GLOSSARY OF STARTUP TERMS
We created this startup glossary page to help startup founders understand some of the most widely used terms related to forming companies, raising money from investors, and buying and selling companies. In other words, this page is intended to be a straightforward resource about the common terms used in the lifecycle of a startup company — that is, from the launch of the company to its eventual sale (hopefully!).
A
Accelerator: An accelerator is a program intended to mentor and accelerate the growth and success of a startup company.
Accredited Investor: A term used by the Securities and Exchange Commission (SEC) to refer to investors who are financially sophisticated and have a reduced need for the protection provided by certain government filings. Accredited investors include wealthy individuals, banks, insurance companies, employee benefit plans, and trusts.
Accredited Investor Questionnaire: An accredited investor questionnaire is a brief form establishing that an individual meets the requirements established by the SEC as being pre-qualified to make certain types of investments.
Acquisition: An acquisition is a transaction between two companies where one company is buying the other company.
Agent: An agent is one who agrees and is authorized to act on behalf of another (the principal), and to legally bind the principal in particular business transactions with third parties, pursuant to the agency relationship.
Angel Investor: An angel investor is an individual who provides capital to a startup company. This person is usually independently wealthy and invests his or her own money in the company.
Antidilution: A term of an agreement that provides price protection for investors. This is accomplished by effectively repricing an investor’s shares to a lower price per share in the event that the company completes a financing at a lower valuation than a previous financing round.
Appraisal: The determination of the value of equity or assets in a company by a third party professional who holds himself or herself out as an appraiser.
Articles of Incorporation: The document that legally creates a corporation when it is filed with the Oregon Secretary of State.
Articles of Organization: The document that legally creates a limited liability company (LLC) when it is filed with the Oregon Secretary of State.
Asset Purchase Agreement: An agreement between a buyer and a seller that finalizes terms and conditions related to the purchase and sale of a company’s assets. It’s important to note that, in an asset purchase agreement transaction, it is not necessary for the buyer to purchase all of the assets of the company.
Assumed Business Name (aka ABN, DBA, Doing Business As): The trade name, or fictitious business name, under which a business is conducted and presented to the world. It is not the legal name of the person or entity who actually owns the business and is responsible for it. It is sometimes also referred to as an ABN, DBA or Doing Business As name.
B
Bill of Sale: A contract for the sale of personal property. It is often used by the founders of startups, any of whom may contribute personal property assets to the company at launch.
Board of Directors: A body of elected or appointed individuals who jointly oversee the activities of a company. They are elected by the shareholders of the company and they appoint the officers of the company to run the day-to-day business affairs of the company.
Book Value: The net asset value of a company, calculated by total assets minus intangible assets (e.g., patents, goodwill, etc.) and liabilities.
Bridge Loan: A bridge loan is a loan given to a company by investors with the intent that the money will fund the company to the next equity financing.
Bylaws: The central governing document of a corporation that sets forth the rules and provisions adopted by a corporation for its internal governance and external dealings. The Bylaws are adopted by the corporation’s Board of Directors and consented to by the Secretary of the corporation.
C
Call Option: An option that gives the holder the right, but not the obligation, to buy stock or other equity at a specific price within a specific time period in the event of a triggering event. Call options are typically defined in Shareholder Agreements or Operating Agreements.
Capital Account: A line item on a corporate entity’s balance sheet representing a member’s share of the company’s capital. It is an accounting term that is common in LLCs.
Capital Call: The method by which a Venture Capital (VC) fund asks its investors to contribute their pro rata portion of money being called by a VC fund to make investments, pay expenses, or pay management fees.
Capital Contribution: An entry on the shareholders’ equity section of a company’s balance sheet that summarizes the total value of stock that shareholders have directly purchased from the issuing company, whether a corporation or an LLC.
Capitalization Table (Cap Table): A capitalization table is a spreadsheet that defines the economics of a deal. It contains a detailed description of all the owners of shares of a company.
