Terminology

Cap Table

• Authorized Shares vs. Issued Shares – Two distinct concepts of a company’s stock structure: Authorized shares —the maximum number allowed —and Issued shares —the actual shares sold to investors.

• Cap Table – A cap table records company ownership, showing shareholders, equity stakes, and investments for managing dilution and fundraising.

• Cap Table for Pre Series A – A cap table that details the ownership distribution before Series A, showing founders’ shares, team shares, and seed investor impact.

• Cap Table in Excel – Cap tables track company ownership details; Excel is common but risky, leading startups to use specialized software.

• Difference between Common and Preferred stock – Two types of equity ownership: Common stock —offers voting rights and growth potential; Preferred stock—provides fixed dividends and liquidation priority.

• Dilution – Dilution reduces the ownership percentage of shareholders by increasing the total number of shares, often due to fundraising or stock options.

• Electronic shares – Digital, paperless company shares recorded electronically, enabling efficient, convenient, and cost-effective equity management.

• Fully diluted shares – Fully diluted shares equal total potential shares if all convertible securities are exercised, showing maximum ownership dilution.

• How does a cap table work? – A cap table details company ownership, tracking shareholders, shares, dilution, and changes across funding rounds.

• Issuing Shares – Issuing shares involves creating and allocating new shares to investors, raising capital and managing company ownership.

• Managing Shares – Tracking ownership, share classes, issuance, and transfers to ensure accurate records and prevent dilution.

• The difference between Electronic Share and PDF or Paper Share Certificate – Electronic share certificates store ownership digitally, offering easier, cheaper, and faster share management than paper certificates.

• What does the dilution mean and example – Dilution occurs when new shares reduce existing shareholders’ ownership percentage, impacting control and equity value in a company.

• What is a Clean Cap Table? – A clean cap table accurately displays all equity holders, share types, and transactions, ensuring transparency and informed decision-making.

• What is a fully diluted cap table? – A fully diluted cap table lists all shares, including options and convertibles, showing total ownership and potential dilution.

Equity Compensation

• Cliff vesting – A set time before employees earn shares, promoting retention by vesting all shares after one year.

• Double Trigger Acceleration – Speeds up equity vesting if a company is acquired and the employee is terminated without cause.

• Employee stock purchase plan (ESPP) – Employees can buy company shares at a discount via payroll deductions, often with up to 15% off market price.

• Equity compensation – Grants employees ownership via stock options or shares, aligning interests and encouraging retention through vesting.

• Exercising Employee Stock Options – Buying company shares at an agreed price, often below market value, as part of compensation.

• Incentive Stock Options (ISO) – Stock options that let employees buy shares at a discount, offering tax benefits and encouraging long-term retention.

• Non-qualified stock options (NSO) – Stock options that allow employees to buy shares at a set price, offering flexible equity compensation with specific tax benefits.

• Restricted Stock Units (RSU) – Employee compensation that grants employees company shares upon vesting, aligning incentives, and delaying share dilution.

• Single Trigger Acceleration – A provision in an equity agreement that vests employee stock upon a single event, such as a company sale or termination, impacting retention and costs.

• Stock Appreciation Rights (SAR) – Form of employee compensation vests employee stock upon a single event, like company sale or termination, which impacts retention and costs.

• Stock Options – Grant the right to buy shares at a set price, incentivizing employees through potential financial gain.

• Vesting – Grants employees ownership of shares or benefits over time to encourage retention and align company interests.

Business Valuation & Financial Analysis

• Fair Market Value (FMV) – The estimated price of an asset under fair, knowledgeable, and unbiased market conditions.

• Pre-money valuation – The company’s estimated worth before receiving new investments helps determine investor ownership stakes.

• Scenario modeling – Evaluates and forecasts possible future events and outcomes, helping businesses plan for risks and opportunities effectively.

• Startup Valuation – Determines a startup’s worth by assessing market conditions, growth potential, and various financial and qualitative methods.

• Waterfall analysis – Analysis that visually breaks down how a company’s exit proceeds are sequentially distributed among shareholders, reflecting complex allocation rules.

• What does pre-money valuation mean? – Valuation that estimates the worth of a company before new external investment, used to determine investor equity stakes.

• What is Business Valuation Date – The specific time when a company’s value is formally assessed for financial or legal purposes.

