VENTURE CAPITAL GLOSSARY FOR STARTUPS
In the esoteric but important and fast-paced venture capital world, startup founders, management teams, and investors benefit greatly from speaking the same language that shapes their landscape. It facilitates clear communication, alignment, and informed decision-making. This glossary is intended to be robust, though it is not exhaustive. It provides a concise reference for many of the unique terms of art, abbreviations, concepts and vocabulary widely used in the venture capital and angel investing ecosystems.
Explore and peruse this glossary as much as needed to enhance your understanding and succeed in the exciting world of venture capital and angel finance. Come back once in a while, as it is intended to be a work in progress, including adding links to related articles and posts. As of June 14, 2023, this Glossary has approximately 180 defined terms.
An individual or Entity that meets certain financial criteria and is allowed to participate in certain types of investment opportunities that are restricted to accredited investors. For individuals, the criteria typically include income thresholds and net worth requirements, or professional certifications. The legal definition and criteria can be found in subsection (a) of Rule 501 of Regulation D of the Securities Act.
Accretive refers to an investment or transaction that is expected to increase a company's value or financial metrics. It can enhance earnings per share and shareholder value. An accretive event generates higher earnings or cash flow than the cost of capital. Investors seek accretive transactions as they improve a company's financial position and growth prospects.
An individual or firm that provides guidance, expertise, and strategic advice to a company or entrepreneur. Advisors often have industry-specific knowledge and experience and may receive compensation in the form of Equity, fees, or a combination of both.
An individual who provides early-stage capital to startups in exchange for Equity. Angel investors are typically high-net-worth individuals who invest their personal funds and often offer mentorship and industry expertise to the companies they invest in.
A provision in an investment agreement that protects existing shareholders from dilution of their ownership stake in the event of future Equity issuances at a lower price. Anti-dilution mechanisms can help maintain the proportional ownership of existing shareholders by adjusting the conversion or exercise price of their Securities. Preemptive Rights or anti-dilution mechanisms protect shareholders from dilution. See also Weighted Average and Full Ratchet.
Board of Directors
A group of individuals elected by shareholders to oversee the management and strategic direction of a company. The board of directors provides governance and makes important decisions on behalf of the company, including the appointment of key executives and approving major corporate actions.
A method of financing a startup or business using personal savings, revenue generated from operations, or other non-traditional sources, without relying on external funding. Bootstrapping allows entrepreneurs to maintain control and ownership of their company but may limit the company's growth potential.
Short-term funding provided to a company to bridge the gap between financing rounds. Bridge financing helps startups meet immediate financial needs while they secure a larger funding round or reach specific milestones.
The rate at which a company spends its capital over a specific period, indicating its cash consumption. Burn rate is an important metric to track the company's financial health and sustainability, particularly in early-stage startups with limited revenue streams.
A legal document that outlines the internal governance and operating procedures of a corporation or organization. Bylaws typically cover topics such as shareholder rights, board composition, meeting procedures, voting mechanisms, and other governance matters.
Capital stock is a Security that represents ownership interests in a corporation. Stock is divided into units called Shares. A corporation's Charter authorizes a specific, maximum number of Shares of one or more classes of capital stock (e.g., Common Stock and Preferred Stock). The Charter may also authorize one or more series of any class of capital stock and the specific, maximum number of Shares of each series. A corporation may issue fewer than the authorized number of Shares, but never more. Capital Stock is also sometimes known as Equity Stock or an Equity Security.
Capitalization / Company Capitalization
The total value of a company's outstanding Securities, including Common Stock, Preferred Stock, Options, Warrants, and other Equity instruments. Capitalization represents the ownership structure and financial position of a company and is a key factor in valuing the business.
Cap Table (Capitalization Table)
A company's cap table shows (usually in the form of a spreadsheet) the company's Capitalization. A detailed cap table will include the names and categories of each holder of company Securities (e.g., founders, investors, employees, consultants, and advisors); the types of Securities held by each; the dates on and financing rounds in which they were acquired; purchase price or other consideration paid; percentage ownership of each holder on an issued and outstanding basis; percentage ownership of each holder on a Fully Diluted basis, and any contractual obligations associated with the ownership interests in a company. In connection with a VC financing, often much negotiation includes preparing the Pro Forma
A legal document that establishes the existence and outlines the governing structure of an organization, such as a corporation or non-profit corporation. It defines the organization's purpose, rights, responsibilities, and operating framework. A Certificate of Incorporation (or Articles of Incorporation) is a charter for a corporation. An LLC's charter is often call Articles (or Certificate) of Organization (or Formation).
A contractual provision that allows an investor or the company to reclaim previously distributed profits or gains from an individual, often a founder or key employee. Clawbacks are designed to align incentives, protect investors, and discourage misconduct or underperformance.
A term used in syndicated investment deals to refer to two or more investors who share the responsibility of leading the investment round. Co-leads collaborate on due diligence, negotiate terms, and coordinate the investment process.
Also called a Tag-Along right, this is a provision in VC deal documents that grants minority shareholders the right to participate in a sale or liquidity event initiated by a majority shareholder. Come-along rights ensure that minority shareholders have the opportunity to sell their shares on the same terms and conditions as the majority shareholder.
Common stock is a class of capital stock in a corporation. Common stock represents ownership in a corporation and grants voting rights (typically one vote per share) and potential dividends to stockholders. In a liquidation or sale, common stockholders have a claim on the company's assets after obligations are settled. However, they are subordinate to Preferred Stock holders in receiving dividends or assets if there are any shares of Preferred Stock then outstanding.
See Come-Along Rights.
Control securities are Securities that are held by individuals or entities that have the ability to exert significant influence or control over the issuer of the Securities. Control securities are often owned by officers, directors, or large shareholders of a company. Control securities are subject to certain restrictions on their resale to prevent potential market manipulation or unfair trading practices. The SEC imposes specific rules on the sale of control securities, such as filing a Form 144 or complying with Rule 144, to ensure transparency and protect investors in the market.
A convertible note is short-term debt that converts into Equity later. It offers flexibility in early-stage financing. Rather than determining an upfront valuation, investors loan money with the option to convert into Equity during a subsequent financing round. Conversion terms, such as price, discounts, or valuation caps, are negotiated. Convertible notes streamline raising capital before establishing a definitive valuation. Compare to SAFE .
