– 8 –


83(b) Election

If a person receives stock (or other property) in exchange for services, he or she is taxed in the year of the issuance on the difference between the fair market value on the date of issuance and the purchase/issuance price. If the stock received by a person is subject to forfeiture, such as vesting, he or she is taxed on the gain as the forfeiture restrictions lapse (as the stock vests). An 83(b) election is an election by the person who receives stock subject to forfeiture to recognize the gain in the year of issuance even though the stock might be forfeited over time. The amount of gain is the product of the number of shares subject to forfeiture and the difference between the fair market value on the date of issuance and the issuance/purchase price. In most cases, the fair market value and issuance price is equal and the gain is therefore zero. To be effective, an 83(b) Election must be made with the IRS within 30 days of date of issuance of the stock.

– A –



An Accelerator in a mentoring organization that take equity in startups in exchange for short-term intensive mentorship and sometimes capital.  The accelerator mentorship is generally three to four months in duration.  Y Combinator, TechStars and 500 Startups are examples of Accelerators.


Accredited Investor

An Accredited Investor is a concept under US federal securities laws that refers to persons who are financially sophisticated and have a reduced need for the protection of the securities authorities.  Examples of accredited investors are:

  • a bank, insurance company, registered investment company, business development company, or small business investment company;
  • an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
  • a charitable organization, corporation, or partnership with assets exceeding $5 million;
  • a director, executive officer, or general partner of the company selling the securities;
  • a business in which all the equity owners are accredited investors;
  • a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;
  • a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
  • a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.



An Acquisition, the primary purpose of which from the Acquirer’s perspective is to acquire the employees of a target company.



An Acquirer is the company or its parent that purchase a target company in an Acquisition.



An Acquisition is a purchase of the stock of one company (the target) by another company (the Acquirer).  There are so called “friendly acquisitions” under which the Acquirer negotiates the share purchase directly with the target company and “hostile acquisitions” under which the Acquirer negotiates the share purchase directly from target shareholders without approval by the target board of directors.



Software development method based on iterative and incremental development through collaboration and cross-functional teams.


Angel Investor

An Angel Investor is a wealthy individual who invests in or loans money to startups. Angel investors are most often family and friends of entrepreneurs. A number of Angel Investors organize themselves into angel groups, such as Band of Angels or Angels Forum.  Angels often provide strategic advice or open their networks to entrepreneurs.



Antidilution is a mechanism to adjust the Conversion Price of Preferred Stock, which is set forth in a startup’s Certificate of Incorporation or Articles of Incorporation. When most members of the startup community refer to Antidilution, they are referring to price-based Antidilution. Price-based antidilution has the effect of reducing the effective price of outstanding Preferred Stock to partially or fully offset the dilutive effect of the issuance of a new securities. There are three general types of price-based antidilution: Full Ratchet, Narrow-Based Weighted Average and Broad-Based Weighted Average. The other type of Antidilution is adjustments made to account for stock splits, reclassifications and reorganizations (e.g., if Common Stock is split into two shares for every one share of Common Stock, the conversion price of the Preferred Stock is adjusted as well so that Preferred Stock represents the same percentage of the company’s capitalization on an as-converted to Common Stock basis.


Articles of Incorporation

Articles of Incorporation are the document for a California corporation equivalent to the Certificate of Incorporation of a Delaware corporation. Articles of Incorporation set forth the type of stock to be issued and the number of authorized shares of such stock.

– B –



Benchmarks are performance goals used to evaluate the progress of a company. Investors often use benchmarks to determine if they should invest additional capital in a company and the valuation for any such investment.


Blind Pool Limited Partnership

A Blind Pool Limited Partnership is a limited partnership with no stated investment objective and few restrictions on the investments that may be made by the general partner.



To bootstrap a business means to start a business with small amounts of capital solely from the founders and from internally generated sources. The majority of startups are initially funded by bootstrapping, including Microsoft, Dell and eBay.


Bridge Loan

A bridge loan is a form of Convertible Debt financing that is short-term and made toward a future debt or equity financing, in anticipation of an exit or sometimes dissolution if the startup is not able to raise capital or find an exit. A Bridge Loan is typically made by existing investors known as inside rounds. The loan will carry an interest rate of between 6% and 12% and usually have both a multiple of principal (2X to 5X) payable on a sale and a Conversion Discount or Warrant Coverage.


Broad-Based Weighted Average Antidilution

Broad-Based Weighted Average Antidilution is the most common type of Price-Based Antidilution. “Weighted Average” means that the Conversion Ratio of a share of Preferred Stock is proportionally reduced through a formula based upon the amount of money previously raised by the startup and the price per share at which it was raised and the amount of money being raised by the startup in the subsequent dilutive financing and the price per share at which such new money is being raised. A broad-based formula is different from a narrow-based formula because a broad based formula includes as a weighting factor all shares of Common Stock and Preferred Stock (on an as-converted to common basis) outstanding, Common Stock issuable upon exercise of outstanding options and any other outstanding convertible securities, such as warrants and a narrow-based formula includes as a weighting factor only Preferred Stock (which means greater price adjustment).