Capitalized Earnings: A common income-based small business valuation method that establishes the business value by dividing the expected business economic benefit, such as the seller’s discretionary cash flow, by the capitalization rate.
Carried Interest: Carried interest constitutes the profits that VCs are entitled to after returning capital committed to their investors. This typically ranges from 20 percent to 30 percent.
C Corporation: A corporation that, under the Internal Revenue Code, is taxed separately from its owners. Upon filing of Articles of Incorporation, all corporations are, by default, classified as C Corporations. A C Corporation is distinguished from an S Corporation and Partnership, each of which are taxed under different sections of the Internal Revenue Code.
Common Stock: Common stock is the type of stock that has the least amount of rights, privileges, and preferences. Normally employees and founders of a company hold common stock. The price they pay for the stock can be much less than that of preferred stock.
Consent: The document memorializing resolutions (i.e., decisions) by the members of an LLC or stockholders or directors of a corporation. A consent serves as documented proof of decisions made by these representatives of a company.
Convertible Debt: Convertible debt is debt or loan instrument that an investor gives to a company with the intent that it will convert later to equity and not be paid back as a standard bank loan would be.
Copyright: A form of protection provided by the laws of the United States for original works of authorship, including literary, dramatic, musical, architectural, cartographic, choreographic, pantomimic, pictorial, graphic, sculptural, and audiovisual creations. Copyright literally means the right to copy, but has come to mean that body of exclusive rights granted by law to copyright owners for protection of their work.
D
Distributions: A company’s payment of cash or other assets to its shareholders of a corporation or members of an LLC. Distributions typically are of the company’s profits, and are only made after the company’s other liabilities and obligations are taken care of.
Dividends: A distribution of a portion of a C Corporation‘s profits, as determined by the Board of Directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.
Double-Trigger Acceleration: Double-trigger acceleration is a term that describes the situation in which a person would receive accelerated vesting. In a double-trigger situation, two events would trigger accelerated vesting, such as a merger of the company followed by a termination of a person’s employment.
Down Round: A down round is a financing round that is at a lower valuation than the previous round.
Drag Along Rights: This right assures that, if the majority shareholder of a corporation, or majority interest holder of an LLC, agrees to sell his or her equity to an outside third party, the minority shareholders or interest holders will be forced to join the deal by also selling his or her shares or interest. Drag along rights protect majority owners of corporations and LLCs.
Due Diligence: Due diligence is the process by which investors explore a company that they are thinking of investing in.
Duty of Care: A legal relationship arising from a standard of care, the violation of which subjects the actor to liability. Shareholders of corporations and members of LLCs owe a duty of care to the company. In an LLC, a member’s duty of care to the company in the conduct and winding up of the business of the Company typically is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct or a knowing violation of law.
Duty of Loyalty: A duty owed by a member of an LLC or a shareholder of a corporation not to engage in self-dealing or otherwise use his or her position to further personal interests rather than those of the company. In an LLC, the parameters of the duty of loyalty can be defined by members in an Operating Agreement.
E
Employee Pool: An employee pool consists of the shares set aside by a company to provide stock options to employees.
Employer Identification Number (“EIN”): A nine-digit number that the IRS assigns in the following format: XX-XXXXXXX. It is used to identify the tax accounts of employers and certain others who have no employees. Employer Identification Numbers (EINs) are used by employers, sole proprietors, corporations, partnerships, non-profit associations, trusts, estates of decedents, government agencies, certain individuals, and other business entities.
Equity: Equity, when in the context of companies and businesses, refers to ownership in a company.
Escrow: Escrow is the amount of money or other assets that an acquiring company holds back following a merger to make sure that representations and warranties made by the target company are true.
Executive Summary: An executive summary is a short summary document, normally one to three pages, that describes material facts and strategies of a company.
Exempt Securities: Exempt securities are securities that are not required to be registered with the SEC because they are limited in regard to who may invest and how much capital the offering is attempting to raise.
