October 26, 2026
This glossary defines 233 startup law terms in plain English, from 409A valuations and 83(b) elections to vesting, warrants and the WARN Act. Each definition is short enough to quote, and most end with a link to the Westaway FAQ or Founder Guide that covers the topic in depth.
Key takeaways
An independent appraisal of the fair market value of a private company's common stock, named for Section 409A of the tax code. A startup gets one before granting stock options so the exercise price is at least fair market value, because an option priced below it can trigger immediate tax and penalties for the holder. A valuation from a qualified independent appraiser is generally presumed reasonable for up to 12 months, or until a material event such as a new financing. See 409A Valuation: When Startups Need One and How It Works.
A filing with the IRS that lets someone who receives unvested stock, such as a founder buying restricted stock, be taxed on the stock's value when it's issued instead of as it vests. It must be filed within 30 days from the date the shares are issued, with no extensions, and the IRS now accepts it on Form 15620 online or by mail. Whether to file is a question for your tax advisor. See 83(b) Election: What Startup Founders Should Know.
A provision that makes unvested shares or options vest earlier than the schedule says, usually in connection with a sale of the company. It comes in single-trigger and double-trigger forms. See Single Trigger vs Double Trigger Acceleration.
An investor who meets SEC tests that let them buy securities in most private offerings, such as an individual with income over $200,000 in each of the last two years ($300,000 with a spouse or spousal equivalent), net worth over $1 million not counting their home, or certain securities licenses. (The SEC proposed adding more professional credentials and an exam in 2026; none is in effect yet.) Most startups raise only from accredited investors because it keeps the securities law exemptions simple. See Can My Startup Raise Money From Non-Accredited Investors?.
An acquisition in which the buyer mainly wants the startup's team rather than its product or revenue. Much of the value often goes into new compensation packages for the team, and the price paid for the company itself may cover little beyond debts and investors' liquidation preferences. See Being Acquihired: What Startup Founders Should Know.
The written action in which the person who filed the certificate of incorporation names the company's first directors, when the charter doesn't name them, and then steps aside. It's usually the first document signed after filing, followed by the new board's organizational consent. See Action of Incorporator: What It Means for Startups.
The contract that sets out what an advisor will do for a startup, what they receive and the confidentiality and IP assignment terms that protect the company. Advisors usually receive a small equity grant, most often vesting monthly over two years with no cliff or a short one. See Startup Advisor Agreement: Everything You Need To Know.
The total amount paid for all the shares in a financing or for a whole company, as opposed to the price per share. In an acquisition, the headline price is reduced by debt, transaction expenses, escrows and other adjustments before stockholders see their proceeds. See Startup Acquisitions: The 3 Types of Deals and How a Sale Works.
A new version of the charter that combines the original certificate and all its amendments into one document, usually making further changes at the same time. Startups adopt one in each priced round to create the new series of preferred stock and set its rights, which takes board approval and a stockholder vote. See Certificate of Incorporation: What It Is and How It Works.
An individual who invests their own money in early-stage startups, usually through SAFEs or convertible notes and often before any institutional fund. Most angels are accredited investors. See 6 Types of Investors in Startups.
A preferred stock term that lowers the investors' conversion price if the company later sells stock at a lower price, so those investors receive more common shares when they convert. Broad-based weighted average is the market standard, and full ratchet is rare and much harsher on founders. See Anti-dilution: What It Is and How It Works.
The laws that police mergers and business conduct that reduce competition. For startups they mostly come up in an acquisition: a deal above a dollar threshold that is adjusted each year must be reported to the FTC and the Department of Justice under the Hart-Scott-Rodino Act, with a waiting period before closing, and even small deals between competitors can draw scrutiny. See How Do I Read an Acquisition LOI? The Economics That Matter.
A stockholder's right under Delaware law to ask the Court of Chancery to set the fair value of their shares in certain mergers, instead of accepting the deal price. Stockholders who vote for the merger give it up, and drag-along provisions usually require stockholders to waive it. See Drag Along Rights: What They Are and How They Work.
An acquisition in which the buyer purchases some or all of the company's assets, such as its IP, contracts and equipment, instead of its stock. The company keeps the liabilities the buyer doesn't take, contracts that can't be assigned without consent need the other party's sign-off, and a sale of substantially all the assets needs stockholder approval. See Startup Acquisitions: The 3 Types of Deals and How a Sale Works.
A written transfer of ownership of intellectual property from one party to another, such as from a founder, employee or contractor to the company. Without one, the person who created the work may own it even though the company paid for it. See Who Owns Startup IP? Founders, Employees and Contractors Explained.
Employment that either the employer or the employee can end at any time, for any lawful reason or no reason. It's the default in every state except Montana, and offer letters should state it plainly and avoid promises, such as probation periods or guaranteed terms, that undercut it. See Startup Employment Contract Guide.
An independent accountant's examination of a company's financial statements, ending in an opinion on whether they're fairly presented. Most early-stage startups don't need audited financials; they come up with later-stage investors, lenders, larger crowdfunding raises, acquisitions and an IPO.
A board committee that oversees financial reporting, internal controls and the outside auditor, made up of independent directors at a public company. Private startups rarely form one until they prepare for an IPO or reach a late stage.