Burn Rate

Burn Rate means the monthly negative cash flow of a startup. By computing the monthly negative cash flow, the startup can calculate how long it can survive before it will either have to start making a profit, find additional funding or dissolve.


Business Plan

A Business Plan is a written description of a startup’s strategy and intended game plan, including market, competition, team and funding. The plan is intended to help the management and board of directors think through the business strategy and for external stakeholders, such as investors. For most startups, a business plan is too long to be helpful in fundraising.  Excerpts of the plan called an executive summary or pitch deck are used in fundraisings.



A Buyout is a transaction under which a company or one or more individuals purchases a controlling interest in a company.  If debt is used to finance the buyout, the buyout is a “leveraged buyout.”  If the existing management of a company purchases a controlling interest in the company, the buyout is a management buyout.



This is a constitutional document for a startup that generally sets out the procedural rules that govern the startup. Delaware law provides flexibility in the composition of the bylaws, but most startup bylaws are similar and follow a boilerplate template. In fact, a startup will appear unusual if it has unusual bylaws. Bylaws generally set forth stockholder meetings, board meetings, composition of the board, officers, corporate records, stock transfers and other matters.

– C –


Capital Gain

Capital gain is a tax concept related to the sale of a capital asset, such as stock, bonds or real estate. The Capital Gains tax rates are generally lower than ordinary income rates on salary, bonuses, interest, etc. The Capital Gain is usually the sales price less the purchase price, and the gain is not realized until the asset is sold. A Capital Gain may be short term (one year or less) or long term (more than one year).


Capital Under Management

Capital Under Management is the total dollar value of capital committed to a venture capital firm.


Certificate of Incorporation

A Certificate of Incorporation is the primary constitutional document for a Delaware corporation that sets forth the authorized classes and series of stock, the rights, preferences and privileges of such stock and other matters.


Change of Control

Change of Control is an acquisition of, sale of a majority of the voting stock or assets of, or merger with or into another company.


Change of Control Premium

A Change of Control Premium is a provision in the Convertible Debt that provides for a payment to the holder of the debt equal to a multiple of the principal of the note (2X to 5X) if the issuer startup has a Change of Control while the note is outstanding.


Class F Common Stock (Supervoting Common Stock)

Class F Common Stock was popularized by the Founder’s Institute and is a type of Common Stock held by founders that provides for super-voting power (e.g., 1 share of Class F Common Stock gets 10 votes per share, while 1 share of typical Common Stock gets 1 vote per share). The goal with Class F Common Stock is to enable founders to issue shares to investors and/or service providers (e.g., employees, consultants and advisors) and maintaining voting control of a startup.


Cliff Vesting

Customary startup vesting terms for restricted stock or stock options are monthly over four years (48 months) with a one-year cliff. The one year cliff means that there will not be any vesting until the first anniversary of the vesting commencement date, and on such first anniversary 12/48ths (25%) of the shares or options will vest because 12 months have elapsed since the vesting commencement date. A cliff could be interpreted as a trial period during which a founder or employee proves himself or herself and the startup can evaluate performance before any equity vests.



The closing of a financing or change of control transaction.


Closing Conditions

Closing Conditions are conditions that must be satisfied (or waived) before parties to a financing or Change of Control transaction can consummate the transaction. Examples of Closing Conditions in a financing include representations and warranties being true and correct, execution of transaction agreements, issuance of legal opinions, appointment of new members to the Board of Directors and the filing of an amended Certificate of Incorporation with the state of Delaware.


Common Stock

Common Stock is the fundamental equity security of a startup formed under Delaware or California law (or, to the knowledge of the editors, any other state). Common Stock of a startup is usually held by founders and employees and Preferred Stock is usually held by investors, such as Venture Capital Firms.


Conversion Discount

A Conversion Discount is a discount represented as a percentage from the price per share effectively paid by the holder of Convertible Debt upon conversion into equity of his or her note.  The discount is usually a discount from the price per share of the next series of preferred stock issued and ranges between 15% and 50%.


Conversion Price

The Conversion Price is price per share at which Preferred Stock may be converted into Common Stock.  When a series of Preferred Stock is initially issued, the Conversion Price is equal to the purchase price per share. However, the Conversion Price can change as a result of Antidilution adjustments.


Conversion Rate

A Conversion Rate is the number of shares of Common Stock that a holder of Preferred Stock receives on conversion of its Preferred Stock. When a series of Preferred Stock is initially issued, the Conversion Rate is typically 1.0. However, the Conversion Rate can change as a result of Antidilution adjustments.