A type of security, such as convertible debt (Convertible Note), Options, Warrants, SAFE's, convertible Preferred Stock, and other investment contracts giving the right of the holder to convert into, or exchange or exercise for, another form of security, typically Equity shares and often Common Stock, at a predetermined price or formula. Convertible securities provide investors with the potential for capital appreciation and the option to convert their investment into Equity. See Fully Diluted EPS.
The practice of raising funds from a large number of individuals, typically through an online platform. Crowdfunding allows startups to access capital from a broad range of investors, often in smaller amounts, and can provide early validation and customer engagement. See also, Reg CF (Regulation Crowdfunding).
A type of dividend provision in Preferred Stock where unpaid dividends accumulate and must be paid to the holders of Preferred Stock before any dividends are distributed to common shareholders. Cumulative dividends ensure that preferred shareholders receive their entitled dividend payments, even if they are not declared in a particular period.
A method of voting in corporate elections that allows shareholders to allocate their votes across multiple candidates or issues in any desired manner. Cumulative voting gives minority shareholders a better chance of electing a representative to the board of directors.
Rights granted to investors that allow them to reduce their pro-rata investment commitment in subsequent financing rounds. Cutback rights provide investors with flexibility in adjusting their investment levels based on changing circumstances or the company's performance.
Deal docs is short hand for the documents to be used in a VC financing deal. In addition to the Term Sheet, they include the Stock Purchase Agreement and Disclosure Schedule, and typically include most of the following: an amended and restated Charter, Indemnification Agreement, Investor Rights Agreement, Legal Opinion (less common in early stage deals), Management Rights Letter, Right of First Refusal & Co-Sale Agreement, and Voting Agreement.
Demand Registration Rights
A contractual right granted to certain shareholders, typically holders of Preferred Stock, to request that the company register their shares for sale to the public. Demand registration rights enable shareholders to potentially sell their shares and realize liquidity in a public market. In a VC deal, demand registration rights are typically included in the Investor Rights Agreement (IRA). In the IRA, the section covering demand registration commonly provides for both S-1 Registration Rights and S-3 Registration Rights. Compare to Piggyback Registration Rights.
DGCL (Delaware General Corporation Law)
The statutory framework governing corporate law in the state of Delaware, which is widely adopted by many corporations, including startups and venture-backed companies. The DGCL provides guidelines on corporate governance, shareholder rights, board responsibilities, mergers and acquisitions, and other corporate matters.
Dilution happens when a company issues additional shares, reducing existing shareholders' ownership, value, and voting power. It occurs through fundraising activities like issuing new shares or converting Convertible Securities. Provisions like Preemptive Rights and Anti-Dilution mechanisms protect shareholders from dilution.
Dilutive refers to the impact on existing shareholders' ownership and voting power when new shares are issued, diluting their stake. It occurs through issuing shares to new investors or converting Convertible Securities. Preemptive Rights and Anti-Dilution mechanisms protect shareholders from dilution.
A Disclosure Schedule is a document prepared by a company for venture capital transactions. It lists disclosures made to investors regarding its operations, financials, contracts, personnel, legal matters, and other key information. It supplements company representations and warranties and is related to due diligence materials provided to investors. The schedule ensures transparency and informs investor decision-making by providing a comprehensive understanding of the company's status, risks, and operations.
A triggering event, such as bankruptcy, liquidation, or sale of a company, that results in the termination and winding up of the company's operations. A dissolution event typically leads to the distribution of assets to shareholders according to their ownership stakes.
A distribution of profits or earnings made by a company to its shareholders. Dividends are usually paid in the form of cash, additional shares of stock, or other assets and are based on the company's profitability and board decisions.
A funding round where a company raises capital at a lower valuation than the previous round. Down rounds can be challenging for existing investors as it implies a decrease in the value of their investment and can lead to dilution of their ownership stake.
A provision in a shareholder agreement or company bylaws that allows a majority shareholder or group of shareholders to compel the remaining minority shareholders to sell their shares in the event of a sale or merger of the company. Drag-along provisions are designed to facilitate transactions and ensure a unified approach to the sale process.
The process of conducting a comprehensive review and investigation of a company's operations, financials, legal, and other relevant aspects to assess its suitability for investment or other business transactions. Due diligence aims to uncover any potential risks, issues, or opportunities associated with the target company.
Due Diligence Request List
A document or checklist provided by a potential investor or acquirer to the target company, outlining the specific information and documentation required for the due diligence process. The request list helps ensure that all relevant areas are covered and that the necessary information is provided for a thorough evaluation.
EBIT stands for Earnings Before Interest and Taxes. EBIT is a financial metric that provides a measure of a company's profitability from its core operations and is often used to assess its operational efficiency and compare performance across different companies or industries.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA is financial metric that provides a measure of a company's operating performance, excluding non-operational factors such as capital financing costs and asset depreciation.
A concise and compelling presentation or summary of a business idea, product, or company that can be delivered within the duration of an elevator ride (typically 30 to 60 seconds). An elevator pitch is used to quickly and effectively communicate the key value proposition and generate interest from potential investors, customers, or partners.
An Entity is a legal person other than an individual (i.e., other than a human being). Entities include corporations, limited liability companies (LLC's), partnerships of various kinds, joint ventures, foundations, cooperatives, trusts, estates, governments and governmental agencies, and other organizations. As a legal person, an Entity can enter contracts, sue and be sued, own property, and have other similar rights. Entities are owned or controlled by individuals or other Entities and are subject to various laws and regulations governing their formation, operation, and dissolution.
Equity refers to the ownership interest or residual claim in a company. It represents the value of an ownership stake after deducting any liabilities. In the context of a corporation, equity represents the shareholders' ownership in the company, which is typically in the form of Common Stock and/or Preferred Stock. In the context of a limited liability company (LLC) or limited partnership, equity is typically in the form of, respectively, membership interests or units, or partnership interests or units.
The process of raising funds by selling ownership Shares in a company. Equity financing allows companies to raise capital without incurring debt obligations and gives investors an ownership stake in the business.