Exercise: Exercise, in the business context, is the act of purchasing stock pursuant to an option or warrant.
F
Fair Market Value: Fair market value (FMV) is the price that a third party would pay for something in the open market.
Fiduciary Duty: A fiduciary duty is a legal and ethical duty that an individual may have to another entity.
Forced Sale: A provision within an agreement, such an Operating Agreement of an LLC, making the sale of an ownership interest in a company mandatory in the event of a deadlock in voting or another triggering event. When used, it forces the buy-out of one, or more, of the equity owners.
Form 2553: A form, when filed with the IRS, that serves to elect S corporation tax status on behalf of the electing entity, whether a corporation or an LLC. Form 2553 must be filed within certain timeframes, and it is up to the discretion of the IRS to accept the election as being valid.
Founder: A founder is someone who creates a new company, also known as a startup.
G
Game Theory: Game theory is the concept that one’s actions depend on what actions other actors may or may not take and what motivates those actions.
Goodwill Purchase Agreement: An agreement to purchase an intangible asset owned by, and associated with, the operation of a business entity. Goodwill is the established reputation of a business regarded as a quantifiable asset, e.g., as represented by the excess of the price paid at a takeover for a company over its fair market value.
Guaranteed Payments: Payments that are guaranteed to be made to a member of an LLC irrespective of whether the company makes a profit or not. Guaranteed payments to members are made to ensure that members are compensated for specific contributions they make to a company, whether in the form of goods or services. This eliminates the risk of their making personal contributions of time or property for which they are never paid if the company is not successful. A guaranteed payment is similar to a salary drawn by an employee.
I
Incentive Stock Options (“ISO’s”): These are rights to buy shares of a company’s stock at some point in the future at a pre-determined fair market value. ISO’s are only available to employees (not outside contractors) of companies that grant such awards.
Indemnification: A legal term that means one party agrees to compensate another party for loss or damage that has already occurred, or guarantees, through a contractual agreement, to repay another party for loss or damage that occurs in the future. Indemnification clauses are common in corporations and LLCs: often a company will agree to indemnify its shareholders, members, officers and Directors for actions they take in such roles on behalf of the company.
J
Joinder Agreement: An exhibit to many LLC Operating Agreements, a joinder agreement is the document pursuant to which an outside third party transferee is admitted as a member and becomes party to, and bound by, the terms of the LLC Operating Agreement.
L
Lack of Marketability Discount: A method used to help calculate the value of closely held and restricted shares in a corporation or units in an LLC. The theory is that a discount exists between the value of a company’s stock or units that is and is not marketable.
Lead Investor: A lead investor is the investor in a startup company who takes on the leadership position in a VC financing.
Letter of Intent (LOI): A letter of intent is a term sheet for a merger or acquisition.
License: A permission granted from an authority to exercise a certain privilege to own or use something, do a particular thing, or carry on a trade. A license is not a property right, which means that no one has the absolute right to a license, but, rather, must be granted a license from an authority figure.
Licensing Agreement: A licensing agreement is a legal contract between two parties, known as the licensor and the licensee. In a typical licensing agreement, the licensor grants the licensee the right to produce and sell goods, apply a brand name or trademark, or use patented technology owned by the licensor.
Limited Liability Company: A limited liability company (LLC) is the U.S.-specific form of a private limited company. It is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation.
Limited Partner (LP): Limited partners are often the types of investors in a VC fund.
Limited Partnership: A form of partnership similar to a general partnership, except that, in addition to one or more general partners (GPs), there are one or more limited partners (LPs). The general party has unlimited liability but the power to manage the limited partnership; the limited partners have limited liability, but with little, if any, powers to manage the limited partnership.
Liquidation Event: A liquidation event occurs when a company is sold and ceases to exist as a stand-alone company.
Liquidation Preference: A liquidation preference is a right given to a class of preferred stock allowing that stock to receive proceeds in a liquidation in advance of other classes of stock.