Convertible Debt

Convertible Debt is promissory notes with short maturities under two years that convert into other equity securities (usually Preferred Stock) on certain events, such as the closing of the next bona fide equity financing.


Corporate Venture Capitalist

A Corporate Venture Capitalist is a Venture Capital Firm associated with a corporation. The most prominent corporate venture capital firm is Intel Capital.


Cumulative Dividends

Cumulative Dividends are Dividends that accrue at a fixed rate or percentage whether or not the Board of Directors declares any Dividends.  Cumulative Dividends are more common on the East Coast than on the West Coast.  With startups, Cumulative Dividends are generally not paid until a Change of Control transaction.

– D –


Deal Flow

Deal Flow to the stream of offers or opportunities to invest that a Venture Capital Firm or angel investor receives as a whole.


Debt Financing

A Debt Financing is raising funds from lenders through the sale of debt instruments, such as Convertible Debt.  Debt Financing includes both secured and unsecured loans.


Demand Registration Rights

Demand Registration Rights allow investors in a startup to demand that the startup register some shares of stock for a public offering, either before or after the startup is a public company.


Double Trigger Vesting Acceleration

Double Trigger Vesting Acceleration provides for acceleration of vesting of options or acceleration of the lapse of Repurchase Rights for restricted stock, as the case may be, if two events occur: (i) a Change of Control and (ii) termination of employment of the holder without cause or for good reason within some period of time following the Change of Control (often one year). Double Trigger Vesting Acceleration is more common than Single Trigger Vesting Acceleration.


Drag Along

A Drag Along is a contractual right/obligation that obligates stockholders to vote in favor of a sale of a startup upon a triggering event, most commonly vote by (i) the startup’s board of directors and (ii) by classes of stock (e.g., a majority of Common Stock and a majority of Preferred Stock) or series of Preferred Stock (e.g., majority of Series A Preferred Stock).  These provision are often found in Voting Agreements.


Drive-By Deal

A Drive-By Deal is an investment by a Venture Capital Firm under which the Venture Capitalist expects to exit quickly, such as investment in a pre-IPO company.


Due Diligence

Due Diligence typically refers to the process investors engage in before making an investment. The process is different for every investor, but usually includes evaluating the IP, reviewing financial forms, checking references of officers and directors and reviewing board minutes and other corporate actions.

– E –


Elevator Pitch

An Elevator Pitch is a short 30 to 60 second statement that summarizes a the valuation proposition of a startup. Founders of startups often practice and continually revise their Elevator Pitch until it resonates with investors.



An Entrepreneur is a person who engages in a new business for profit, often with substantial risk of failure.


Equity Financing

An Equity Financing is a method of financing through which a startup raises capital through the issuance of capital stock.



An Exit is the process of achieving liquidity for equity interests in startups through a Change of Control or IPO.


Exit Strategy

An Exit Strategy is the method or methods that investors or other stockholders intend to get liquidating for their equity interests in a startup.

– F –


First-Round Financing

The First-Round Financing is the first investment in a startup by third party investors. The form of the financing could be Convertible Debt, Series Seed Equity or Preferred Stock.


Follow-On Investment

A Follow-On Investment is a new investment in a startup by an existing investor in the startup. For example, if an investor invests in the startup’s Series A financing, its participation in the Series B financing would be considered a Follow-On Investment in the startup.


Series FF Preferred Stock

Series FF Preferred Stock is a special form of founder’s stock originated by the Founders Fund (i.e., the FF in the name) and is issued to founders at incorporation or prior to the Series A financing. The stock is convertible into either Common Stock at the discretion of the holder or the Preferred Stock issued in a later financing round (e.g., Series A, Series B) if (i) the startup’s board of directors approves the conversion and (ii) an investor is willing to pay the same price per share to the converting founder for the newly issued Preferred Stock as the price paid by investors to the startup for the same series of Preferred Stock. Other than this conversion feature, the Series FF Preferred Stock is identical to Common Stock.  The stock is intended to help s founder achieve some liquidity for part of its stock. The Series FF Preferred Stock automatically converts into Common Stock upon an IPO or upon the consent of holders of a majority of Series FF Preferred Stock.



A Freemium is promotional system where a product or service, such as an APP or basic form of a game, is offered without charge. There is often a premium form of the same product or service available for a fee.


Full-Ratchet Antidilution

Antidilution is the more punitive form of Price-Based Antidilution that adjusts the Conversion Price of outstanding Preferred Stock to be equal to the price of newly issued security (usually a newly issued series of Preferred Stock), regardless of the number of new shares sold at the lower price, through an adjustment to the Conversion Price of the outstanding Preferred Stock.


Fund of Funds

A Fund of Funds is a pooled investment fund that invests in other pooled investment funds, such as venture
capital and angel funds.

– H –



A Hackathon is an event where programmers and developers work together to quickly develop a product in a short period of time, such as a weekend.