A third-party account that holds funds or assets until specific conditions are met, such as the completion of a transaction or agreement. Escrow provides security and ensures that funds or assets are released to the appropriate party once all conditions are satisfied.
Employee Stock Ownership Plan, a program that allows employees to acquire ownership in the company through stock options or restricted stock grants. ESOPs are used as a tool to attract and retain talent, align employee interests with the company's success, and provide a path to employee ownership.
The Securities Exchange Act of 1934 is a federal law that governs the trading and listing of Securities on national stock exchanges, as well as the ongoing reporting obligations of public companies. The Exchange Act establishes the regulatory framework for the securities markets, including rules and regulations for Securities transactions, registration and regulation of securities exchanges and brokers, and disclosure requirements for public companies. The Exchange Act created the Securities and Exchange Commission to enforce the provisions of the Act and oversee the Securities industry.
An offering for sale of Securities that is exempt from the full Registration requirements of the Securities Act. This means the issuer of the Securities is not required to go through the extensive Registration process with the SEC before offering and selling the Securities to investors. Exempt offerings are typically allowed under specific exemptions provided by the SEC, such as Regulation D, which provides safe harbor provisions for certain Private Placement offerings. These exemptions are designed to facilitate capital raising for certain types of issuers and investors while still maintaining investor protections. Exempt offerings are still subject to conditions and restrictions outlined in all applicable laws, rules, and regulations.
See Liquidity Event.
A plan outlining how investors can realize their return on investment, such as through an IPO or acquisition. An exit strategy is important for investors as it determines how and when they can sell their shares and generate liquidity.
Fair Market Value
An individual or Entity that has a legal obligation to act in the best interests of another party. This responsibility entails putting the beneficiary's interests first and avoiding conflicts of interest.
See Right of First Refusal.
FMV stands for Fair Market Value. FMV is the price at which an asset would be sold between a willing buyer and a willing seller in an open market transaction. Fair market value serves as a benchmark for valuing assets, Securities, or other investments and is often used for tax purposes, financial reporting, and determining the purchase price in transactions.
Form D is a filing with the SEC submitted by companies offering or selling Securities under Reg D. It is a notice of an Exempt Offering and provides information about the company, the Securities offered or sold, and certain other information. Form D is to be filed within a specified timeframe after the first sale of Securities in the offering. By filing Form D, the company notifies the SEC and potential investors of its sale or its intent to offer Securities for sale in reliance on an exemption from the full Registration requirements of the Securities Act.
Form 144 is a filing with the SEC submitted by individuals or entities intending to sell Restricted Securities, including Control Securities, in compliance with Rule 144. The form is required to provide information about the seller, the Securities being sold, and the manner of sale. By filing Form 144, the seller notifies the SEC of its intent to sell Restricted Securities and provides transparency to the market.
Founders Preferred Stock
A class of Preferred Stock specifically designated for founders or key individuals of a startup company. Founders Preferred Stock often carries additional rights or privileges compared to other classes of Preferred Stock or Common Stock, such as voting control, liquidation preferences, or Anti-Dilution protection.
Friends and Family Round
An early-stage funding round where a startup company seeks investment from close friends, family members, or personal connections. Friends and family rounds are often the initial source of capital for entrepreneurs and serve as a way to secure funding during the early stages of a company's development. There is no exemption for a company from following federal or state securities laws when selling Securities to family and friends.
A mechanism used to protect the value of existing Preferred Stock holders in the event of a subsequent financing round at a lower valuation. In a full ratchet Anti-Dilution provision, the conversion price of the Preferred Stock is adjusted downward to the price at which the new shares are issued, effectively increasing the number of shares the Preferred Stock holders receive.
The total number of shares a company would have if all outstanding options, warrants, and other convertible Securities were exercised or converted into Common Stock. Fully diluted shares represent the maximum potential ownership claims and are used to assess ownership percentages and dilution.
Fully Diluted EPS
Earnings Per Share calculated by considering the impact of all issued and outstanding shares of Common Stock, and all shares of Common Stock into which Convertible Securities can be converted or for which they can be exchanged. See Convertible Securities. Fully diluted EPS provides a more comprehensive picture of a company's earnings on a per-share basis.
The act of promoting or advertising an investment opportunity to a wide audience, including the general public, to attract potential investors. General solicitation is regulated by Securities laws and may require compliance with specific regulations, such as filing a Form D with the SEC for certain Private Placements.
In a venture capital or private equity fund, the general partner refers to the entity or individuals responsible for managing the fund and making investment decisions on behalf of the limited partners. The general partner is typically the fund manager or management team and assumes the day-to-day operations and Fiduciary duties of the fund.
An individual who has access to confidential or non-public information about a company due to their position as an employee, director, or significant shareholder. Insiders are subject to strict legal and regulatory restrictions regarding the trading of Securities based on material non-public information.
ICO stands for initial coin offering. An IOC is a fundraising method used by startups and companies in the cryptocurrency or blockchain industry, where they issue and sell digital tokens or coins to investors in exchange for funding. ICOs have gained popularity as a way to raise capital but have also faced regulatory scrutiny due to potential fraud or unregulated Securities offerings.
IPO stands for initial public offering. An IPO is first sale of a company's Securities to the public, allowing Registered securities to be traded on a stock exchange. An IPO represents a major milestone for a company, providing access to public capital markets, liquidity for shareholders, and increased visibility and credibility. See also Registered Offering and Registration Statement.
Intangible assets that provide competitive advantage and can be protected legally. Intellectual property is valuable to startups as it safeguards their innovative ideas, inventions, and brand identity from unauthorized use or imitation. There are four main kinds of IP: patents, trademarks, copyrights, and trade secrets.
An organization or program that supports the growth and development of early-stage startups by providing resources, mentorship, infrastructure, and funding. Incubators typically offer startups access to workspace, networking opportunities, and educational programs to help them navigate the challenges of building a successful business.
An Indemnification Agreement is a contract between parties that establishes compensation terms for specified losses, damages, liabilities, or expenses. In venture capital, it protects investors from potential losses arising from breaches of representations, warranties, or legal violations.