Delaware's default way of calculating franchise tax, based only on how many shares the charter authorizes. It produces large bills for startups: a company with 10,000,000 authorized shares owes about $85,000 under it, which is why startups pay under the assumed par value capital method instead and usually owe the $400 minimum. See Delaware Franchise Tax: How to Save $80,000+ (Legally).
The maximum number of shares a company can issue, as set in its certificate of incorporation. Westaway's default setup authorizes 10,000,000 shares with a 1,000,000-share option pool adopted at incorporation, and the company can authorize more later by amending its charter with board and stockholder approval. See Authorized, Outstanding and Fully Diluted Shares: How Startups Count Shares and How Many Shares Should a Startup Company Have?.
One hundredth of one percent (0.01%), so 100 basis points equal 1%. Lenders and investors use it to state interest rates, fees and small changes precisely.
A private certification from the nonprofit B Lab for companies that meet its social and environmental standards and build accountability to stakeholders into their governing documents. It's a seal you earn and renew, not a legal form, and a Delaware corporation seeking it is expected to become a public benefit corporation. B Lab's new standards replaced its old points-based assessment in 2026. See Founder Guide to Public Benefit Corporations.
A report of a company's owners and controllers that the Corporate Transparency Act required companies to file with FinCEN. Under rules FinCEN issued in 2025 and finalized in August 2026, US-formed companies and US persons no longer have to file; the requirement now reaches only certain companies formed outside the US that register to do business here.
A for-profit corporation formed under a state benefit corporation statute, whose directors must weigh a stated public benefit and the interests of stakeholders alongside stockholder returns. Delaware's version is the public benefit corporation (PBC). See Founder Guide to Public Benefit Corporations.
A written approval signed by every director, also called a unanimous written consent, that lets the board act without a meeting. Delaware allows it unless the charter or bylaws restrict it, the consent must be unanimous, and it's filed with the board's minutes; most early-stage board decisions are made this way. See Startup Board Consent: What Founders Should Know.
The written record of what a board decided at a meeting, including who attended, what was approved and how directors voted. Many startup decisions are instead made by unanimous written consent, which serves the same record-keeping role without a meeting. See How Do I Take Startup Board Meeting Minutes? and Startup Board Consent: What Founders Should Know.
A person, usually named by an investor, who may attend board meetings and receive board materials but has no vote and isn't a director. Observer rights are created by contract, usually in a side letter or the investors' rights agreement, which should require confidentiality and let the board exclude the observer to protect privileged discussions. See How Do I Build an Early-Stage Startup Board?.
The group elected by stockholders to oversee the company, approve major decisions and appoint the officers. At formation the board is usually the founders, and after a priced round investors often hold one or more seats. See What Does My Startup's Board of Directors Need to Approve? and How Do I Build an Early-Stage Startup Board?.
A short-term raise, usually on convertible notes or SAFEs, that funds a company until its next priced round or another event such as an acquisition. Existing investors often lead it. See Bridge Rounds: How to Structure a Bridge Financing Between Rounds.
The standard form of anti-dilution in venture deals. If the company sells stock at a lower price, the investors' conversion price drops by a formula that weighs how much new stock was sold, and at what price, against all outstanding shares, options and convertible securities, so a small down round produces a small adjustment. See Anti-dilution: What It Is and How It Works.
How much cash a company spends each month beyond what it brings in. Burn determines runway, the months of cash left, which drives when a company must raise and how much leverage it has in the next round. See How Do I Update Investors in My Startup?.
Delaware's presumption that directors made a decision on an informed basis, in good faith and in the honest belief that it served the company. Courts won't second-guess decisions it protects, but directors can lose it when they have a conflict of interest or act without adequate information. See Fiduciary Duties of Startup Founders: Care, Loyalty and Delaware's 2025 Changes.
The purchase of an entire company or a controlling stake in it, or of one holder's stake, such as a departing co-founder's shares. When a founder leaves, the company typically buys back unvested shares at the price paid, typically $0.00001 per share for founder stock, and any purchase of vested shares is a separate negotiation. See Unvested Shares: What They Are and How They Work.
A corporation's internal rulebook, covering how directors are elected, how board and stockholder meetings work, what the officers do and how directors and officers are indemnified. The board adopts them at formation, and they rank below the certificate of incorporation and Delaware law. See Startup Bylaws: What They Are and How They Work.
Profit from selling an asset, such as stock, for more than its tax basis. How a gain is taxed depends on how long the asset was held and on rules such as QSBS, so talk to a tax advisor before a sale.
A capitalization table, the record of who owns what in a company: every class of stock, options, warrants, SAFEs and notes, and how they convert. Investors check it closely in due diligence, and errors in it are among the most expensive startup legal problems to fix. See What Is a Cap Table? A Guide for Startup Founders.
Exceptions written into a contract provision. In startup deals they show up in anti-dilution terms (issuances such as option grants that don't trigger an adjustment), in protective provisions, and in management carve-out plans that set aside part of an acquisition price for the team when liquidation preferences would otherwise leave them little. See Anti-dilution: What It Is and How It Works.