A Hacker is person who is a skilled computer programmer whose life revolve around computers and are often called nerds or tech geeks and often create code and solve complex problems with no remuneration. Individuals who break into secure systems with malicious intent are sometime
known as hackers as well.

– I –



An Incubator is organization intended to help startups that are usually founded by the organization or residents of the organization’s facilities. The typical Incubator provides mentorship, office space and capital for periods of years in exchange for substantial equity interests in their incubated companies.


Institutional Investor

An Institutional Investor is an organizations (such as Venture Capital Firm, banks, finance companies, insurance companies, mutual funds or pension funds) which have considerable cash reserves that need to be invested.  They are investors that usually act on behalf of others by pooling capital and investing in a variety of investments to reduce risk.  This means that if one of their investments fails, such a failure will be only a small part of the entire investor’s investment portfolio.



An Intrapreneur is a term used by management consultant Gifford Pinchot to refer to employees within companies who develop new, innovative ideas. Intrapreneurs are similar to entrepreneurs except intrapraneurs innovate for their existing organizations.


Investment Bank

An Investment Bank is a financial services firm that performs a variety of services which includes underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients.


Investors’ Rights Agreement (or Registration Rights Agreement)

An Investors’ Rights Agreement is an agreement entered into in connection with venture capital financings. Customary terms of an Investors’ Rights Agreement are the right to receive various reports and financial statements, the right to inspect the books and records of a startup, the right to have stock registered for sale in a public offering and the right to participate in future equity financings. The agreement also includes covenants by the startup to take certain actions.


IPO (or Initial Public Offering)

An IPO is the first sale of stock by a private company to the public.


IRR (or Internal Rate of Return)

An IRR in the context venture capital is the annual return calculated as a percentage generated for limited partners by an Venture Capital Firm based on the timing of draws of capital from the limited partners and distributions of cash and securities to the limited partners.

– K –


Key Person Insurance

Key Person Insurance is life insurance purchased by a startup on certain “key employees” and for which the beneficiary is the startup. Investors sometimes require this insurance as a condition to their investments if they are investing in key employees as much as the startup.

– L –


Lead Investor

A Lead Investor is the lead investor in a syndicate of investors, which often means it drafts a term sheet and submits to the startup, negotiates the term sheet, hires lawyers, takes a board seat and helps find other investors, if necessary.  In certain financings, there are co-lead investors.


Lean Startup

A Lean Startup is a term originated and made popular by Eric Ries. Under his methodology, he wants companies to make rapid prototypes for customer feedback and then iterate based on the feedback. In a lean startup, entrepreneurs reduce waste by increasing the frequency of contact with real customers.



Lean means a startup that operates with few resources and whose employees wear many hats.


Limited Partnership

A Limited Partnership is an entity that must have at least one limited partner and one general partner. Limited Partners are liable only for their investment in the partnership and are not involved in the management of the Limited Partnership. A general partner is manages the Limited Partnership.   Most Venture Capital Funds are formed as Limited Partnerships.



A Liquidation is the process when a startup is dissolved and wound up, its assets sold in a fire sale and the proceeds used to pay creditors and then distributed to stockholders.


Liquidation Preference

A Liquidation Preference is the dollar amount of proceeds that the holders of Preferred Stock are entitled to receive in connection with a Liquidation Event prior to the holders of Common Stock receiving any proceeds from the event. For example, if holders of Preferred Stock have a Liquidation Preference equal to $10 million and the startup has a Liquidation Event, the holders of Preferred Stock will receive the first $10 million before the holders of Common Stock receive any proceeds. The typical Liquidation Preference per share of Preferred Stock is equal to the original purchase price of such share of Preferred Stock.


Liquidation Event

A Liquidation Event is a winding up and liquidation of a startup and (i) a merger or consolidation under which the stockholders of the company do not own a majority by voting power of the outstanding shares of the surviving or acquiring entity, (ii) the transfer of a majority of the outstanding voting power of the startup, and (iii) a sale, lease, transfer, exclusive license or other disposition of all or substantially all of the assets of the startup.


Liquidity Event

A Liquidity Event is an event under which company stockholders are able to get liquidity for some or all of their equity ownership in a startup. The most common Liquidity Events are IPOs or Changes of Control.


Lock-Up Period

A Lock-Up Period is period during which a lock-up is in effect. The typical lockup period for IPOs is 180 days and for other public offerings, 90 days.


Lock-Up (Market Standoff)

A provision that defines the Lock-Up Period during which stockholders, option holders and warrant holders of a company are prohibited from directly or indirectly selling their stock in the company. The underwriters for a company’s IPO also require material stockholders of a company to enter into a Lock-Up agreement directly with the underwriter. A Lock-Up is intended to help a company have more stability in its trading price after a public offering by preventing existing stockholders to sell their shares for a period of time.

