409A Appraisal or 409A Valuation – A valuation report prepared for the purposes of determining the Fair Market Value of the corporation’s stock reserved for issuance under its Stock Incentive Plan. The Board must only authorize the issuance of Stock Options at the current Fair Market Value of the corporation’s Common Stock or the Stock Option recipient will be assessed a tax penalty under IRC Section 409A. The 409A Valuation is prepared to avoid this tax penalty to the recipient/Employee. 409A Valuations should be prepared once a year or every time there is an event that would materially cause the value of the corporation to increase; such as increased earnings or a Preferred Equity Financing.
83(b) Election – An election under IRS Code Section 83(b) allows a stockholder whose shares are subject to reverse vesting to be taxed on all the shares effective as of the date the stock is granted, rather than each month as the company’s repurchase option falls off. In addition, the tax is based on the excess of the Fair Market Value of the Restricted Stock over the amount paid for the Restricted Stock, and there is often no excess as the stock is granted at the Fair Market Value. This is generally a tax-advantaged election for the stockholder, however, if the stockholder later forfeits the shares by leaving the company before all the shares have vested, they are not entitled to a refund for the taxes paid.
Action by Written Consent – The Board of Directors and Stockholders of a company can vote to approve certain corporate acts via written consent instead of holding a meeting.
Advisor – An expert who gives advice in a particular field, but is not an Employee nor an independent Contractor.
Angel Investor – A person who invests in startup companies, instead of an entity investor such as a VC fund. This person is generally one of the earliest investors of a corporation.
Anti-dilution – Essentially price protection for investors: anti-dilution provisions effectively reprice an investor’s shares to a lower Price Per Share in the event that the corporation completes a Financing at a lower valuation than a previous Financing round, sometimes referred to as a down-round.
Authorized Number of Shares (a.k.a. Authorized Shares, Authorized Capital Stock, Authorized Capital) – The maximum number of shares of Capital Stock that a corporation may legally sell and issue. It is set forth in the Certificate of Incorporation.
Blue Sky Laws – The state statutes, rules, and regulations that relate to and govern the offers and sales of securities in a particular state. Each of the 50 states has enacted its own Blue Sky Laws, which the company must comply with when offering and selling SAFEs, Convertible Notes, Preferred Stock, or Common Stock. The Blue Sky Laws typically require the company to register or qualify a security before offering or selling the security unless an exemption to registration or qualification applies.
Blue Sky Regulatory Filing – Filings that may be required by a state’s Blue Sky Laws. 1
Buyback Option (a.k.a. Buyback) – (See Repurchase Option.)
Cap – (See Valuation Cap.)
Capital Stock – Refers to any type or class of stock a corporation is authorized to issue including Common Stock and Preferred stock.
Capitalization Table (a.k.a. Cap Table) – A table or spreadsheet used to show the overall capitalization of a corporation—both (i) equity and (ii) convertible securities to equity, including the total shares issued to each stockholder and the percentage ownership of each stockholder as of a particular date.
Certificate of Incorporation (a.k.a. the Charter) – The primary formation document of the corporation and it sets forth all of the rights, preferences, and privileges of each class of Capital Stock of the corporation. The Certificate of Incorporation must be filed with the Secretary of State office of the state you intend to incorporate; in this case, we recommend Delaware. If there is any inconsistency between the Certificate of Incorporation and other governing documents of the corporation, such as its Bylaws, the Certificate of Incorporation is the controlling document.
Class A Common Stock – If you decide to adopt the Startup Program forms, the Class A Common Stock is the class of Common Stock that will be issued to the Founders. The holders of Class A Common Stock have the right to vote on all matters that the stockholders of the corporation are entitled to vote, including the right to vote on the members of the Board of Directors and the sale or merger of the corporation. It is recommended that Class A Common Stock should only be issued to Founders or members of the management team who are intended to control the corporation. Please remember that not all corporations have Class A Common Stock, and that if the corporation does have Class A Common Stock, it may not have the same rights and privileges that the Class A Common Stock as provided for in the Startup Program documents has.