A corporation taxed separately from its owners under Subchapter C of the tax code. It's the standard form for venture-backed startups because funds, preferred stock, option plans and QSBS all assume one, which is why founders who plan to raise venture money form a Delaware C corp. See Why Do VCs Require a Delaware C Corp? What Startup Founders Should Know and C Corp vs LLC: What Startup Founders Should Know.
A certificate from the Delaware Division of Corporations confirming that the company legally exists and is current on its annual report and franchise tax. Investors, buyers, banks and other states ask for a recent one at closings and registrations, and a company that falls behind on its filings can't get one. See What Does My Delaware C Corp Have to File Every Year? An Annual Compliance Calendar.
The document filed with the Delaware Secretary of State that creates the corporation and sets its name, registered agent, authorized shares, par value and the rights of each class of stock. It's often called the charter, and it's amended and restated in a priced round to create the preferred stock. See Certificate of Incorporation: What It Is and How It Works.
A defined event, usually a merger, a sale of most of the company's stock or a sale of substantially all its assets, that triggers rights in other documents. Acceleration of vesting, liquidation preferences, SAFE and note payouts, and consent or termination rights in customer, vendor and loan agreements often turn on it, so check how each document defines it before you agree to a sale. See Startup Acquisitions: The 3 Types of Deals and How a Sale Works.
The officer responsible for a company's finances, including budgeting, accounting, cash management and financial reporting. Early startups usually rely on the CEO plus an outside accountant or fractional CFO until the finance work justifies a full-time hire.
A period at the start of a vesting schedule during which nothing vests, followed by a block that vests all at once. The standard is a one-year cliff on four-year vesting: someone who leaves before one year gets nothing, and 25% vests on the first anniversary. See Vesting Schedule: What It Means for Startup Founders.
Rights that arise from use rather than registration. A business that uses a name in commerce gets some trademark protection in the area where it operates even without filing, but federal registration gives far stronger nationwide rights. See How Do Trademarks Work? What Startup Founders Should Know.
The basic class of ownership in a corporation, held by founders, employees and advisors. It's paid after preferred stock when the company is sold or wound down. See Preferred Stock vs Common Stock: What Startup Founders Should Know.
The agreement in which an employee, contractor or founder promises to keep the company's confidential information secret and assigns to the company the inventions and IP they create in their work. Founders sign them too, because investors expect everyone who built the product to have assigned their IP. See CIIAA: What It Is and How It Works for Startups.
A situation in which a director, officer or controlling stockholder has a personal stake in a decision they make for the company, such as a contract with a business they own. Delaware law, as amended in 2025, gives these transactions protection when they're fully disclosed and approved by disinterested directors or stockholders. See Fiduciary Duties of Startup Founders: Care, Loyalty and Delaware's 2025 Changes.
A company that builds a hardware startup's product to its specifications. The manufacturing agreement should confirm that the startup owns its designs and tooling, protect its confidential information, and set quality, pricing and liability terms. See How Do I Draft a Strong Contract for My Startup? The 10 Clauses That Matter.
Another name for the valuation cap on a SAFE or convertible note, the maximum valuation at which the instrument converts. See Valuation Cap: What It Is and How to Set One on a SAFE.
A short-term loan from investors that converts into equity in a later priced round, usually at a discount or subject to a valuation cap. Because it's debt, it accrues interest, typically about 6% to 8%, and has a maturity date, typically 18 to 24 months after issuance. See Convertible Notes: What They Are and How They Work and Founder Guide to Convertible Notes.
The legal right in original creative works such as code, text, designs and video, which arises automatically when the work is created. Registration with the US Copyright Office is required before suing over a US work, and registering early makes statutory damages and attorney's fees available. See Should My Startup Register a Copyright? What Founders Should Know.
The legal separation between a corporation and its owners that keeps the owners' personal assets out of reach of the company's creditors. Courts can pierce it when owners ignore corporate formalities, mix personal and company money, or use the company to dodge its debts. See Am I Personally Liable for My Startup's Debts? Veil Piercing, Insolvency and Hibernation.
Also called a tag-along right, it lets investors sell alongside a founder or other key holder who sells shares to a third party, on the same terms and in proportion to their holdings. It usually sits with the right of first refusal in one agreement signed in a priced round. See Right of First Refusal (ROFR): What It Means for Startups.
A promise in a contract to do or not do something, such as a borrower's promise to keep insurance or a company's promise to send investors financial statements. Breaching one can put the company in default or give the other side other remedies. See How Do I Draft a Strong Contract for My Startup? The 10 Clauses That Matter.
A secure online folder where a company shares its legal, financial and corporate documents with investors or buyers during due diligence. Companies that keep their records organized from day one can open one in days instead of weeks. See Startup Data Room: What Investors Expect Before They Invest, Startup Due Diligence: What Founders Should Know and How to Prepare and How Do I Keep My Startup Legal Documents Organized?.
The report every Delaware corporation files by March 1 each year, listing its directors, an officer, its address and the share and asset figures used to calculate franchise tax. The filing fee is $50 plus the tax, a late filing costs a $200 penalty, and Delaware won't issue a certificate of good standing until the report is filed and the tax is paid. See Delaware Franchise Tax: How to Save $80,000+ (Legally).
