California and Idaho startups should be aware of key terminology associated with venture deals.
Below is a list of the most common words and terms used by founders, startups, and venture capitalists – and their definition or common meaning:
Antidilution
A term 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 a company completes a financing at a lower valuation than a previous financing round
Cap
Valuation ceiling that exist in a convertible note deal
Captable
A spreadsheet that defines the economics of a deal. It contains a detailed description of all the owners’ stock of a company. Captables are usually excel spreadsheets, and should have the capabilities to “model” different financing and exit scenario
Common stock
The type of stock which has the least amount of rights, privileges, and preferences. Normally held by employees and founders. Value less than preferred stock
Conversion & Convertible Debt
A 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
Discount
Provision which entitles investors to convert their debt lent to the company into equity at a % lower than what the next investors pay for equity
Double trigger acceleration
Acceleration of the vesting of founder stock when both 1) acquisition and 2) termination of employment occurs
Due diligence
An audit of a company performed in order to disclose possible business liabilities or deficiencies.
Equity
Ownership in a company
Exercise and Exercise Price
Exercise- act of purchasing stock option or warrant. Exercise price- Price at which a stock option can be exercised ( and subsequently the price per share the employee pays for the stock option).
Founder’s stock
Common stock issued to founders at a very low price at the formation of the company
Fully diluted
A term explicitly defining that all rights to purchase equity should be in the valuation calculation
KISS
Legal instrument called Keep It Simple Security used as an alternative to convertible debt. Also delays the need for valuation. Allows participation rights for any future rounds
Lead Investor
Investor leading the round and representing other investors. The Lead will negotiate the term sheet and the legal documents on behalf of the other investors
Liquidity event
When a company is sold in an acquisition
Liquidation preference
Right given to preferred class of stock to receive proceeds in a liquidation in advance of other classes of stock (Ex: 1x vs 2X; Participating vs Non-Participating)
Most Favored Nation (MFN)
The right to get the equivalent terms to any future investors who may receive better terms in the future. Common in seed-investments.
Negative Covenants
Behaviors and actions that the company may not engage in without the lender’s consent
Non participating preferred
Investor receives their liquidation preference OR the value of their converted common stock
Option Pool
The shares set aside by a company to provide stock options to employees
Pari Passu
When all classes of preferred stock have equivalent payout rights in a liquidation. For examples, Series A and Series B are paid out pro-rata rather than being “stacked” with the latest round being paid out first.
Participating preferred
Investor receives their liquidation preference AND the value of their converted common stock
Post Money
Value of the company after an investor has put money into company
Pre-money
Value ascribed to a company by an investor before investing in the company
Pre-seed round
The round before a seed round. The first financing round in a company. Usually friends and family or Angels. Range of 50-500k
Protective provisions
Contractual rights that allow the holders of preferred stock to vote on certain important matters pertaining to a company used as an alternative to convertible debt. Also delays the need for valuation
SAFE
Legal Instrument called Simple Agreement for Future Equity Legal instrument used as an alternative to convertible debt. Also delays the need for valuation.
Security
Financial instrument that demonstrates ownership in a company
Single Trigger Acceleration
Acceleration of the vesting of founder stock when either 1) acquisition or 2) termination of employment occurs
Shares
A single unit of stock ownership
Stock option
A right to purchase shares of stock in a company
Stock
Form of asset representing the holder’s equity
Term sheet
A memorandum of understanding of the terms of an investment
Valuation
The value ascribed to a company by an investor
Vesting
The schedule upon which rights to equity convert to equity for founders and employees
Voting rights
The specific rights of how preferred stock and common stock vote
Warrant
A right to purchase shares of stock in a company