– M –


Management Rights Agreement

A Management Rights Agreement is a letter agreement requested by most Venture Capital Firms in connection with their investment in a startup. The purpose of the agreement is to allow Venture Capital Firms to quality as “venture capital operating companies” under ERISA, which exempts the funds from onerous requirements of ERISA that are not reasonable for Venture Capital Firms. The rights typically include the right to consult with and address management and the board of directors, and rights to inspect board meeting minutes and materials and the books and records of the startup.


Mandatory Conversion

Mandatory Conversion is automatic conversion of Preferred Stock into Common Stock, as described in a startup’s Certificate of Incorporation.  Preferred Stock is also convertible into Common Stock at any time at the discretion of the holder of the Preferred Stock. Common mandatory conversions are IPOs with certain minimum criteria, such as valuation and proceeds, or the vote or written consent of a specific percentage of the Preferred Stock.


Maturity Date

The date on which the principal amount of a Convertible Debt or other debt instrument becomes due and payable to the lender.


Mezzanine Debt

Mezzanine Debt is a hybrid debt instrument that incorporates elements of equity (usually warrants) with elements of debt. The debt elements of Mezzanine Debt usually have importance in the event of insolvency or bankruptcy.


Mezzanine Financing

A Mezzanine Financing is a late-stage venture capital financing prior to a Liquidity Event, such as an IPO.  Mezzanine Financing is often done with startups expecting to go public usually within 6 to 12 months, usually so structured to be repaid from proceeds of a public offerings, or to establish floor price for public offer.


Minimum Viable Product

A term originated by Eric Ries of Lean Startup fame, which describes a methodology for fast and quantitative market testing of a product or product feature. The concept is to develop a prototype with only basic functionality (no bells and whistles) and test with a startup’s target market of early adopters for feedback. The strategy is intended to avoid building products that customers do not want. The development and testing process is iterated until a marketable product is developed.

– N –


Narrow-Based Weighted Average

Please check back for the definition.


No-Shop Provision (or Exclusivity Provision)

A No-Shop Provision prohibits a seller from directly or indirectly soliciting other buyers or investors, as the case may be, for an agreed upon period of time. A No-Shop in venture financings is typically 30 to 90 days.


Non-Disclosure Agreement (NDA, CDA or confiden/h3>

A Non-Disclosure Agreement is a legal agreement under which two parties agree not to disclose or use confidential information disclosed under the agreement.


Non-Competition Agreement

A Non-Competition Agreement is a legal agreement under which two parties agree not to engage in competitive business activities with a company for a certain period of time and in a certain geographic region. In certain states, namely California, Non-Competition Agreements are generally unenforceable.


Non-Cumulative Dividends

Non-Cumulative Dividends paid on stock only if and when they are declared by the Board of Directors of a startup.  If a startup chooses not to pay non-cumulative dividends in any year, the investors do not have the right to claim dividends in such year.


Non-Participating Preferred Stock

Non-Participating Preferred Stock is a type of Preferred Stock that entitles the holders to receive a Liquidation Preference in connection with a Liquidation Event. The remaining proceeds in the Liquidation Event go to the holders of Common Stock and/or the holders of Participating Preferred Stock (if any).  If a holder of Non-Participating Preferred Stock will receive more in connection with a Liquidation Event by converting to Common Stock, it will forego its Liquidation Preference and convert to Common Stock before the proceeds are distributed.


Non-Solicitation Agreement

A Non-Solicitation Agreement is an agreement under which a person agrees not to solicit employees or others affiliated with a company (such as consultants and suppliers) to leave their current relationship with the company.


Note Purchase Agreement

A Note Purchase Agreement is an agreement between a startup and lenders under which Convertible Debt is sold by the startup. The agreement includes basic representations and warranties, closing conditions and miscellaneous terms.

– O –


Original Purchase Price

The Original Purchase Price is the price per share an investor pays for its Preferred Stock.

– P –


Pari Passu

Pari Passu is a Latin term that means that the pari passu series of Preferred Stock have the same rank in connection with a Liquidation Event of the startup.


Participating Preferred Stock

Participating Preferred Stock is a type of Preferred Stock that receives its Liquidation Preference plus accrued and unpaid dividends, if any, in connection with a Liquidation Event and then shares the remaining proceeds with the holders of Common Stock on an as-converted to Common Stock basis.


Participating Preferred with a Cap

Participating Preferred with a Cap is a type of Participating Preferred Stock that receives its Liquidation Preference plus accrued and unpaid dividends, if any, in connection with a Liquidation Event and then shares the remaining proceeds with the holders of Common Stock on an as-converted to Common Stock basis, but stops sharing with holders of Common Stock after it has received a multiple of its Liquidation Preference (usually 3 to 5 times).