The annual tax Delaware charges corporations formed there, due with the annual report by March 1. Startups that calculate it under the assumed par value capital method, which uses gross assets and issued shares, usually owe the $400 minimum instead of the much larger bill the default authorized share method produces. Delaware LLCs pay a flat $400 a year instead, due June 1. See Delaware Franchise Tax: How to Save $80,000+ (Legally).
The Delaware statute, Title 8, Chapter 1 of the Delaware Code, that governs how Delaware corporations are formed, run, financed, merged and dissolved. Delaware amends it most years, and its predictability, together with the Court of Chancery's body of case law, is a main reason investors expect a Delaware C corp. See Why Do VCs Require a Delaware C Corp? What Startup Founders Should Know.
The drop in an existing holder's ownership percentage when a company issues new shares. Each financing, option pool increase and SAFE conversion dilutes existing stockholders, though a higher valuation can make the smaller stake worth more. See Equity Dilution: How It Works In Startups.
A way to go public in which a company lists its existing shares on a stock exchange without an underwritten offering, letting current holders sell directly to the market. The major exchanges now also allow a version in which the company sells new shares at the opening. It's rare for all but well-known, late-stage companies.
Insurance that covers directors and officers for claims arising from their service, such as suits by stockholders or creditors, and reimburses the company when it indemnifies them. Priced-round investors usually require it as a closing condition or soon after, and outside directors expect it before they join. See What Should Founders Know About Startup Insurance and Accounting?.
The document attached to a stock purchase or acquisition agreement that lists exceptions to the company's representations and warranties, such as pending disputes, liens or contracts that need consent. Something properly disclosed there generally can't be the basis of a later breach claim, so a thorough schedule protects the company. See Startup Due Diligence: What Founders Should Know and How to Prepare.
A SAFE or convertible note term that lets the investor convert at a lower price than new investors pay in the priced round, often 20% lower. When an instrument has both a cap and a discount, the investor gets whichever produces the lower price. See SAFE (Simple Agreement for Future Equity): What It Is and How It Works.
The formal process of ending a corporation's legal existence. In Delaware it takes a board resolution, approval by a majority of the outstanding voting stock plus any separate vote the preferred requires, payment of franchise taxes and a filed certificate of dissolution, and creditors must be paid or provided for before stockholders receive anything. See How Do I Shut Down My Startup? Steps to Dissolve a Delaware Corporation Without Burning Bridges.
A payout to investors in property, such as shares, instead of cash. Venture funds use it to hand their limited partners shares of a portfolio company after it goes public, instead of selling the shares and distributing the proceeds.
Payments a company makes to its stockholders out of its profits or surplus, declared by the board. Startups almost never pay them, and venture preferred stock usually carries non-cumulative dividends paid only if the board declares them, while cumulative dividends, which accrue each year and are paid ahead of the common in a sale, are uncommon at seed and Series A and worth striking. See Founder Guide to Series A.
Accelerated vesting that requires two events, typically a sale of the company and the holder's termination without cause, or resignation for good reason, within a set period after the sale. It's the market norm because the buyer keeps the team's incentive to stay while the holder is protected if they're pushed out. See Single Trigger vs Double Trigger Acceleration.
A financing at a lower price per share than the company's previous round. It can trigger anti-dilution adjustments, hurt morale and require careful board process, because existing investors often lead it. See What Is a Down Round In Startup Funding?.
An agreement under which stockholders must vote for, and join, a sale of the company that the required holders approve. Westaway's recommended trigger is approval by the board, a majority of the preferred and a majority of the common. See Drag Along Rights: What They Are and How They Work.
The investigation an investor or buyer runs on a company before closing, covering corporate records, the cap table, IP assignments, contracts, employment and compliance. Gaps found here are what delay closings and lower prices. See Startup Due Diligence: What Founders Should Know and How to Prepare.
A representation in financing and acquisition documents that the company was properly formed and still validly exists under the laws of its state. It's usually backed by a certificate of good standing from the state.
The duty of directors and officers to make decisions on an informed basis, after reasonably considering the available information. A Delaware charter can eliminate directors' personal liability for money damages for care breaches, and since 2022 it can do the same for officers in claims brought directly by stockholders. See Fiduciary Duties of Startup Founders: Care, Loyalty and Delaware's 2025 Changes.
The duty of directors and officers to act in the interests of the company and its stockholders rather than their own, which bars self-dealing and taking company opportunities for themselves. Unlike care, Delaware doesn't let a company eliminate liability for loyalty breaches. See Fiduciary Duties of Startup Founders: Care, Loyalty and Delaware's 2025 Changes.
An option feature that lets the holder exercise before the option vests, receiving restricted stock that stays subject to the vesting schedule and the company's repurchase right. Paired with an 83(b) election filed within 30 days, it changes when tax is measured and when holding periods start, so the holder should talk to a tax advisor first. See Early Exercise Stock Options: What Startup Founders and Employees Should Know.
Part of an acquisition price paid only if the business hits defined milestones, such as revenue targets, after closing. Earnouts bridge valuation gaps but often lead to disputes, so the metrics, the buyer's operating obligations and the accounting need precise drafting. See How Does an Earnout Work, and How Do I Negotiate One?.