A right granted to certain shareholders, typically preferred shareholders, to receive periodic updates, financial statements, and other relevant information about the company's operations and performance. Information rights enable shareholders to stay informed and monitor their investment, promoting transparency and accountability.
Investor Rights Agreement
An Investor Rights Agreement is a contract between a company and its investors, outlining the rights and protections granted to investors. It covers information rights, registration rights, board representation, pre-emptive rights, and other provisions ensuring transparency, participation, and alignment of interests.
Initial Coin Offering
Initial Public Offering
Investor Rights Agreement
A legally binding agreement between a company and its investors that outlines the rights and protections granted to investors. The agreement covers important matters such as information rights, voting rights, registration rights, and other provisions that safeguard investor interests.
The Entity, usually a company, that offers or sells Securities, such as stocks, bonds, or other financial instruments, to investors. The issuer is responsible for complying with Securities laws, providing accurate and timely information to investors, and meeting the regulatory requirements for offering Securities.
JOBS Act (Jumpstart Our Business Startups Act)
A U.S. federal law enacted in 2012 to facilitate capital formation and ease certain regulatory burdens for small businesses and startups. The JOBS Act introduced various provisions, including crowdfunding exemptions, relaxed restrictions on general solicitation, and streamlined public offering processes, to encourage entrepreneurship and access to capital.
A tax form used by partnerships, including limited partnerships (LPs) and limited liability companies (LLCs), to report the individual partners' share of income, deductions, credits, and other tax-related information. Each partner receives a K-1 form that they use to report their share of the partnership's taxable income on their personal tax returns.
Key-Person Clause (f/k/a Key-Man Clause)
A contractual provision that protects the interests of investors by allowing them to take certain actions, such as reducing their investment or terminating the agreement, in the event of a key person's departure, incapacity, or death. Key-person clauses mitigate the risks associated with key individuals' impact on a company's success and continuity.
Key-Person Insurance (f/k/a Key-Man Insurance)
An insurance policy taken out by a company on the life or health of a key individual, such as a founder, executive, or key employee, to protect against financial losses that may arise from their absence, incapacity, or death. Key-person insurance provides a source of funds to cover expenses, loss of revenue, or facilitate the transition in the event of a key person's unavailability.
Key-Person Risk (f/k/a Key-Man Risk)
The risk associated with the potential negative impact on a company's operations, performance, or value resulting from the absence, incapacity, or departure of a key individual, such as a founder, executive, or key employee. Key-person risk highlights the importance of succession planning and mitigating the potential disruptions caused by the loss of key personnel.
KISS (Keep It Simple Security) A simplified form of investment contract developed by the AngelList platform. KISS documents are designed to streamline the investment process by using standardized terms and reducing the complexity and cost traditionally associated with investment agreements.
A Legal Opinion is a written statement by a lawyer expressing their professional judgment on a specific matter. In venture capital transactions, it confirms the validity, enforceability, and legality of documents such as formation papers, investment agreements, and related contracts.
Letter of Intent
The order in which proceeds from a company's liquidation or sale are distributed among shareholders. Liquidation preferences give certain shareholders the right to receive their investment back before other shareholders, providing a level of protection in the event of a company's dissolution.
An event that allows shareholders, typically investors or employees, to convert their ownership stakes into cash or other liquid assets. Liquidity events include initial public offerings (IPOs), acquisitions, mergers, or other transactions that create an opportunity for shareholders to sell their shares and realize the value of their investment.
A period of time during which certain shareholders, often company insiders or large investors, are restricted from selling or transferring their shares after an initial public offering (IPO) or other specified event. Lock-up periods are intended to prevent excessive selling pressure and stabilize the company's stock price during the initial trading period.
LOI stands for letter of intent. An LOI is a non-binding agreement or document that outlines the preliminary terms and conditions of a proposed business transaction, such as a merger, acquisition, or investment. An LOI serves as a starting point for negotiations and demonstrates the parties' intention to proceed with the transaction, but it is not legally binding.
LP stands for limited partner. An LP is an investor who contributes capital to a venture capital fund but does not participate in the fund's management. Limited partners have a passive role and receive a share of the fund's profits, while the general partners manage the fund's investments and operations.
In VC transactions, a Major Investor is typically both a concept and a defined term. The term is normally defined in the Investor Rights Agreement. A major investor is an individual or Entity that contributes a significant amount of capital to a startup or a company. The definition is is usually determined with reference to the amount of investment made relative to other investors (often stated as a specific minimum number of share held). Major Investors receive rights that other investors may not.
Rights granted to certain investors, typically preferred shareholders or venture capital funds, that allow them to participate in the management and governance of the company. Management rights may include the right to appoint a representative to the board of directors, receive financial and operational information, or participate in major decision-making processes.
Management Rights Letter
A legal document or agreement that outlines the specific rights and obligations of an investor with respect to their participation in the management and governance of a company. The management rights letter typically addresses topics such as board representation, information rights, voting rights, and other provisions related to the investor's involvement in company matters.
MFN stands for Most-Favored Nation. An MFN Provision is a contractual provision that ensures an investor receives the most favorable terms, conditions, or rights compared to other investors in subsequent financing rounds or transactions. The MFN Provision protects the investor from potential disadvantageous terms and provides them with similar rights and benefits as those granted to other investors in the future.
A milestone is a significant achievement in a startup's development that triggers new investment. It represents completing tasks, reaching targets, or accomplishing goals. Milestones attract investment by showcasing progress, viability, and growth potential. They include product launches, market expansion, revenue targets, user acquisition, or other significant accomplishments that inspire investor confidence and support funding for the startup's advancement.
See Reg A+.
Most Favored Nation Provision
See MFN Provision.
In venture capital deals, the term "non-binding" often refers to provisions or agreements that do not impose legally enforceable obligations on the parties involved. It is a common practice in the early stages of negotiations, allowing flexibility and exploration of terms without creating a binding commitment. Non-binding agreements in VC deals enable parties to engage in discussions, conduct due diligence, and negotiate terms with the understanding that they are not legally obligated until a binding agreement is reached. This approach provides flexibility and allows parties to assess the viability and alignment of interests before committing to enforceable obligations.