Pay to Play

A Pay to Play requires that certain stockholders participate in a defined amount in a future financing or part or all of their shares of Preferred Stock will convert into Common Stock, resulting in the loss of their Liquidation Preference and Antidilution protection, among other rights, or a different series of Preferred Stock (often referred to as “shadow preferred”) without the same rights, preferences or privileges as their existing Preferred Stock. The most common use of these provisions is in startups that are not performing to expectations and that are struggling to raise sufficient capital to fund their operations. Pay to Plays in theory are intended to incent all holders of Preferred Stock to continue to support the startup. In certain circumstances, these provisions are used solely as a punitive tool by Venture Capital Firms with deep pockets.


Piggyback Registration Rights

A Piggyback Registration Right is a type of Registration Right that allows an investor to register his/her unregistered stock when the company initiates a registration. Piggyback Registration Rights do now allow the investors to initiate an IPO, but merely allow them to register their shares in IPOs and other public offerings.


PIPE (Private Investment in Public Equity)

A PIPE is a form of equity financing in which investors purchase a certain amount of stock in a publicly traded company at a discount from its market value. PIPEs are popular with small and medium-sized publicly traded companies that lack resources to raise capital through underwritten secondary offerings.



A Pipeline is a general term used to describe upcoming deals.



A Pitch is the set of activities intended to persuade someone to buy a product or take a specific course of action.



A Pivot means to change a startup’s direction when performance of the startup is not meeting expectations


Portfolio Company

A Portfolio Company is a company in which an angel fund or venture capital fund has made an investment.


Post-Money Valuation (or Post-Financing Valuation)

The Post-Money Valuation is the valuation of a startup after the investors have made their investment, such as immediately after the Series A, Series B or Series C investment rounds. The formula for calculating Post-Money Valuation is the Pre-Money Valuation plus the amount raised is the Post-Money Valuation.


Pre-Emptive Rights

Pre-Emptive Rights are rights given usually to holders of Preferred Stock to maintain their current ownership of a startup by buying a proportional number of shares of any future equity offering. If any investor decides to pass on its right, the other investors usually have a right to subscribe for the unsubscribed shares. This right is typically set forth in a startup’s Investor’s Rights Agreement.


Preferred Stock

Preferred Stock is an equity securities that has “preferences” relative to Common Stock and is usually issued to investors, such as Venture Capital Firms. The preferences include Liquidation Preferences, preferential dividends and preferential voting rights for certain members of the Board of Directors or certain important matters.


Pre-Money Valuation (or Pre-Financing Valuation)

A Pre-Money Valuation is the monetary valuation investors have given a startup prior to their investment. Price per share is determined by dividing the Pre-Money Valuation by the number of shares outstanding on a fully diluted basis.  The formula for calculating Pre-Money Valuation is the Post-Money Valuation minus the amount raised is equal to the Pre-Money Valuation.


Private Placement

A Private Placement is a direct private offering of securities to a limited number of sophisticated investors.


Promissory Note

A Promissory Note is a document that provides a promise by a company to pay a lender a defined principal sum of money plus accrued and unpaid interest on a future date or on demand.


Proprietary Information and Inventions Agreement (or PIIA)

A Proprietary Information and Inventions Agreement is an agreement signed by officers and employees of a startup to assign their inventions during their tenure with the startup to the startup.


Protective Provisions

Protective Provisions are negative covenants held by holders of Preferred Stock under which the holders have a right to approve or block certain company actions. Protective Provisions are typically in the Certificate of Incorporation of a Delaware corporation. The list of approvals include declaring authorizing a new series of preferred stock, selling the company, changing the size of the board and issuing debt instruments.

– Q –


Qualified Financing (Next Equity Financing)

A Qualified Financing is a term in Convertible Debt that defines the equity financing that triggers conversion (usually automatically) of the principal (and usually the accrued and unpaid interest) under the Convertible Debt into equity securities. The Qualified Financing is usually a minimum round size, such as $2 million of new cash proceeds.

– R –



A Recapitalization is reset of a startup through which the equity ownership of the startup substantially changes, often as a result of a Pay-to-Play or a new financing at a very low valuation.



Redemption is a right to redeem Preferred Stock for the original purchase price or some multiple of the original purchase price after a number of years in some (but not all) venture backed startups. The right is usually a right held by investors, but sometimes is a right held by the startup to redeem investors for some multiple of their investment amounts. Redemption Rights are in a startup’s Certificate of Incorporation and are almost never exercised.


Registration Rights

Registration Rights are contractual rights of investors usually in an Investors’ Rights Agreement that give the investors the right to demand that the startup register the shares of restricted stock with the SEC for public sale. The typical Registration Rights are Demand Registration Rights, Piggy-Back Registration Rights and S-3 Registration Rights.