M
Management Fee: A management fee is the fee that the VC funds have a right to receive from their Limited Partners (LPs) as money to manage their business operations regardless of the performance of the fund.
Mandatory Triggering Event: An event, the occurrence of which, gives the company or an equity holder in the company, the obligation to buy stock or other equity interest at a specified price within a specific time period the event occurs, such as the death of another investor in the company.
Manager-Managed LLC: A limited liability company (LLC) wherein management decisions are made by an appointed manager who may or may not be an owner of the company. The other form of LLCs is a member-managed LLC, wherein the management decisions are made jointly amongst the members, similar to a general partnership. An LLC owned by another corporate entity is always manager-managed.
Member-Managed LLC: A limited liability company (LLC) wherein management decisions are made jointly amongst the members of the LLC, similar to a general partnership. The other form of LLCs is a manager-managed LLC, wherein an appointed manager who may or may not be an owner of the company, makes management decisions on behalf of the company.
Minority Discount: A minority discount is the reduction applied to the valuation of a minority equity position in a company due to the absence of control. Minority shareholders usually have the inability to dictate the future strategic direction of the company, the election of Directors, the nature and timing of their return on investment, or even the sale of their own shares. This absence of control reduces the value of the minority equity position against the total value of the company.
Minutes: Minutes refers to a company’s books and records, including any Consents entered into by the members, shareholders, Directors and officers. Traditionally, companies maintained their minutes in a physical minute book, which was held by the Secretary (in the case of a corporation). However, these days, it’s not uncommon for companies to maintain their minutes in virtual format.
N
Nonassessable: A characteristic of a class of stock in which the issuing company is not allowed to impose levies on its shareholders for additional funds for further investment.
Nondisclosure Agreement (NDA): A contract, commonly referred to an “NDA,” pursuant to which one or more parties agree not to disclose confidential information that they have shared, or intend to share, with each other. Nondisclosure agreement are common with startups where founders want to protect business inventions or ideas, and also in companies that hire consultants and independent contractors, and want to ensure that the company’s confidential information remains protected.
Notice of Issuance: A document that serves in place of a stock certificate, and which represents shares held by a stockholder in a corporation.
Non-qualified stock options (“NSO’s” or “NQSO’s”): These are a type of equity incentive awards that companies can award to any service providers to the company, whether internal employees or outside contractors.
O
Officer: A high-level management official of a company, hired by the Board of Directors of a corporation or the owners of an LLC, to run the day-to-day operations of the company. Corporations must have a president and secretary as officers, and typically also have treasurer, as well as any other positions, as defined by the Board. Other common positions include a vice president, chief financial officer (CFO) and chief executive officer (CEO). LLCs do not typically have officers, but some LLCs choose to appoint officers anyway. Officers have actual or apparent authority to contract or otherwise act on behalf of a company.
Operating Agreement: As the central governing document of a limited liability company (“LLC”), an operating agreement is a contract among owners (“members”) of an LLC and the company itself, setting forth the rules on how the company will conduct its affairs, restrict transfers of ownership, and the duties and rights of the members and managers, amongst other key provisions.
Option Pool: An option pool consists of the shares set aside by a company to provide stock options to employees.
P
Par Value: Par value is the minimal price at which stock can be sold in a corporation.
Pari Passu: Pari passu refers to the equal nature of investment terms between different classes of stock.
Partnership: A business organization in which two or more individuals manage and operate the business. All owners are equally and personally liable for the debts from the business, and all owners have unlimited liability. A partnership is formed automatically by operation of law, and, unlike corporations and LLCs, no documents must be filed with state agencies to verify its existence.
Phantom Stock: Phantom stock (sometimes also known as phantom equity or phantom stock units) is a type of an incentive award given to key company employees without giving away actual shares in the company while allowing those employees to share in some of the economic upside of the company.