Funding & Investment

• Accelerator – Intensive programs providing mentorship, seed funding, and resources in exchange for equity to rapidly grow early-stage companies.

• Accredited investors – Accredited investors meet income, net worth, or professional criteria, granting access to unregistered, higher-risk private securities.

• Angel Investor – High-net-worth individuals who invest personal funds in early-stage startups, often providing mentorship alongside capital.

• Conversion Ratio – The number of common shares received when converting convertible securities impacts valuation and investor returns.

• Convertible Note Cap – Limits the maximum valuation at which convertible debt converts into equity, protecting early investors and ensuring favorable conversion terms.

• Convertible Notes – Short-term debt instruments that convert into equity, offering early investors a discount or valuation cap upon startup financing.

• FAST Agreement – A simple contract where a company engages an advisor who, instead of cash, earns future shares as compensation.

• Incubator – Support early-stage startups by providing workspace, mentorship, resources, and access to investors for growth and development.

• KISS – Keep It Simple Security 一 Simple, flexible funding agreements offering founders balanced terms for equity or debt financing.

• Liquidation preference – Determine the order and amount investors get paid before others in a company’s sale or liquidation event, protecting preferred shareholders’ returns.

• SAFE – Startup funding agreement converting investment into equity during future rounds, offering flexible, founder-friendly terms.

• Seed funding – The early capital invested in a startup to cover initial costs like product development and market research, enabling growth.

• Series A, B, C, D Funding – Funding rounds provide startups with capital to grow—from launching products and expanding markets to scaling operations and preparing for IPOs.

• Venture Capitalist (VC) – Invest capital and expertise in startups with high growth potential, providing funding, mentorship, and network access.

• Warrants – Grant holders the right, but not the obligation, to buy company shares at a fixed price before expiration, offering leverage and investment flexibility.

Compliance & Taxation

• Alternative Minimum Tax (AMT) – AMT ensures taxpayers pay a minimum income tax by adding back certain deductions to taxable income.

• Board meeting – Formal gathering of directors to discuss strategic decisions, review performance, ensure compliance, and guide company governance.

• 83b Election – Let founders or employees pre-pay taxes on restricted stock’s current value rather than at vesting, benefiting from future growth.

• Co-Sale Agreement – Let minority shareholders sell their shares alongside majority shareholders, ensuring equal terms and protection.

• Lock-up Period – Prevent insiders from selling shares for a set time post-IPO, stabilizing stock prices and ensuring commitment.

• Material Event – Significant company changes— funding rounds, mergers, leadership changes, or major market shifts —that impact share value, requiring updated 409A valuations to ensure compliance.

• Organization Chart – Visually maps a company’s internal structure, roles, reporting relationships, and hierarchy to clarify communication and responsibilities.

• Right of First Offer – ROFO- gives a party the first chance to buy an asset before the owner sells it to others, ensuring negotiation priority and potential business stability.

• Right Of First Refusal – ROFR- grants a party the option to enter a transaction before others, often matching a third-party offer.

• Term sheet – Non-binding document outlining key terms and conditions of a venture capital investment, guiding legal agreements.

• Term sheets guide – Non-binding document outlining key terms and conditions of a venture capital investment, guiding legal agreements.

• What is stock expensing and how is it done? ASC 718 (123R) – Records the fair value of employee stock options as a compensation cost, allocated over the vesting period.

Share Transactions & Events

• Liquidity Event – Allows investors and founders to convert equity in a private company into cash, typically through IPO or acquisition.

• Reverse Stock Split – Consolidates existing shares into fewer, higher-priced shares without changing the company’s total market value.

• Stock Split – A stock split increases a company’s shares by dividing existing shares to lower the price per share, enhancing liquidity.

• Transfer shares – Secondary Transactions – Occur after primary share issuance, involving transfers, sales, or repurchases that change ownership and equity distribution.

Financial Metrics

• Burn rate explanation – Burn rate measures how fast a startup spends its cash reserves monthly before becoming profitable, indicating financial runway length.

• LTM (Last Twelve Months) – The trailing 12-month period used to measure a company’s recent financial performance, often including revenues and earnings.

• Minimum Viable Product (MVP) – Enables testing product viability and guides development based on real user input before full launch.

• NTM (Next Twelve Months) – Forecasts key financial metrics, such as revenue and EBITDA, providing forward-looking insights for valuation and performance projections.