A Reorganization is a either (a) the conversion of outstanding Preferred Stock into Common Stock, or into a new series of Preferred Stock with a substantially reduced Liquidation Preference amount and/or (b) a reverse stock split of outstanding stock. Reorganizations are usually implemented to reset the economic interests of existing stockholders to current economic realities so as to facilitate the startup’s ability to attract additional investment and to provide appropriate incentive to the management team. The conversion of outstanding Preferred Stock into Common Stock or a new series of Preferred Stock has a significant economic effect, as those stockholders will often lose substantial Liquidation Preferences and other rights. A reverse stock split has no economic effect in and of itself, but is usually undertaken when a startup’s stock price has fallen significantly and the startup wants to raise it to a more typical range.


Return on Investment (ROI)

Return on Investment is the annual percentage return based on the amount invested by the investor, the amount paid back to the investor and timing of the cash flows.


Right of First Refusal

Right of First Refusal is a contractual right that one person has to purchase the equity shares or business of another person. These rights require the person burdened with the Right of First Refusal to give the beneficiary of the Right of First Refusal notice of a proposed sale to and allow such beneficiary the opportunity to match the terms of the proposed sale.


Right of First Refusal and Co-Sale Agreement

Right of First Refusal and Co-Sale Agreement is a contract between holders of Preferred Stock and significant holders of Common Stock (usually the founders) that requires such holders of Common Stock to offer such holders of Preferred Stock a time period to buy any shares of Common Stock proposed to be transferred or sold to a third party. If the holders of Preferred Stock do not want to exercise their right to buy the Common Stock, they also have a right to sell their pro rata portion of their Preferred Stock to any third party purchaser. The Right of First Refusal and Co-Sale is intended to make it difficult for founders to sell their stock.


Risk Capital

Risk Capital are funds invested in startups that have high potential of failure. These types of investments are typically very risky, but also offer potential for outsized returns.


Round of Funding

Round of Funding for a startup is a Convertible Debt or equity financing in one or more related closings. For example, Series A, Series B and Series C are each rounds of funding.

– S –


S-3 Registration Rights

These rights entitle holders to require a company to register some of their shares for sales to the public on a Form S-3 registration statement. The rights are exercisable only if the company is a public company, typically after an IPO. The purpose of registration rights (including S-3) is to ensure that holders of Preferred Stock are able to sell their shares to the public on certain conditions.


Software Development Kit

Software Development Kit is a set of software development tools that allows programmers to create applications for software systems, hardware platforms, gaming platforms or operating systems.  An example of a Software Development Kit is Apple’s Xcode for Mac computers, iPhone and iPad.


Secondary Public Offering

Secondary Public Offering is the issuance of stock to public investors after a company’s IPO. The proceeds are paid to the issuer company through the investment bank that underwrites the offering. The investment banks involved in the offering are issued an allotment of the offering.


Secondary Purchase

Secondary Purchase is a sale of stock by a stockholder to another person, rather than a direct issuance of stock by the issuer company.


Secured Note

Secured Note is a type of Promissory Note under which the repayment obligation of the issuer company is secured by collateral of the issuer, such as all the issuer’s assets. With startups, the security is often all the startup’s assets other than its intellectual property.


Seed Capital

Seed Capital is the capital used to fund a startup at its initial stages. Seed capital is often invested by a startup’s founders (also called Bootstrapping) and is high risk investment because the startup is most prone to fail at or near its inception.


Series A Preferred Stock

The Series A Preferred Stock is usually the first round of Preferred Stock offered and sold to third party investors in a startup. In recent years, a minority of startups offer and sell a “Series Seed” Preferred Stock prior to the Series A (see Series Seed). Series A Preferred Stock is convertible into Common Stock upon the holder’s requests and automatically in certain cases such as an IPO.


“Series” of Preferred Stock

When a startup raises venture capital in a Preferred Stock financing, it typically designates the shares of Preferred Stock sold in that financing with a letter. The shares sold in the first financing are usually designated “Series A”, the second “Series B”, the third “Series C” and so forth. Shares of the same series all have the same rights, but shares of different series often have different rights.


Series Seed Preferred Stock

Please check back for a definition of Series Seed Preferred Stock.


Silent Partner

Silent Partner is an investor who is not involved in the management of a company.


Single Trigger Vesting Acceleration

This is a type of accelerated vesting under which all or a portion of a person’s unvested stock options or restricted stock have some accelerated vesting on an event, such as a Change of Control and/or an involuntary termination. The amount of accelerated vesting varies from some percentage less than or equal to 100% and more than 0%. The most typical range is 25% to 100% of the unvested shares vest on such event.


Small Business Investment Company (SBIC)

A Small Business Investment Company or SBIC is an investment firm that is licensed and regulated by the Small Business Administration. SBICs provide venture capital financing to startups. SBICs are able to borrow from the federal government to supplement the private funds of their investors.



Startup is a business venture that seeks a scalable business model and is characterized by high risk. Even though the name “startup” implies a brand new venture, often startups have been in existence for years. Startups do not need to be technology companies, but most Silicon Valley startups are technology companies.