The federal tax ID number the IRS assigns a business. A startup needs one to open a bank account, run payroll and file tax returns, and it's free from the IRS. See How Do I Get an EIN for My Startup?.
The agreement between a client and a law firm that names who the client is, describes the work and sets out how fees are charged. Once a startup is formed, the company is the client, not the founders, so read the letter to see whom the lawyer represents. See Why Your Startup's Lawyer Is Not Your Lawyer (and When You Need Your Own) and How Do I Choose a Startup Lawyer? Questions to Ask Before You Hire.
Ownership in a company, held as stock or as rights to acquire stock, such as options, warrants and SAFEs. See Startup Equity Compensation: Everything Founders Need to Know.
The plan, adopted by the board and approved by the stockholders, that lets a company grant options, restricted stock and RSUs from its option pool and sets the rules for those grants. Stockholders must approve it within 12 months of the board's adoption for options under it to qualify as ISOs. See Employee Stock Option Plan (Equity Incentive Plan): How Startups Set One Up.
Part of an acquisition price, commonly around 10%, held back by a neutral agent for 12 to 18 months to cover the buyer's claims if the seller's representations turn out to be wrong. It's also called a holdback when the buyer keeps the money itself. See Escrow, Holdbacks and Indemnification: How Much of the Purchase Price Do I Actually Get?.
The EU member states plus Iceland, Liechtenstein and Norway, which share the EU's single market rules. The GDPR applies across the EEA, so a US startup that offers products to people there, or monitors their behavior, may have to comply. See GDPR Basics: What Startup Founders Should Know.
A commitment, usually in a term sheet or letter of intent, that the company won't negotiate with other investors or buyers for a set period, often 30 to 60 days. It's one of the few binding terms in an otherwise nonbinding term sheet. See Startup Acquisitions: The 3 Types of Deals and How a Sale Works.
The part of a board meeting held with only the directors, or only the non-management directors, in the room. It gives directors a chance to discuss performance, compensation or concerns candidly. See How Do I Run an Effective Startup Board Meeting?.
An employee who isn't entitled to overtime because they're paid a salary at or above the legal threshold and their job meets an executive, administrative, professional or other duties test. The federal threshold is $684 a week, and states such as California and New York set higher ones. See Exempt vs Non-Exempt Employees: What Startup Founders Should Know.
The fixed price per share an option holder pays to buy the underlying stock, also called the strike price. It must be at least the stock's fair market value on the grant date, which is why startups get a 409A valuation before granting options. See Stock Options: What They Mean for Your Startup.
The period after someone leaves the company during which they can still exercise their vested options, often 90 days. Some companies extend it to years, but an ISO exercised more than three months after employment ends is taxed as an NSO. See What Happens to Startup Stock and Options When You Leave the Company?.
The price at which property would change hands between a willing buyer and a willing seller who both know the relevant facts and neither has to act. For startup common stock it's usually set by a 409A valuation, sits below the price investors pay for preferred stock, and is the floor for option exercise prices. See How to Value Startup Stock: Fair Market Value vs. Venture Value.
The federal agency that enforces consumer protection and antitrust law. For startups, it matters most for privacy and data security promises, advertising and endorsements, subscription practices and merger review. Its 2024 rule banning most non-competes was struck down and the FTC abandoned it in 2025, though it still challenges specific non-competes case by case.
The legal duties directors and officers owe the company and its stockholders, chiefly the duty of care and the duty of loyalty. See Fiduciary Duties of Startup Founders: Care, Loyalty and Delaware's 2025 Changes.
A person paid to introduce a company to investors. A fee tied to the money raised is a hallmark of broker activity, so a finder paid that way generally needs to be a registered broker-dealer, and using an unregistered one can give investors grounds to ask for their money back and will come up in diligence. See How Do I Find the Right Angel Investors for My Startup?.
A corporation doing business in a state other than the one where it was formed, such as a Delaware corporation with its office in New York. It must register, or foreign qualify, in that state. See Do I Need to Foreign Qualify My Delaware Startup in My Home State?.
Registering an out-of-state company to do business in a state where it has an office, employees or significant operations. A Delaware startup based in California must qualify there, pay California's fees and file its annual statements, on top of its Delaware obligations. See Do I Need to Foreign Qualify My Delaware Startup in My Home State?.
A notice filed with the SEC reporting a private securities offering made under Regulation D. Depending on the type of fundraise, you may need to file a Form D and state blue sky filings. See What Comes After Fundraising? A Post-Closing Checklist for Startups.
Common stock a founder buys from the company at formation, usually at par value, under a restricted stock purchase agreement with vesting and a company repurchase right. Until it's actually issued, with a board consent and a signed purchase agreement, the founder isn't a stockholder, and the 30-day 83(b) deadline runs from the date the shares are issued. See How Do I Issue Founder Stock After Incorporating?.
The harshest form of anti-dilution: if the company sells any stock at a lower price, the investors' conversion price drops all the way to the new price, no matter how few shares are sold. It's rare in today's venture deals and worth pushing back on. See Anti-dilution: What It Is and How It Works.
