The purpose of this page is to provide plain English definitions of terms that are commonly used in the startup and early stage company ecosystem, and to provide links to more detailed information about such terms.
If you don’t find a definition you were looking for, please email me at firstname.lastname@example.org and I’ll add it.
Please note that this page is a constant work in process, so don’t judge anything you find here too harshly!
“83(b) election” — an income tax election filed by a person who received shares in a service-based compensatory transaction, which shares are subject to vesting (i.e., an at cost or lower FMV repurchase right which lapses as services are performed).
“Accredited Investor” — defined in Rule 501 of Regulation D. See here: http://www.law.cornell.edu/cfr/text/17/230.501
Generally, an accredited investor is an individual who either has (i) a greater than $1M net worth excluding the value of their primary residence (but taking into account debts on the primary residence in excess of its fair market value), or (ii) $200,000 in income for the last two years with the expectation of the same in the year of investment, or $300,000 with spouse.
“Anti-dilution protection” — usually refers to a form of purchase price anti-dilution protection. For example, if you buy Series A preferred stock at $1.00 per share, and the company subsequently sells stock at $0.80 a share–your conversion formula will adjust such that when you convert your preferred to common you will convert into more than 1 share of common stock per share of preferred stock held.
“Authorized but unissued shares” — these are shares that the company has authorized in its articles or certificate of incorporation but has not issued.
“Authorized shares” — the number of shares a company has authorized for issuance in its charter. For example, a company might authorize 20M shares, but only issue 2M shares.
“Convertible Equity” — a type of security used in company financings in which the purchaser of the security obtains equity in the company in an amount to be defined in the company’s next financing. Similar to convertible debt, but expressly not debt, and not bearing interest.
“Common Stock” — stock that is entitled to all the residual assets of the company after payment of all debts, and all amounts owed to holders of shares of stock entitled to liquidation preferences.
“Date of first sale” — “For this purpose, the date of first sale is the date on which the first investor is irrevocably contractually committed to invest, which, depending on the terms and conditions of the contract, could be the date on which the issuer receives the investor’s subscription agreement or check.”
Pages 178-179, http://www.sec.gov/rules/proposed/2013/33-9416.pdf
See Form D.
“Dividends” — distributions with respect to shares of stock out of the earnings and profits of the company.
“Dissenters Rights” — a statutory right to be paid the fair value for your shares if you do not vote in favor of a transaction entitling you to dissenters rights, such as a sale of the company.
“Drag Along” — a contract that requires shareholders to vote their shares in favor of a particular transaction, such as a sale of the company, if certain conditions are met, such as a majority of the shareholders approve of it.
“Full ratchet” — a form of purchase price anti-dilution protection which entitles the holder of the securities to have their preferred shares convertible into common shares based on the lower price per share at which shares are subsequently sold, regardless of how many shares are sold at that price.
“Incentive Stock Option” — a stock option that meets the criteria of an incentive stock option under Section 422 of the Internal Revenue Code.
“Information rights” — the right to receive monthly, quarterly, or annual financial reports.
“Liquidation preference” — a right to receive a certain amount of money on the sale of the company, typically in preference to another class of shares. For example, Series A Preferred Stock might have a liquidation preference of $1.00 per share, in preference to and before payment to with respect to any common stock of the company.
“Nonqualified stock option” — a stock option that doesn’t meet the requirements of an incentive stock option under Section 422 of the Internal Revenue Code.
“Option pool” — refers to the number of shares reserved or to be reserved for issuance pursuant to a stock option or stock equity incentive plan.
“Ownership percentage” — refers to the percentage of the company a particular shareholder owns. Determined by reference to either the issued and outstanding shares, or the fully diluted shares. Not determined by reference to the authorized shares. For example, if a shareholder owned 1M shares, and the company had 2M shares outstanding, the ownership percentage on an issued and outstanding basis would be 50%. If the same company had an option pool of 200,000 shares, the ownership percentage on a fully diluted basis would be 1M/2.2M.
Ownership percentage is never determined with reference to the authorized shares. For example, if you and your co-founder each own 1M shares, and there is no option pool, and no other shareholders, and your company has 10M authorized shares–you each own 50%. The authorized share figure does not affect your ownership percentage.
“Pari passu” — on the same footing; on the same level. For example, if Series A and Series B preferred shares are pari passu with respect to each other, the company will make distributions to the Series A and Series B at the same time; one won’t be preferred as to the other.
“Participating Preferred Stock” — stock that is entitled to a liquidation preference, and then after payment of the liquidation preference, to participate in further distributions to stockholders on an as converted to common stock basis.
“Post-money” –refers to the valuation of a company after receiving an investment. For example, if the pre-money valuation was $2M, and the amount of the investment was $1M, the post-money valuation would be $3M.
“Pre-money” — refers to the valuation of a company before an investment. Is used to calculate the price per share for the investment. For example, if a company’s pre-money valuation was $2M, and its fully-diluted share figure was 2M, the price per share would be $2M/2M, or $1 per share.
“Preemptive rights” — usually refers to a contractual right to participate in a company’s subsequent equity fincancing.
“Preferred Stock” — stock that is has rights, preferences and privileges that give it preferences over the common stock–such as a liquidation preference, or purchase price anti-dilution protection.
“Protective Provisions” — provisions, typically is a company’s charter, that require the approval of a majority or super-majority of the holders of the preferred stock, or a class of the preferred stock, to approve certain matters, such as amendments to the company’s charter, or the sale of the company or its assets.
“Registration Rights” — a contractual right to require a company to register shares with the Securities and Exchange Commission.
“Reverse Triangular Merger” — a business combination transaction structure in which the acquiror company forms a subsidiary, and that subsidiary merges into the target company, with the target company surviving the merger but becoming a wholly owned subsidiary of the acquiror company.
“Rule 506” — one of three exemptions available under Regulation D. You can find Rule 506 here, http://www.law.cornell.edu/cfr/text/17/230.506
“Section 83(b)” — a section of the Internal Revenue Code governing the taxation of shares of stock received in compensatory transactions.
“Vesting” — refers to the requirement that services have to be provided, usually over time, to have shares owned released from an at-cost or lower repurchase right.
If you want to read a great book on financings in general, this book is really good.