A provision in an agreement, such as a letter of intent or exclusivity agreement, that restricts a company from seeking or accepting proposals or offers from other potential buyers or investors for a specified period. The no-shop provision allows the parties involved to negotiate a transaction in good faith without the risk of competing offers.
NVCA stands for the National Venture Capital Association, a trade association representing the interests of the US venture capital industry. It provides resources, advocacy, networking opportunities, and industry research to foster innovation, entrepreneurship, and investment. The NVCA publishes a set of model deal documents for venture capital deals that are widely used and which are familiar to many or most legal practitioners, VC firms, and angels.
Rights granted to certain investors, typically minority shareholders or investors with a smaller ownership stake, that allow them to attend and observe meetings of the company's board of directors without having voting power or decision-making authority. Observer rights provide investors with visibility into the company's operations and decision-making processes.
A contractual agreement that gives the holder the right to buy or sell a specific number of shares at a predetermined price within a specified period. Options are often used as compensation incentives for employees or as investment instruments for investors.
In VC deals, an option pool refers to a specific portion of a startup's Equity reserved for granting Restricted Stock or stock Options to employees, advisors, consultants, or directors. Typically, venture capitalists prefer to see an Option Pool representing around 10-20% of the company's total capitalization after closing the investment. The Option Pool allows the company to attract and retain talent by offering stock Options that provide potential financial upside as the company grows. By allocating a portion of Equity to the Option Pool, startups can incentivize employees and align their interests with the long-term success of the company, a practice commonly encouraged in VC transactions.
A Latin term meaning "equal footing" or "on equal terms." In the context of investments, pari passu refers to the equal treatment of investors or Securities holders, such as in the distribution of proceeds or assets upon liquidation or other events. Pari passu provisions ensure that investors share in the benefits or burdens of an investment equally.
Rights which grant investors the opportunity to participate in a company's future financing rounds. Participation rights can be structured in different ways, such as full participation (Pro Rata Rights), where investors can invest in the new round to maintain their same proportionate Equity position, or capped participation, which limits the maximum investment amount. Compare with Preemptive Rights (aka Rights of First Refusal).
Participating Preferred is Preferred Stock that entitles holders to receive preferred dividends and participate with common shareholders in distributing remaining proceeds upon a liquidity event. It combines preferred dividend rights with the opportunity to share in additional proceeds on an as-converted-to-Common Stock basis. This feature offers the potential for a higher return compared to non-participating Preferred Stock. Participating Preferred terms are typically negotiated between investors and the company during financing rounds.
Pay to Play is a provision in VC financing agreements where investors may face penalties or loss of rights for not participating in future funding rounds. It incentivizes continued support and active involvement, discouraging passive shareholders. Non-participating investors might convert preferred shares to common shares or have higher liquidation preferences. This provision encourages ongoing investor support and engagement in the company's success. This provision is relatively infrequently used in VC deals.
P/E stands for Price to Earnings. The P/E Ratio is a financial metric that measures a company's valuation by comparing its stock price to its earnings per share (EPS). The P/E ratio is calculated by dividing the company's stock price by its EPS and provides insights into how the market values the company's earnings potential. A higher P/E ratio suggests that investors are willing to pay a premium for the company's earnings.
Piggyback Registration Rights
Piggyback Registration Rights grant investors the privilege to include their shares in ("piggyback" onto) a public offering that the company intends to conduct for itself or another shareholder. These rights typically allow investors to participate in an unlimited number of offerings until the registration rights agreement expires. With piggyback registration rights, investors can join the offering and sell their shares on the same terms and conditions as the primary offering. This provision ensures that investors have the opportunity to benefit from the company's public offerings and achieve liquidity along with other shareholders. Compare Demand Registration Rights.
A presentation or slide deck that provides an overview of a company's business model, product or service, market opportunity, financial projections, team, and other key aspects. Pitch decks are used to attract potential investors, partners, or customers and effectively communicate the value proposition and growth potential of a company.
A legal document used to disclose information about a private offering of Securities to potential investors. A PPM provides detailed information about the company, its business model, financial statements, Risk Factors, and other relevant information to enable investors to make informed investment decisions.
See Right of First Refusal.
A preferred director represents preferred shareholders on a company's board of directors. Appointed by holders of Preferred Stock, they have specific voting rights and may possess veto powers over select matters. Preferred directors protect preferred shareholders' interests, ensuring their rights are considered in corporate decisions. They play a pivotal role in balancing the concerns of various shareholder classes and fostering alignment between investors and management. Preferred director rights are not always granted to VC's, though some VC firms may require it.
The value of a company or startup prior to an infusion of external funding or investment. Pre-money valuation is used to determine the ownership stake and share price for new investors and is often based on various factors, including the company's financial performance, growth prospects, market conditions, and comparable transactions.
Preferred stock is a class of of capital stock in a corporation. Preferred stock has preferences over Common Stock (hence, the name), including higher priority in receiving dividends and assets in a liquidation. Shares of preferred stock may or may not have voting rights, though in a VC financing deal they nearly always will. Preferred stock shares will typically have as many votes per share as the number of shares of Common Stock into which the preferred stock can then convert.
See P/E Ratio.
Private placement refers to the sale of Securities to a select group of investors, such as institutional investors, accredited individuals, or private equity firms, without conducting a Public Offering. In a private placement, companies offer Securities to a limited number of investors who meet specific eligibility criteria. This method of raising capital provides companies with flexibility and efficiency, as it involves fewer regulatory requirements. Private placements are typically conducted by use of a PPM that outlines the terms of the investment and discloses Risk Factors and other relevant information to prospective investors.
Private Placement Memorandum
Pro Forma (Pro Forma Cap Table)
During VC financing negotiations, parties often create a pro forma Cap Table (often referred to simply as the "Pro Forma") to illustrate the expected ownership structure after the completion of the proposed financing round. The Pro Forma serves as a working version of the company's "regular" Cap Table, allowing stakeholders to model the anticipated changes in ownership resulting from the VC round. It can be a subject of detailed discussion, as parties seek to align their interests and determine the optimal distribution of ownership. In addition to showing existing outstanding shares of common stock (e.g., owned by the founders, employees, and advisors), Pro Forma Cap Tables also illustrate the conversion or exercise of Convertible Securities triggered by the financing round, as well as the impact on ownership of unissued Options from the company's closing Option Pool. Pro Forma's undergo iterative revisions to capture evolving details and terms, providing valuable insights into ownership outcomes tied to specific financing events.