At Westaway, fully diluted means all issued and outstanding shares, plus the full option pool (granted and ungranted), plus warrants. It never counts SAFEs or convertible notes, whose share counts aren't fixed until they convert, and an investor's term sheet may define it differently, so read the definition. See Authorized, Outstanding and Fully Diluted Shares: How Startups Count Shares.
The EU's data protection law, which also applies across the EEA and reaches companies outside it that offer goods or services to people there or monitor their behavior. It requires a legal basis for processing personal data, gives individuals rights over their data and allows fines of up to 20 million euros or 4% of worldwide annual turnover, whichever is higher. See GDPR Basics: What Startup Founders Should Know.
Offering securities through channels that reach people the company has no existing relationship with, such as public social media posts about a raise, public pitch events that don't meet Rule 148's demo day conditions, press or mass emails. Rule 506(b), the exemption most startup rounds use, prohibits it, while Rule 506(c) allows it if every investor is accredited and the company takes reasonable steps to verify that. See Can I Talk About My Fundraise on LinkedIn or at Demo Day? General Solicitation Explained.
Language in an executive's offer letter or equity terms that lets them resign and still be treated as if they were fired without cause, typically after a material pay cut, demotion or forced relocation. It's central to double-trigger acceleration. See Single Trigger vs Double Trigger Acceleration.
A domain ending not tied to a country, such as .com, .org or newer endings like .app. Endings popular with startups, such as .ai and .io, are country code domains, so their rules are set by that country's registry.
Part of an acquisition price that the buyer keeps at closing, instead of placing it with an escrow agent, to cover indemnification claims or price adjustments. It's worse for sellers than a true escrow, because they rely on the buyer's credit and the buyer can set off disputed claims against it directly. See Escrow, Holdbacks and Indemnification: How Much of the Purchase Price Do I Actually Get?.
The nonprofit that coordinates the internet's domain name system, including which top-level domains exist and which registrars can sell names. Founders mostly meet it through its UDRP process, which can transfer a domain that someone registered in bad faith using your trademark. See How Do Trademarks Work? What Startup Founders Should Know.
Stock that can't easily be sold for cash, which describes nearly all private startup stock. Transfer restrictions, rights of first refusal and the lack of a market mean holders usually wait for an acquisition or IPO. See How to Value Startup Stock: Fair Market Value vs. Venture Value.
A stock option that meets tax code requirements for special treatment: the holder owes no regular income tax at exercise, though the spread can trigger alternative minimum tax, and gain can be taxed as capital gain if holding periods are met. Only employees can receive them, and Westaway's default is ISOs for US employees and NSOs for everyone else. See NSO vs ISO: Key Differences for Startups.
A written plan for how a company detects, contains and recovers from a security incident or data breach, including who makes which decisions and how to meet notification deadlines. Enterprise customers increasingly ask to see one in security reviews. See Data Breach Response for Startups: What Founders Should Know.
A promise by one party to cover another's losses from specified claims, such as a buyer's losses from a seller's inaccurate representation or a director's legal costs from serving on the board. Startups sign indemnification agreements with their directors and negotiate indemnities in customer and vendor contracts. See How Do I Draft a Strong Contract for My Startup? The 10 Clauses That Matter.
A worker who runs their own business and controls how the work gets done, as opposed to an employee. Treating an employee as a contractor creates exposure for back pay, taxes and penalties, and states such as California apply strict tests. See Independent Contractor vs Employee: A Startup Guide.
A director who isn't an employee, a founder or a representative of an investor, often chosen jointly by the common and preferred holders to fill a neutral seat. A five-person Series A board commonly has two common seats, two preferred seats and one independent director. See How Do I Build an Early-Stage Startup Board?.
Investors' contractual rights to receive financial statements, budgets and other company information, usually limited to major investors above an investment threshold. See How Do I Update Investors in My Startup?.
Using someone else's patent, copyright or trademark without permission in a way the law reserves to the owner. See Copyright Infringement: What Startup Founders Should Know and How Do I Avoid Trademark Infringement When Choosing a Name for My Startup?.
Creations of the mind that the law protects, chiefly patents, copyrights, trademarks and trade secrets. A startup's first priority is making sure the company, not individual founders or contractors, owns it, and the rules for AI-generated code and inventions are a new area likely to shift. See Startup Intellectual Property: Everything Founders Should Know.
The cost of borrowing, stated as a yearly percentage. On convertible notes, interest usually accrues at about 6% to 8% and converts into equity with the principal instead of being paid in cash. See Convertible Notes: What They Are and How They Work.
A proceeding at the US Patent and Trademark Office in which anyone can challenge an issued patent as invalid based on earlier patents and publications. It has been a faster, cheaper alternative to fighting validity in court, though the USPTO has made it harder to get these challenges heard since 2025. See Startup Patents: Are They Worth It?.
An agreement in which a person assigns to the company the inventions they create in their work. Startups usually combine it with confidentiality terms in a single CIIAA. See CIIAA: What It Is and How It Works for Startups.