Class B Common Stock – If you decide to adopt the Startup Program forms, the Class B Common Stock is the class of Common Stock that will be reserved and allocated for the corporation’s Stock Incentive Plan. The holders of Class B Common Stock do not have the right to vote on any matters of the corporation unless required by law (e.g., a change in the rights or privileges to the holders of Class B Common Stock). Class B Common Stock only has the right to receive equal dividends as are paid to the holders of the Class A Common Stock, or, in the event of the sale, the Class B Common Stock shares equal in proceeds from the sale, as the holders of the Class A Common Stock.
Cliff – A length of time beginning when the Restricted Stock is granted during which none of the Restricted Stock will vest. It is most common for a vesting schedule to have a 1-year Cliff, but other durations of time for the Cliff are permissible.
Common Stock (a.k.a. Common Shares) – A class of Capital Stock of the corporation. Generally, Common Stock has fewer rights, privileges, and preferences than Preferred Stock to share in any dividends paid or the proceeds of the sale of a corporation, but generally retains equal voting
rights to Preferred Stock. A company can have multiple classes of Common Stock (e.g., Class A, Class B, etc.), each with different rights.
Confidentiality Invention Assignment Agreement (“CIAA”) – This agreement requires an Employee to agree to protect and safeguard the corporation’s confidential information and that all of the Employee’s future work for the corporation will be owned by the corporation.
Consultant – This is a person who provides professional services for the corporation but is not classified as an Employee of the corporation. Consultants can provide corporations with detailed information on a variety of specialties such as investments, marketing, or management. This person may also be referred to as a Contractor or Advisor.
Contractor – Contractors are independent individuals or businesses that contract with the corporation to provide goods or services in exchange for compensation, but are not classified as Employees and thus not entitled to the same rights and protections as Employees.
Convertible Note – A debt or loan agreement that will convert into Capital Stock of the corporation upon the occurrence of an event, such as a Next Qualified Financing or the Maturity Date of the Convertible Note. Convertible Notes typically have a Valuation Cap and a Discount, and always have a Maturity Date and interest component.
Conversion Price – The Conversion Price of a Convertible Note or SAFE is the price per share at which the investment will convert into Preferred Stock during the next Preferred Equity Financing. For Convertible Notes and SAFEs that have both a Discount and a Valuation Cap, the Conversion Price is the lesser Price Per Share of the Discount Price and the Price Per Share determined by dividing the Valuation Cap by the corporation’s Fully Diluted Capital.
Dilution – Dilution of shares is a reduction in relative ownership percentage resulting from subsequent equity issuances by the company. When the aggregate outstanding equity is increased, then Dilution occurs.
Director – Directors are elected by the corporation’s shareholders to form the Board of Directors, which governs the corporation and is responsible for corporate management. The Board of Directors appoints Officers and makes major decisions for the corporation, such as authorizing the sale of Capital Stock. A Director does not need to be an Employee of the corporation.
Discount/Discount Rate/Discount Price – A defined term in a Convertible Note or SAFE that states the percentage discount the Note/SAFE holder has against the Price Per Share of Preferred Stock sold to new money investors in the next Preferred Equity Financing.
Double-Trigger Acceleration (a.k.a. Double Trigger) – A provision that would cause some or all unvested shares to immediately vest (the vesting schedule “accelerates”). A Double-Trigger Acceleration means two events must occur in order to trigger accelerated vesting (i.e., (i) the sale of the corporation followed by (ii) a termination of a person’s employment within 12 months of the sale).
Drag Along Right – An investor’s or stockholder’s right to force all other equity holders to accept a third party’s offer to purchase all of the Capital Stock of the corporation.
Employee – A person the corporation employs for wages or salary.
Employer Identification Number (“EIN”) – A unique number assigned to entities by the IRS for purposes of tax filing and reporting.
Equity – Another way of describing Capital Stock.
Equity Financing – When a corporation sells shares of Capital Stock to raise capital. The most common Venture Capital Financing is a Preferred Equity Financing.
Exercise – The act of purchasing stock pursuant to a Stock Option or warrant.
Exercise Period – The period of time a holder of a Stock Option may purchase stock at the Exercise Price. The Exercise Period is set forth in the Stock Option Agreement and/or Stock Incentive Plan. The Exercise Period is usually ten years in duration unless the person ceases performing services, in which case the duration is shortened depending upon the reason the services ceased.
Exercise Price – The price at which a Stock Option may be exercised.
Fair Market Value (“FMV”) – The price that a third party would be willing to pay for a share of
Capital Stock, or the Price Per Share determined by the 409A Valuation.