Pay-to-Play: Pay-to-Play is a term that refers to an event in which VCs must continue to invest in future company financings or suffer adverse consequences to their ownership positions.
Placement Agent: A placement agent is an intermediary who raises capital for investment funds or companies.
Post-money: Post-money refers to the value of a company after an investor has put money into the company.
Preemptive Rights: A right of shareholders of a corporation or members of an LLC giving them the power to purchase additional shares in the corporation, or units in the LLC, in the event that the company authorizes the issuance of additional shares or units. Preemptive rights allow equity holders to maintain their pro rata ownership positions in companies.
Preferred Stock: Preferred stock is a type of stock that has preferential terms, rights, and privileges compared to common stock.
Promissory Note: A signed document containing a written promise to pay a stated sum to a specified person or the bearer at a specified date or on demand. A promissory evidences a debt owed, whether to a company or a person.
Pre-money: Pre-money refers to the value of a company before an investment in the company.
Price Per Share: Price per share is the dollar amount assigned to purchase one share of stock.
Private Offering: A private offering is a securities offering that is limited to certain accredited investors only.
Private Placement Memorandum (PPM): A private placement memorandum (PPM) is a long legal document that is prepared by a company, its bankers, and its lawyers to solicit investors.
Pro Rata Right: A pro rata right is the right of a shareholder to purchase shares in a future financing equal to the percentage the shareholder currently holds at the time of such financing.
Put Option: An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security (i.e., shares or units) at a specified price within a specified time should a certain triggering event occur. A put option is the opposite of a call option, which gives the holder the right to buy shares.
Q
Quorum: A quorum is the minimum number of members of a deliberative assembly (a body that uses parliamentary procedure, such as a legislature) necessary to conduct the business of that group. In companies, a quorum typically refers to the minimum number of members at a meeting or other gathering to take action (i.e., vote) on a decision on behalf of the company.
R
Regulation D (Reg D): Regulation D (Reg D) is an SEC regulation allowing companies to raise capital through the sale of equity or debt securities without having to register their securities with the SEC.
Resolution: A resolution is a formal action (i.e., decision) by a corporate board, shareholders, or the members of an LLC authorizing a particular act or transaction. Resolutions are typically memorialized in the form of Consents.
Restricted Securities: Restricted securities are securities purchased in a private offering that are subject to certain regulations preventing their resale on the open market.
Restrictive Covenants: Agreements between interest holders or high level employees in a company and the company itself restricting such individuals from competing with the company, using confidential information to the company’s disadvantage or soliciting the company’s employees and officers after leaving the company. Common restrictive covenants include non-competition and non-solicitation agreements.
Right of First Offer: A contractual obligation by the owner of an asset to a rights holder to negotiate the sale of that asset with the rights holder before offering the asset for sale to third parties.
Right of First Refusal: A contractual right that gives its holder the option to enter a business transaction with the owner of something, according to specified terms, before the owner is entitled to enter into that transaction with a third party. Rights of first refusal are commonly negotiated between members of LLCs or shareholders of corporations to ensure that other equity owners don’t sell their equity without first offering it to the other equity owners.
Right of Rescission: A right of rescission is the right of shareholders to force the company to buy back their stock.
Risk Factors: Risk factors are a long list of potential reasons why an investment in a security may result in a loss of all or part of that investment. Risk factors are often found in PPMs.
Rule 506: Rule 506 is an SEC regulation that allows for the sale of certain types of unregistered securities directly to investors that meet a number of specific requirements.
S
Safe (Simple Agreement for Future Equity): A legal document that allows early investors in a company to invest money with the understanding that their investment will convert into equity if the company later sells equity in a priced round or is acquired or liquidates under certain terms.
Safe Harbor: A safe harbor is a legally defined way of escaping liability under a law if the party performs certain acts enumerated under the law.
