by which someone earns their equity over time or by hitting milestones, instead of owning all of it at once. Until equity vests, the company can usually take back the unvested portion if the person leaves. Vesting is foundational for founders and...

“Warrant” is a Security that gives to the holder of the Warrant the right to buy certain Equity Securities at a certain price for a certain period of time. One key difference between a Warrant and a Stock Option is that only individuals may receive Stock...

“Weighted-Average Anti-Dilution Protection” is the most common form of Anti-Dilution Protection for Preferred Stock Financings. The Weighted-Average Anti-Dilution Protection increases the number of shares of Common Stock into which the applicable series of Preferred Stock can convert. In a Preferred Stock Financing, Investors often will require...

"Working Capital" is defined generally as a company’s Current Assets minus its Current Liabilities. However, in M&A transactions, Working Capital usually is an important Definition contained in the Acquisition Agreement, which includes a customized determination of Current Assets and Current Liabilities. If a Working Capital Adjustment...

“Working Capital Adjustment” usually refers to a certain type of Purchase Price Adjustment in an Acquisition transaction, which can be positive or negative, and is determined based upon a Seller’s actual Working Capital as of the Closing and how it compares to a previously agreed upon...

“Written Consent” refers to the method used by a Corporation’s Board of Directors or Stockholders to approve certain corporate actions on paper, rather than taking the steps to hold a formal in-person meeting with the related notice, Quorum and voting requirements.  By acting via Written Consent,...

“X-Factor” is that special and unique “something” that every Startup should try to develop in order to set it apart from the competition. Your company’s X-Factor will help make your business unique and often times is that extra tangible or intangible quality or characteristic that: Investors...

“Y Combinator” is a popular Accelerator that provides Seed Funding, mentorship, resources and networking in exchange for a small Equity Ownership stake in your company. Y Combinator is located in Silicon Valley and has a long track record of highly successful investments in companies such as...

"Z-Factor" is a measure of statistical effect size. Z-Factor (sometimes referred to as Z-prime and written as Z') is used in high-throughput screening to determine whether the response in a particular assay warrants further attention by attempting to quantify the suitability of a particular assay for...

"Zero" will be the likely value of your Startup if you fail to, among other things, plan and manage its business, protect its IP, bring in the right people or monitor cash flow and profitability.