One of the NVCA model financing documents, signed by the company and the preferred investors in a priced round. It gives investors registration rights, information rights and pro rata rights, and adds company promises such as obtaining and maintaining D&O insurance and having employees and consultants with access to confidential information sign confidentiality and invention assignment agreements. See Series Seed vs. NVCA Documents: A Guide for Startup Founders.
A company's first sale of stock to the public, registered with the SEC and followed by a listing on a stock exchange. It turns private stock into freely tradable shares, though insiders usually agree to a lock-up, commonly 180 days, before they can sell. See Preparing for an IPO: What Founders Should Get Right Early.
A person who contributed to conceiving at least one claim of a patented invention. Each joint inventor co-owns the patent unless they assign their rights, so a startup needs assignments from everyone who contributed, and how AI-assisted inventions are treated is a new area likely to shift. See Startup Patents: Are They Worth It?.
A convertible instrument published by 500 Startups (now 500 Global), in debt and equity versions, as an alternative to the SAFE. It's rarely used today, and the post-money SAFE is the market default. See SAFE vs. Convertible Note vs. Priced Round: Which Should Your Startup Use?.
The investor who sets the price and terms of a round, negotiates the term sheet and usually writes the largest check, with other investors following on the same terms. In a priced round the lead often takes a board seat. See How Do I Run a Fundraising Process?.
The usually nonbinding document that sets out the main terms of an acquisition, such as price, structure, escrow and key employee terms, before the definitive agreement is drafted. Its binding parts are usually exclusivity and confidentiality, but the economics agreed here are hard to reopen later. See How Do I Read an Acquisition LOI? The Economics That Matter and Startup Acquisitions: The 3 Types of Deals and How a Sale Works.
Giving someone permission to use intellectual property, such as software, a patent or a brand, on defined terms without transferring ownership. See Startup Licensing Agreement: How to Monetize Your IP.
A flexible business entity that shields its owners from company debts and is taxed as a pass-through by default. It suits businesses that won't raise venture money, but most venture funds can't or won't invest in one. See C Corp vs LLC: What Startup Founders Should Know and S Corp vs LLC: Which Is Best for Your Startup?.
An entity with at least one general partner that manages it and limited partners who invest passively. Venture funds are usually limited partnerships, with the fund manager as general partner and the fund's investors, also called LPs, as limited partners. See Venture Capital 101: Is It Right for Me?.
The right of preferred stockholders to be paid back first, ahead of common, when the company is sold or wound down. The market standard is a 1x non-participating preference: investors take their money back or convert to common, whichever pays more. See Liquidation Preference: What It Is and How It Works.
A period, commonly 180 days after an IPO, during which insiders and other pre-IPO holders agree not to sell their shares. Equity plans and financing documents usually commit holders to sign one in advance, sometimes called a market standoff provision, and a public buyer paying in stock may ask founders for a similar lock-up. See Preparing for an IPO: What Founders Should Get Right Early and Getting Paid in Buyer Stock: What to Check Before You Accept It.
An investor whose holdings meet a threshold set in the financing documents, which entitles it to rights other holders don't get, typically information and pro rata rights. Set the threshold high enough that only investors with meaningful checks qualify. See Pro Rata Rights: Everything Startup Founders Need to Know.
A plan that sets aside a percentage of acquisition proceeds, commonly 5% to 10%, for a named group of employees, paid ahead of the liquidation preferences. Investors agree to fund one when the sale price is below the preference stack, so the team still has a reason to close the deal. See What If the Sale Price Is Less Than the Preference Stack? Carve-Outs, Retention and the Board's Duties.
A short side letter that gives a venture fund the right to consult with and advise management, inspect records and receive information. Certain funds need one to qualify for an ERISA exemption, so they don't have to treat their assets as pension plan assets, and it's usually routine to sign. See Management Rights Letter: What It Is and Why VCs Ask for One.
A defined term, also called a material adverse effect, for an event that significantly harms a business. In an acquisition, the absence of one is usually a closing condition, and Delaware courts set a high bar before letting a buyer walk away on that basis; in a venture loan, a MAC default lets the lender declare a default if it decides your business has deteriorated, so ask to narrow it or add a cure period. See Venture Debt: When Does It Make Sense and What's in the Term Sheet?.
The date a convertible note's principal and interest come due if it hasn't converted, typically 18 to 24 months after issuance. Noteholders usually agree to extend it rather than demand repayment, but sign the extension before the date passes. See Convertible Notes: What They Are and How They Work.
A transaction in which two companies combine under state law and one survives. Most startup acquisitions use a reverse triangular merger, in which a subsidiary of the buyer merges into the startup, so the startup survives as the buyer's subsidiary and keeps its contracts, though change of control clauses can still apply. In Delaware it needs board approval and the vote of a majority of the outstanding voting stock, plus any class vote the charter requires. See Startup Acquisitions: The 3 Types of Deals and How a Sale Works.
A clause that lets an investor adopt better terms the company later gives other investors in the same kind of instrument, typically on SAFEs or notes issued before a priced round. Y Combinator publishes an uncapped MFN version of its SAFE for this. See SAFE (Simple Agreement for Future Equity): What It Is and How It Works.