Financing – The raising or accumulation of capital via the sale of debt or Equity.
Foreign Qualification – If a company intends on conducting business in a state other than the state it was formed in, then they will need to submit the Foreign Qualification filing with that state to be permitted to conduct business in that state. A Foreign Qualification may be required to open a business bank account for the corporation.
Founder – The person or people who establish the entity.
Fully Diluted Capitalization (a.k.a. Fully Diluted Number) – All shares of the corporation’s Capital Stock issued and outstanding, plus all the shares reserved for and/or issued under the Stock Incentive Plan, plus all shares that would be issued if each outstanding warrant were exercised, and plus all shares of Capital Stock that would be issued upon the conversion of each Convertible Note and/or SAFE.
Incentive Stock Options (“ISOs”) – A type of Stock Option that can be granted to Employees only and can qualify as a “Statutory Stock Option” to receive tax-favorable treatment under the Internal Revenue Code. When an ISO is qualified, it is not subject to ordinary income taxes at grant or exercise, rather only the profit from selling underlying shares is taxed.
Incorporator – Is a person, or persons, who incorporate a corporation by filing the Certificate of Incorporation with the Secretary of State. The Incorporator of a corporation holds all elements of control over the corporation until the initial Directors are appointed and the Incorporator’s resignation, which are typically done by an Action by Written Consent of the Incorporator.
Issued and Outstanding Capital Stock (a.k.a. Issued and Outstanding) – All shares of a corporation’s Capital Stock that have actually been issued and are currently owned by the stockholders. This does not include (i) shares reserved to be issued pursuant to the Stock Incentive Plan, (ii) stock repurchased by the corporation and held as treasury stock, and (iii) Authorized Shares which have never been sold, granted, or otherwise allocated.
Issued Stock – Issued Stock is the Authorized Shares sold to and held by the shareholders of a company, regardless of whether they are insiders, institutional investors, or the general public.
Liquidation Preference – A right given to a class of Preferred Stock allowing the holders of that class of Preferred Stock to receive proceeds to be paid to the stockholders upon a liquidation event before any other class of Capital Stock. Liquidation Preference determines who gets paid first and how much, when a corporation is liquidated, sold, or declares bankruptcy.
Most Favored Nation Clause (“MFN”) – The right to receive terms as favorable as offered to any other subsequent investor following the original investor’s investment and prior to a next Preferred Equity Round.
National Venture Capitalist Association – An organization of venture capital firms, corporate backers, and individuals dedicated to professionally investing private capital in new companies.
Non-Qualified Stock Options (“Non Quals” or “NQSOs”) – Unless a Stock Option grant is an ISO, it is an NQSO. NQSOs can be granted to Employees, Contractors, and Advisors, but have a less favorable tax treatment than ISOs. A holder of an NQSO does not recognize any income on the grant of the NQSO, but instead recognizes ordinary income equal to the difference of the Exercise Price and the Fair Market Value on the date the option holder Exercises the NQSO and again as capital gains when the option holder sells the stock.
Non-Statutory Stock Options (“NSOs”) – (See
Non-Qualified Stock Options.)
Officer – A person named to serve in a principal executive position in the corporation, such as President, Chief Executive Officer, Secretary, Treasurer, or Chief Financial Officer.
Option Refresh – A negotiated term in a Preferred Equity Financing that relates to the corporation reserving and allocating additional shares to the corporation’s Stock Incentive Plan to provide a large enough Equity stake in the corporation to attract new Employees and talent after the Financing. During the negotiations of the Term Sheet, the lead investor will typically negotiate that the Option Refresh is counted as part of the corporation’s Pre-Money Fully Diluted Capitalization.
Options – (See Stock Options.)
Outstanding Stock – Is the company’s stock currently held by all of its shareholders, including share blocks held by institutional investors and Restricted Shares owned by the Officers and insiders. Note, the corporation’s number of Outstanding Shares is not static and may fluctuate much more frequently than the number of Authorized Shares, which is set forth in the Certificate of Incorporation on file with the state (in our case, Delaware).
Phantom Income – Means that you are receiving an illiquid asset (e.g. a grant of stock that is not publicly traded on a stock exchange) which causes you to incur taxable income on that asset, but this means you will not be receiving any cash to pay for the taxes resulting from your receipt of such asset.