S Corporation: A company, whether a corporation or an LLC, that elects to be taxed as a small business corporation under chapter “S” of the Internal Revenue Code. An S Corporation election is made by filing Form 2553 with the IRS. An S corporation is a pass-through entity, such as a partnership, as opposed to a C Corporation, which is subject to double-taxation.
Seed Stage: A company is in its seed stage when it is a startup in its infancy.
Service Mark: A service mark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of a service rather than goods. The term “trademark” is often used to refer to both trademarks and service marks.
Series A Financing: Series A financing is the first or early round of financing that a company raises.
Shareholders: Also referred to as “stockholders,” shareholders own the stock of corporations, vote their stock, elect directors, and share in the corporation’s profits (referred to as dividends), if there are any.
Shareholders Agreement: An agreement among a corporation’s shareholders describing how the company should be operated, and setting forth the shareholders’ respective rights and obligations, as between themselves. A shareholders agreement includes information on the regulation of the shareholders’ relationship, the management of the company, ownership of shares and privileges and protection of shareholders. It is similar to an operating agreement in an LLC.
Single-Trigger Acceleration: Single-trigger acceleration is a term used to describe the situation (e.g., a merger) in which a person would receive accelerated vesting of that person’s stock.
Spousal Consent: A document signed by a spouse of a limited liability company member. By signing the consent, the spouse agrees to the terms of the operating agreement between the members, and to the fact that the member is the person involved in the business. A spousal consent serves as evidence to prevent transfer of ownership in the company in the event of a divorce between a member and his or her spouse.
Statement of Agreed Value: A predetermined price per unit of an LLC, agreed to by the interest holders, for use in the event of a future transfer in ownership.
Stock Certificate: A legal document that certifies ownership of a specific number of shares of stock in a corporation. Stock certificates are issued to shareholders in exchange for something of value — money, time or other assets — contributed by those shareholders to the corporation.
Stock Ledger: A book or table kept by a corporation in which are entered the names of the stockholders, the amounts of their respective holdings, contributions made them for such stock, and a record of transfer of ownership.
Stock Option: A stock option is a right to purchase shares of stock in a company.
Stock Purchase Agreement: An agreement that finalizes all terms and conditions related to the purchase and sale of shares of a corporation. It is different from an Asset Purchase Agreement (“APA”) where the assets (not the shares) of a corporation are being bought/sold.
Stock Redemption Agreement: An agreement between a shareholder and a corporation for the corporation to repurchase that shareholder’s stock, effectively buying out the shareholder.
Strike Price: A strike price is the price at which a stock option may be exercised.
Subscription Agreement: An application by an investor to purchase shares of a company. In most cases, the investor will have to fill out a form evaluating the investor’s suitability for the investment in the company, in connection with the subscription agreement.
T
Tag Along Rights: These rights assure a minority shareholder in a company that if a majority shareholder negotiates to sell his or her shares to an outside third party, that minority equity holder will be allowed to join the transaction and also sell his or her shares on the same terms and conditions. These rights protect minority shareholders.
Tax Matters Member: The designated person in an LLC (taxed as a partnership) who receives tax notifications from the Internal Revenue Service, has the authority to enter into tax agreements on the behalf of the LLC and is responsible for keeping all partners informed of any applicable tax issues.
Term Sheet: A term sheet is a summary document of key terms in contemplation of a financing.
Trademark: A trademark is a word, phrase, symbol, and/or design that identifies and distinguishes the source of the goods of one party from those of others. Trademarks need not actually be registered with the USPTO to be legally recognized as such.
U
Unit: A unit is an indication and record of ownership in a limited liability company (LLC).
V
Valuation: The value assigned to a company by an investor or a third party professional or firm.
VC Fund: A VC fund consists of the entities that make up the investment family of a venture capital firm.
Venture Capitalist (VC): A venture capitalist (VC) is a person who invests in startups and growing companies on behalf of his or her venture capital firm.
W
Warrant: A warrant is a right to buy or sell shares of stock in a company, and it is similar to a stock option.