Pro Rata Rights
Pro rate rights are a type of Participation Rights. Pro rata rights may be granted to existing shareholders, typically preferred shareholders, that entitle them to participate in future financing rounds to maintain their ownership percentage in the company. Pro rata rights allow existing shareholders to invest additional capital in proportion to their existing ownership, ensuring they are not diluted by subsequent financing activities. See Super Pro Rata Rights.
See Quasi-California Corporation
See Registered Offering.
This term refers to certain non-California corporations that operate in California. Under Section 2115 of the California Corporations Code, foreign corporations that meet specified conditions are required to comply with a long list of other provisions of California law regarding corporate governance, even to the exclusion of their own states' laws. Though presumed by many practitioners to be unconstitutional, the law remains in place. The law imposes these requirements on qualifying foreign corporations that have a substantial nexus to California (as defined by tests given in Section 2115), regardless of whether the corporation wishes to be subject to those provisions, and despite the fact that compliance with some of those provisions might necessarily result in non-compliance with the law of the corporation's own state.
A written notice provided to shareholders, typically by a company's transfer agent, confirming their ownership of shares and other relevant information, such as the number of shares held and the registration details. Record notices serve as evidence of ownership and are important for communication and record-keeping purposes.
The rights granted to certain shareholders, typically holders of preferred stock, to require the company to repurchase their shares at a specified price or formula. Redemption rights are commonly structured to become exercisable after a specified period, typically five years or more, following the initial investment. While redemption rights are infrequently exercised, they provide investors with leverage to ensure eventual liquidity for their investment in case the company does not go public through an IPO by a predetermined date. Redemption rights are not commonly encountered in early stage deals.
Regulation A+. Not really part of the VC world for startups, the term may come to the attention of startup founders, so its worth knowing. The plus part of the name (+) is not part of the formal name. Corporate finance professionals and securities lawyers have given the colloquial name Reg A+ to the provisions added in 2015 by the JOBS Act to then-existing Regulation A. Reg A+ allows certain companies to raise capital through a streamlined public offering process, known as a "mini-IPO," with reduced regulatory requirements compared to traditional initial public offerings. Regulation A+ offerings provide an avenue for smaller companies to access public capital markets and offer investment opportunities to a broader range of investors.
Reg CF stands for Regulation Crowdfunding. Reg CF is a set of rules and regulations under the Securities Act established by the SEC that governs Equity crowdfunding offerings. Reg CF allows companies to raise capital from the general public (including in particular from people who are not Accredited Investors) by selling Securities through registered crowdfunding platforms. Non-accredited investors, however, still have restrictions place on their freedom to invest their money based on their wealth and income.
Reg D stands for Regulation D, a set of rules and regulations under the Securities Act established by the SEC that provides several Safe Harbor exemptions from the Registration requirements for certain Private Placement offerings of Securities. Regulation D offerings are limited to Accredited Investors (and, with rigidly applicable conditions in some cases, certain non-accredited investors) and have specific rules and restrictions on the number of investors, advertising, amounts raised over given time periods, and other matters. See Rule 504, Rule 506, Rule 506(b), and Rule 506(c).
Reg S stands for Regulation S, a set of rules and regulations under the Securities Act established by the SEC that provides a Safe Harbor for offshore transactions of Securities. Reg S exemptions allow companies to offer and sell Securities outside of the United States without having to comply with Registration requirements.
A registered offering is a public offering of Securities for sale by a company after filing a Registration Statement with the SEC. The SEC must accept the filing before it is effective for any sale. This process often requires several rounds of responding to SEC comments. The process is intended to ensure compliance with Securities laws and regulations, providing transparency and investor protection. Registered offerings, such as IPO's or follow-on offerings, allow companies to raise capital on a larger scale and offer Securities directly to the public. See Registration Statement.
Registration refers to the process by which companies comply with the legal requirements to register their Securities offerings with regulatory authorities before making them available to the public. The registration process involves submitting extremely detailed information about the company and its Securities, including financial statements, business plans, legal matters, officers and directors, investors, material contracts, employment matters, regulatory compliance, internal controls, and other matters. Securities that are registered can typically be freely bought and sold, but their issuing companies are subject to regulatory oversight and regular and periodic reporting obligations.
A legal document filed with the SEC by companies that intend to offer their Securities for sale to the public in a Registered Offering. The registration statement contains comprehensive information about the company, its management team, its board of directors, its business operations, financials, legal matters, Risk Factors, and other relevant information required by the SEC. A registration statement undergoes rigorous review by regulatory authorities to ensure compliance with disclosure requirements. The cost, in time and attention and money, of doing a Registered Offering are significant. There are several SEC approved and required forms for different kinds of Registered Offerings. See S-3 Registration Rights and S-3 Registration Rights.
See Reg A+.
See Reg CF.
See Reg D.
See Reg S.
Shares of stock that are subject to certain restrictions or limitations on transferability. Restricted stock is typically issued to founders, employees, or other insiders of a company and may be subject to vesting schedules or contractual restrictions on transfer until specific conditions are met.
Return on Investment
Revenue Run Rate (or Runrate)
A method of estimating a company's future revenue based on its current financial performance. The revenue run rate extrapolates the company's current revenue over a specific period (e.g., monthly or annual) to project its future revenue potential. This metric is often used for forecasting and valuation purposes.
Right of First Offer
Right of First Refusal
Right of First Refusal & Co-Sale Agreement
A Right of First Refusal and Co-Sale Agreement includes the ROFR and Co-Sale Rights provisions that are common in VC transactions. The ROFR grants existing shareholders or investors the priority to purchase additional shares before they are offered to third parties, protecting their ownership stake. The Co-Sale Rights provision allows minority shareholders to participate in share sales alongside majority shareholders. This agreement ensures fair treatment and safeguards shareholders' investments. See also Right of First Refusal, and see Co-Sale Rights.
Factors or variables that could potentially affect the success or performance of a company or investment. Risk factors are disclosed in offering documents, such as a PPM or prospectus, to inform investors about the potential risks associated with investing in the company.