Post-Money Valuation – The value of a corporation after a capital investment has been made; the sum of the Pre-Money Valuation and the amount of new capital.
Post-Money Valuation Cap (a.k.a. Post Money, Post Money Cap) – A defined term in the new Y Combinator SAFE. This term is analogous to Valuation Cap, but Y Combinator uses this term to differentiate its new SAFE from older versions. Do not confuse this term with Post-Money Valuation. This new mechanism benefits early SAFE investors who are no longer getting diluted by additional SAFE rounds.
Preferred Equity Financing – The sale of Preferred Stock of the corporation to raise funds for the corporation’s operations and growth. Preferred Equity Financings are typically referred to by round (e.g., Series A, Series B, etc.).
Preferred Share Price – The monetary value assigned to Preferred Equity in a corporation, which is determined by the Valuation of the company and approved by the Board of Directors.
Preferred Stock (a.k.a. Preferred Shares) – A class of Capital Stock that has preferential terms, rights, and privileges compared to Common Stock as set forth in the Certificate of Incorporation. Preferred Stock is typically issued in connection with an Equity Financing. A corporation can have multiple classes of Preferred Stock with different terms, rights, and privileges relative to the other classes of Preferred Stock.
Pre-Money Valuation (a.k.a. Pre-Money) – The value ascribed to a company by an investor before the investment of capital in the company.
Price Per Share – The dollar amount assigned to one share of stock.
Pro Forma Capitalization Table – A Capitalization Table that models how the sale of additional securities (whether via convertible securities or stock) in a future Preferred Equity Financing will affect each stockholder’s ownership interest in the corporation after the Financing.
Promissory Note – An agreement used to document a debt owed.
Pro Rata Right (a.k.a. Pro Rata) – The right of a stockholder to purchase shares in a future.
Preferred Equity Financing to maintain their percentage ownership stake in a company.
Registered Agent – The person residing in a state who is designated to receive service of process and other official documents on behalf of the corporation in that state, and responsible for notifying the corporation on receipt of such documents.
Repurchase Agreement – (See Repurchase Option.)
Repurchase Option – A right granted to the corporation to repurchase a stockholder’s shares. The Repurchase Option is the mechanism by which Reverse Vesting in the Restricted Stock Purchase Agreement is effected.
Restricted Stock – Stock that cannot be transferred because of a transfer restriction imposed by contract and/or by securities laws (e.g. a Restricted Stock Purchase Agreement means the shares are subject to a Repurchase Option in favor of the company so it, therefore, is Restricted Stock).
Restricted Stock Grant Agreement (“RSGA”) - A type of stock incentive award whereby the employee or consultant is issued stock in exchange for the performance of services. Restricted stock may be subject to vesting and other stock transfer provisions.
Restricted Stock Purchase Agreement (“RSPA”) – An agreement between a corporation and a prospective investor (frequently a Founder or an Employee pursuant to a Stock Incentive Plan) who will purchase stock from the corporation at the time of grant, instead of at a later date such as through Stock Options. The RSPA details the terms under which the stock may vest and/or be transferred.
Reverse Vesting – When a stockholder’s ownership of their shares is subject to a Repurchase Right by the corporation in the event the stockholder’s employment or service is terminated, and the Repurchase Right lapses over a period of time or upon the occurrence of milestone(s). Reverse Vesting protects a corporation from giving up too much Equity to someone who spends only a short time with the corporation.
Right of First Refusal (“ROFR”) – A right that allows the corporation to have the first opportunity to purchase the corporation’s stock from a stockholder before the stockholder can sell the stock to a third party.
Simple Agreement for Future Equity (“SAFE”) – An acronym for “simple agreement for future equity.” SAFEs are a simpler alternative to Convertible Notes. Y Combinator, a Silicon Valley accelerator, created these instruments to allow startups to structure early-stage investments without interest rates or Maturity Dates. The SAFE is an open source document and can be downloaded here: https://www.ycombinator.com/documents/#safe. There are 4 standard versions of SAFEs: (1) Post-Money Valuation Cap & Discount Rate; (2) Post-Money Valuation Cap only; (3) Discount Rate only; (4) MFN only.
Series A Financing – Typically, the first or the earliest round of Preferred Equity Financing that a corporation undergoes.