Stock Option

Please check back for a definition of a Stock Option.


Stock Option Plan

Stock Option Plan is a plan approved by a startup’s board and stockholders that governs the issuance of stock options, restricted stock units, phantom stock units and the like to the startup’s employees, consultants, advisors, etc. Stock Option Plans are exempt from registration under U.S. security laws under Rule 701 of the Securities Act of 1933.


Stock Purchase Agreement

Stock Purchase Agreement is an agreement under which a person purchases stock from a startup. If the Stock Purchase Agreement is a Founder Stock Purchase Agreement (or RSPA), the founder purchases Common Stock that vests over time or upon certain events.



Syndication is a group of investors making an investment together in a single round of financing.

– T –


Technology Assignment Agreement

A Technology Assignment Agreement is an agreement signed by the founder to transfer intellectual property, which has been created by the founder prior to formation of a startup, to the startup usually in exchange for founder’s stock.  After the startup is formed, the founder also usually signs a Proprietary Information Invention Assignment Agreement to assign intellectual property developed while an employee of the startup.


Term Sheet

A Term Sheet is a summary of a proposed investment, which is usually non-binding other than confidentiality, no-shop and dispute resolution provisions. The Term Sheet serves as a basis for drafting definitive investment agreements.



A Turnaround is a process of reversing the direction of a startup in significant decline and often near insolvency.

– U –



An Underwriter is an investment banking firm that commits to distribute securities publicly through the underwriter’s distribution network for an issuer company. In certain underwriting arrangements called a “firm commitment,” an Underwriter purchases the securities from the issuer and assumes the risk if the Underwriter is unable to sell the securities at or above its purchase price. Underwriters generally receive underwriting fees from their issuer clients, but they also usually earn profits when selling the underwritten shares to investors.


Unsecured Promissory Note

An Unsecured Promissory Note is a type of Promissory Note which repayment is secured by specific items of the issuer borrower’s collateral. The only recourse for lenders if a borrower defaults on an Unsecured Promissory Note is to take legal action against the borrower.

– V –


Valuation Cap

A Valuation Cap is a concept in Convertible Debt that provides that such debt will convert into equity securities at or below a fixed valuation cap.


Venture Capital

Venture Capital is investment by Venture Capital Firms in early and mid-stage startups, most of which are based on technology, with potential for exceptional growth. Venture Capital is a subset of the broader alternative asset class, private equity. Venture Capital is usually investment for Preferred Stock, but venture capital investment can also be for Convertible Debt or Common Stock. Most startups that receive venture capital investment are not able to raise capital through bank loans or other similar means because such startups are not profitable and do not have sufficient assets to collateralize loans.


Venture Capital Firm

A Venture Capital Firm is investment company that invests high risk capital in early and mid-stage startups, most of which are based on technology, with potential for exceptional growth.


Venture Capital Funds

See Venture Capital Firms.


Venture Capitalist

A Venture Capitalist is an investor that is affiliated with a Venture Capital Firm.


Vesting (Right of Repurchase)

Vesting is a means of earning equity according to a metric, usually time.  The most common vesting terms for startups is 25% of the equity (or stock options) vests after 1 year of service (often called a “cliff”), and the remainder of the equity (or stock options) vests in 36 equal monthly installments over the next three years.  Vesting is often used interchangeable with a “Right of Repurchase” and it is generally acceptable to do so.  A “Right of Repurchase” is how vesting is implemented for founder’s stock/restricted stock and vesting is the same concept for stock options. A Right of Repurchase lapses over time similar to vesting. The reason for the difference is that founder’s stock is outstanding in full upon issuance, but the stock is subject to repurchase if the founder ceases to provide services.


Voting Agreement

A Voting Agreement is an agreement that governs how a startup’s board of directors will be designated and elected. This is one of the customary venture capital investment agreements.


Vulture Capitalist

A Vulture Capitalist is a slang term for a Venture Capitalist.

– W –


Warrant Coverage

Warrant Coverage is a term to refer to the number of Warrants issued. Warrant Coverage is usually expressed as a percentage of the amount of a loan, such as 25%.  For example, if a person lends $100,000 to a startup and receives 25% Warrant Coverage, such person could buy $25,000 of securities, such as the Preferred Stock issued in the Next Equity Financing. The number of shares are determined by diving $25,000 by the purchase price of such Preferred Stock.



Warrants are securities similar to stock options, but not issued for compensatory reasons.  For startups, warrants are issued most often in connection with Convertible Debt financings or in connection with Venture Debt.


Weighted-Average Antidilution

Weighted Average Antidilution is the milder form of Price-Based Antidilution, and decreases the Conversion Price of outstanding Preferred Stock based on a formula that uses a weighting factor. The formula includes variables for the price at which new stock is sold, the price at which the outstanding Preferred Stock was sold, the total number of new shares issued and the total number of shares outstanding.