A series of presentations and meetings held by a company's management team and underwriters to market and promote an upcoming IPO or other Securities offering. Road shows allow companies to showcase their investment opportunity to potential investors and generate interest in the offering.
ROFO stands for Right of First Offer, a contractual right that grants a party, typically a significant existing investor (e.g., a Major Investor), the first opportunity to invest in additional Securities before they are offered to other potential investors. The holder of the ROFO has the privilege to review and accept or decline the offer to invest on the same terms as offered to third parties. The purpose of the ROFO is to provide the holder with a priority opportunity to participate in subsequent financing rounds, allowing them to maintain their ownership stake and avoid dilution. Contrast this with Pay-To-Play.
A contractual right given to existing shareholders, typically preferred shareholders, to have the first opportunity to purchase additional shares of stock or other Securities issued by the company before they are offered to third parties. First refusal rights protect existing shareholders from dilution and provide them with the opportunity to maintain their ownership stakes. See also Right of First Refusal and Co-Sale Agreement.
ROI stands for Return on Investment, a financial metric that measures the profitability or return generated from an investment relative to its cost. ROI is calculated by dividing the net profit or gain from the investment by the initial investment amount and expressing it as a percentage. ROI is commonly used to evaluate the performance and attractiveness of investment opportunities.
A corporate strategy or transaction where multiple smaller companies in the same industry or market are merged or consolidated to create a larger, more efficient Entity. Rollups are often used to achieve economies of scale, expand market share, and streamline operations.
A rule established by the SEC that provides a safe harbor for the sale of restricted and Control Securities. Rule 144 sets forth certain conditions and holding periods that must be met before these Securities can be sold in the public market.
A rule under Reg D established by the SEC that provides definitions for special terms used throughout Regulation D.
A rule under Reg D established by the SEC that provides a registration exemption for certain small offerings of Securities. Rule 504 allows companies to raise up to a specified amount of capital within a 12-month period without having to register the offering with the SEC.
A rule under Reg D established by the SEC that provides a safe harbor for non public offerings of Securities under Regulation D. Rule 506 offers two distinct exemptions, Rule 506(b) and Rule 506(c), with different requirements and limitations for offering Securities to investors.
A rule under Reg D established by the SEC that provides a safe harbor exemption for companies to raise capital in Private Placements of Securities. Rule 506(b) allows companies to raise capital from an unlimited number of Accredited Investors and up to 35 non-accredited investors who meet certain sophistication requirements. There is no General Solicitation or advertising permitted, and issuers must provide information to investors that is sufficient to make informed investment decisions.
A rule under Reg D established by the SEC that provides a safe harbor exemption for companies to raise capital in Private Placements of Securities. Rule 506(c) allows companies to engage in General Solicitation or advertising to attract investors, but all investors must be verified as Accredited Investors. Issuers must take reasonable steps to ensure that investors meet the Accredited Investor requirements, such as reviewing financial statements, tax documents, or obtaining written confirmation from a third-party service.
S-1 Registration Rights
S-1 registration rights refer to the rights granted to certain shareholders or investors to have their Securities registered on a Form S-1 registration statement. Form S-1 is a registration statement filed with the SEC for companies planning to go public through an IPO. By exercising S-1 registration rights, eligible shareholders or investors can have their Securities included in the Registration Statement (subject to certain conditions), allowing them to sell their Securities to the public in compliance with Securities laws. These rights provide investors with liquidity options and the ability to participate in the public offering process. See also Demand Registration, S-3 Registration Rights, and Piggyback Registration Rights.
S-3 Registration Rights
S-3 registration rights granted to certain shareholders to have their shares registered (subject to certain conditions) on Form S-3, a simplified registration form filed with the SEC for Public Offerings. S-3 registration rights provide flexibility and a streamlined process for shareholders to sell their shares to the public. Use of Form S-3 is not automatic. The issuer-corporation must have already satisfied other applicable reporting requirements of the Exchange Act.
SAFE stands for Simple Agreement for Future Equity. A SAFE is a type of financial instrument used in early-stage investments, particularly in startups, to provide a simple and flexible framework for raising capital. SAFEs represent a promise to issue shares to the investor in the future, upon the occurrence of specified triggering events, such as a subsequent Equity financing round. Unlike Convertible Notes, SAFE's have no maturity date, accrue no interest, and are not carried as debt on the issuing company's balance sheet.
Safe harbor refers to a legal provision which, if followed, provides protection or immunity from certain legal liabilities or penalties. In the context of Securities regulations, safe harbor provisions offer companies and individuals protection when they meet specific requirements or follow prescribed guidelines. These provisions are designed to encourage certain activities or behaviors by providing a level of certainty and protection against legal consequences. Safe harbor provisions may exist in various areas of law, including Securities laws, intellectual property, antitrust, and more. The purpose of safe harbor provisions is to promote compliance, innovation, and the free flow of information while balancing the interests of different stakeholders. See Reg D and Reg S.
SEC stands for the U.S. Securities and Exchange Commission. The SEC is a federal regulatory agency created by the Exchange Act. The SEC is responsible for regulating and overseeing the securities industry and securities transactions throughout the United States to protect investors, maintain fair and efficient markets, and facilitate capital formation. The SEC enforces securities laws, promote disclosure of accurate and timely information, and regulates Securities offerings, sales, and trading activities. The SEC also plays a crucial role in supervising securities exchanges, investment advisors, and other market participants.
Securities refer to tradable financial instruments that represent ownership or rights in a company or Entity. They encompass a wide range of instruments, such as Common Stock, Preferred Stock, bonds, debentures, Options, Warrants, and other derivative securities. Securities provide individuals and organizations with opportunities to invest, trade, and raise capital in financial markets. They are subject to regulatory frameworks and disclosure requirements to protect investors and ensure transparency in the market. The buying and selling of securities occur in various exchanges and over-the-counter markets.
The Securities Act of 1933 is a federal law in the United States that regulates the offering and sale of securities to the public. Its purpose is to ensure that investors receive accurate and complete information about Securities being offered for sale and to prevent fraudulent activities in the Securities markets. The Securities Act requires companies to register their Securities offerings with the SEC unless they qualify for an exemption.