Series A Term Sheet – The Term Sheet used to negotiate the important terms and conditions with your lead investor(s) during a Series A Financing.
Series A Share Price – (See Preferred Share Price.) 7
Series Seed Financing – A small Equity Financing that occurs before a Series A Financing and is usually the corporation’s very first outside financing. A corporation will undertake a Series Seed Financing when the investment amount does not warrant the use of the NVCA Series A Financing forms. Sometimes this term can be used to describe a Convertible Note Financing or SAFE financing.
Series Seed Share Price – The Price Per Share in a Series Seed Financing.
Shareholders Agreement – An agreement that sets forth terms agreed to amongst the corporation’s shareholders, but is rarely used because the NVCA’s Series A Financing Documents include superior terms.
Share Price – The monetary value assigned to Common or Preferred Equity in a corporation, which is determined by the Valuation of the company and approved by the Board of Directors.
Single-Trigger Acceleration (a.k.a. Single Trigger) – A term used to describe a situation or condition that would trigger some or all of a person’s unvested Restricted Stock to immediately vest (i.e., accelerate). For example, the sale or merger of a corporation is a common “Single- Trigger” event.
Stock Incentive Plan (“SIP”) – A plan that the corporation’s Board of Directors and shareholders adopt to grant compensation in the form of the corporation’s Common Stock to Employees, Advisors, Consultants, Officers, Directors, etc. By adopting the Stock Incentive Plan, the corporation can issue shares at any time in compliance with federal and state securities laws without having to register each offer and sale of shares with the SEC or state regulatory agencies. If you adopt the Startup Program forms, your corporation will reserve and allocate Class B Common Stock for your Stock Incentive Plan. Typically, Stock Incentive Plans comprise between 5 - 20% of the Fully Diluted Capitalization.
Stock Buybacks – (See Repurchase Option.)
Stock Grant – The issuance of stock in exchange for non-cash consideration, such as an assignment of intellectual property or performance of services.
Stock Option – An agreement that grants a person the right to purchase shares of a corporation’s Common Stock at a fixed price (the Exercise Price). A Stock Option is almost always granted pursuant to a corporation’s Stock Incentive Plan and will either be an ISO or NQSO.
Stock Option Plan – (See Stock Incentive Plan.)
Stock Option Pool – The total shares of Common Stock reserved for issuance in a corporation’s Stock Incentive Plan. If you adopt the Startup Program forms, your corporation will reserve and allocate Class B Common Stock for the Stock Incentive Plan.
Stock Purchase – The issuance of stock in exchange for a cash payment.
Stock Purchase Agreement (“SPA”) – An agreement between a corporation and person who will purchase stock from the corporation. Restricted Stock may be purchased pursuant to a SPA or RSPA – the naming of the agreement is not important.
Stock Repurchase Agreement – (See Repurchase Option.)
Term Sheet – A document that sets out the principal terms of a Preferred Equity Financing, and is typically negotiated and signed at the prior to the consummation and closing of Financing transaction documents. Term Sheets are generally not legally binding, although their terms are often taken literally when incorporating them into the Financing transaction documents.
Total Authorized Capital Stock – The total number of shares of Capital Stock a corporation is authorized to issue as set forth in the corporation’s Certificate of Incorporation. Note, when determining percentage ownership of each stockholder of your corporation, we recommend using the Total Authorized Capital Stock as the benchmark instead of the Fully Diluted Capital Stock because it is easier to calculate percentage ownership based on a fixed number. This is what is known as “Locking Your Cap Table.”
Valuation – The value ascribed to a corporation by an investor.
Valuation Cap – Also known as the Cap, the Valuation Cap is an investor-favorable term that puts a ceiling on the conversion price of a Convertible Note or a SAFE.
Vesting – Vesting is the process where an Employee or Founder earns the right to own the shares of Common Stock granted to/purchased by them by continuing to provide services over time or upon the occurrence of milestone(s). Vesting protects a corporation from giving up too much Equity to someone who spends only a short time with the corporation.
Vesting Schedule – The schedule that sets forth the Vesting terms of a Stock Option.
Y Combinator – A famous Northern California accelerator that has been used to launch numerous successful companies, serves as a leader in the startup community, and invented the Simple Agreement for Future Equity commonly used by early-stage companies today.
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