Securities and Exchange Commission
The initial round of funding for a startup company, typically raised from friends, family, Angel Investors, or early-stage VC firms. Seed rounds provide capital to support the company's product development, market validation, and initial growth before seeking larger-scale investments.
Series A, B, C Funding
Sequential rounds of funding typically raised by startups or early-stage companies as they progress and achieve specific milestones. Series A, B, C, and subsequent funding rounds involve larger investment amounts and are often led by venture capital firms or institutional investors, allowing the company to scale its operations, expand its market presence, or develop new products or services.
Series Seed Preferred Stock
Series Seed Preferred Stock is a class of Preferred Stock issued to early-stage startup investors during the Seed Round. It provides specific rights, preferences, and privileges. This type of stock typically includes features like a liquidation preference and may have Anti-Dilution provisions. It is designed to attract initial funding and support the growth of startups. Series Seed Preferred Stock has simpler terms compared to later-stage financing rounds (e.g., Series A, B, C ...), making it an attractive investment vehicle for early-stage investors.
A legally binding agreement among shareholders that outlines their rights, obligations, and relationships with respect to the ownership and governance of a company. Shareholder agreements cover various topics, including voting rights, transfer restrictions, management and control, dispute resolution, and other provisions related to shareholders' rights and responsibilities.
Shareholder of Record
The registered owner of shares in a company as maintained on the official record of shareholders. Shareholders of record are entitled to exercise their rights as shareholders, such as voting on company matters, receiving dividends, and participating in corporate actions.
A Share is the basic unit of Capital Stock. A corporation's Capital Stock is divided into a fixed number of total possible authorized Shares, each Share representing a percentage ownership in a company depending on the total number of Shares that have been issued. A corporation may issue fewer than the authorized number of Shares, but never more. By virtue of owning Shares, shareholders are entitled to certain rights and privileges, which may include voting rights, the ability to receive dividends or distributions, and any other rights provided for in the issuing company's Charter. Shares can be issued in different classes, such as shares of Common Stock or Preferred Stock, each having distinct rights and characteristics. See also Capital Stock.
Simple Agreement for Future Equity
SPA stands for stock purchase agreement. An SPA is a legally binding contract and the primary operative agreement in a VC deal that sets out the terms for buying and selling Preferred Stock of a company. It covers details like purchase price, number and type of shares, representations, warranties, closing conditions, and post-closing provisions.
See Capital Stock.
Stock Purchase Agreement
Super Pro Rata Rights
Despite the name, this is a right granted to certain investors in venture capital financing deals. Its allow the investor to participate in subsequent funding rounds in excess of what Pro Rata Rights would grant. The grantee of the right has an enhanced allocation compared to other investors. These rights are often given to investors who have demonstrated a significant commitment to the company or possess unique strategic value. However, these rights can make it difficult to attract new investors and are typically disfavored by company management and company legal counsel.
A group of individuals or entities, often investors or financial institutions, who come together to collectively invest in a specific opportunity or transaction. Syndicates pool their resources and expertise to share the risks and rewards associated with the investment.
See Come-Along Rights.
A non-binding document that outlines the proposed terms and conditions of an investment or transaction, typically prepared by the investor or acquiring party. A Term Sheet serves as a basis for negotiations and provides a framework for structuring the deal, including the investment amount, valuation, rights and preferences of the Securities, and other key terms.
A term used to describe a privately held startup company with a valuation exceeding $1 billion. Unicorns are often high-growth companies, particularly in the technology sector, that have attracted significant funding from investors and demonstrate the potential to disrupt existing industries or create new markets.
VC stands for Venture Capital, a type of private Equity investment made in early-stage, high-growth companies with significant growth potential. VC firms provide funding to startups and emerging companies in exchange for an Equity stake. Besides capital, venture capitalists often offer expertise, mentorship, and industry connections to help the companies grow and succeed. The goal of venture capital is to generate substantial returns on investment by supporting companies through their critical stages of growth, from seed funding to later-stage financing rounds.
A process by which an individual, typically an employee or founder, earns ownership rights or Equity in a company over time, subject to certain conditions, such as continued employment or achievement of specific milestones. Vesting schedules are commonly used to align incentives, retain key talent, and ensure that Equity ownership is earned gradually over a specified period.
A Voting Agreement is a contract between shareholders with voting rights that sets the terms for voting on specified corporate matters. It commonly is entered into to cover director elections and Drag-Along Rights, but can also cover other significant actions to ensure a unified approach and prevent disputes.
A financial instrument that grants the holder the right, but not the obligation, to purchase a specific number of shares of a company's stock at a predetermined price within a certain timeframe. Warrants are often issued as part of a financing or investment arrangement and provide additional upside potential to the holder if the company's stock price increases.
A method used to calculate the average conversion price in Anti-Dilution provisions. Weighted average formulas take into account both the price and number of shares outstanding, providing a fair adjustment to the conversion price based on the new issuance.
Weighted Average (Broad Based)
A variant of weighted average Anti-Dilution protection that considers all shares outstanding, including shares that were previously issued at a lower price. Broad-based weighted average protection provides a more significant adjustment to the conversion price compared to narrow-based weighted average protection.
Weighted Average (Narrow Based)
A variant of weighted average Anti-Dilution protection that excludes shares issued at a lower price in the calculation of the adjustment. Narrow-based weighted average protection provides a smaller adjustment to the conversion price compared to broad-based weighted average protection.
The process of liquidating a company's assets, paying off its liabilities, and formally dissolving the company. Wind-up occurs when a company's operations are terminated, and its remaining assets are distributed to its shareholders according to their ownership stakes. Wind-up may occur voluntarily or involuntarily, such as in bankruptcy or insolvency proceedings.
A well-known startup accelerator and VC firm based in the United States. Y Combinator provides seed funding, mentorship, and resources to early-stage companies in exchange for Equity. It is recognized for its intensive startup programs and has helped launch numerous successful companies. Y Combinator also introduced the SAFE some years ago, and publishes several forms of SAFE's with various terms and other documents. These SAFE forms are widely used by lawyers and investors as the bases for final versions in real-world deals. YC also publishes an excellent SAFE User Guide.
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