A round that closes in stages, so investors can sign and fund at different times on the same terms. A SAFE round closes investor by investor, and priced rounds usually allow additional closings for a set period after the first, at the same price and up to a cap on the extra shares. See Can You Have Multiple Closings in a Startup Funding Round?.
The trade group for the US venture industry, which publishes the model documents most priced rounds use: the term sheet, charter, stock purchase agreement, investors' rights agreement, voting agreement and ROFR and co-sale agreement. See Series Seed vs. NVCA Documents: A Guide for Startup Founders.
An agreement in which one or both parties promise to keep shared information confidential and use it only for a stated purpose. It's useful with potential partners, vendors and acquirers, but most investors won't sign one. See NDA: What It Means for Startups.
A tax loss that a company can carry forward to offset future taxable income. Its use can be limited after a large ownership change, which financings and acquisitions can trigger, so talk to a tax advisor before counting on it.
Anyone who doesn't meet the SEC's accredited investor tests. A startup can sell to up to 35 financially sophisticated non-accredited investors in a Rule 506(b) offering, but including even one triggers disclosure requirements, including financial statements, that usually cost more than the check is worth. See Can My Startup Raise Money From Non-Accredited Investors?.
A promise not to work for a competitor or start a competing business for a period after leaving. California and a growing number of states void most of them for employees, and Westaway doesn't use them for employees: a narrow non-solicit, a CIIAA and trade secret law protect the company instead. See Non-Compete Clauses: What Startup Founders Should Know.
Preferred stock whose holders, in a sale, get the greater of their liquidation preference or what they would receive by converting to common, never both. A 1x non-participating preference is the market standard in seed and venture deals. See Liquidation Preference: What It Is and How It Works.
A stock option that doesn't meet the requirements for ISO treatment. Startups grant NSOs to advisors, consultants, directors and anyone outside the US, and the spread between the exercise price and fair market value at exercise is taxed as ordinary income. See NSO vs ISO: Key Differences for Startups.
A promise not to poach the company's employees or customers for a period after leaving, usually 12 months. Courts enforce narrow non-solicits more readily than non-competes, but California voids most of them and other states vary, so check the rules where your people work. See Non-Solicitation Clauses: What They Mean for Your Startup.
California requires employers to give an employee written notice right away when they're fired, laid off or placed on leave, along with a state pamphlet on unemployment benefits. Other states have their own separation notice rules. See What Do I Need to Do When an Employee is Fired?.
A short letter that offers a job and states the key terms: title, salary, start date, at-will status, equity in exact share numbers, and conditions such as signing a CIIAA. Westaway's offer letters leave out probation periods, which can muddy at-will employment. See Startup Employment Contract Guide.
A person the board appoints to run the company day to day, such as the CEO, president, CFO or secretary. Officers sign documents on the company's behalf and owe fiduciary duties like directors. See Fiduciary Duties of Startup Founders: Care, Loyalty and Delaware's 2025 Changes.
The license under which open source software is released, setting what users may do with the code and what they must do in return. Permissive licenses such as MIT and Apache 2.0 mostly require keeping notices, while copyleft licenses such as the GPL and AGPL can require you to share your own source code in some uses, which investors and buyers check in diligence. See What Are the Most Common Open Source Licenses for Startups?.
The award of a stock option to an employee, advisor or other service provider, approved by the board and documented in a grant agreement that sets the number of shares, the exercise price, the vesting schedule and the post-termination exercise period. See Stock Options: What They Mean for Your Startup.
Shares reserved under the company's equity incentive plan for future grants to employees, advisors and consultants. Westaway's default adopts a 1,000,000-share pool at incorporation, and before a priced round the pool is commonly sized at 10%, 15% or 20% of the company depending on the hiring plan. See Employee Option Pool: How Big Should It Be, and How Do I Set It Up?.
The practice of requiring a startup to create or enlarge its option pool before a priced round, so the new pool shares dilute only the existing holders and lower the founders' effective pre-money valuation. Negotiate the pool size against a real hiring plan. See Option Pool Shuffle: How the Option Pool Lowers Your Valuation and How to Negotiate It.
The new board's first action, usually taken by written consent rather than at a meeting, which adopts the bylaws, appoints officers, approves founder stock purchases, adopts the equity plan and authorizes bank accounts. See Action of Incorporator: What It Means for Startups and Delaware C Corp Incorporation Documents: The Startup Checklist.
Shares a company has actually issued that holders still own. They don't include authorized but unissued shares, unexercised options or unconverted SAFEs. See Authorized, Outstanding and Fully Diluted Shares: How Startups Count Shares.
Latin for "on equal footing." Series of preferred stock that rank pari passu share sale proceeds in proportion to their preferences, so if there isn't enough to pay them all, each series receives the same percentage of its preference rather than one series being paid in full first. See Liquidation Preference: What It Is and How It Works.
Preferred stock whose holders, in a sale, take their liquidation preference and then also share in what's left alongside the common as if they had converted, sometimes up to a cap. It shifts proceeds from founders and employees to investors and is uncommon in seed and Series A deals, so push back if a term sheet includes it. See Liquidation Preference: What It Is and How It Works.
The nominal minimum price per share set in the certificate of incorporation, which has nothing to do with what the stock is worth. Westaway sets initial par value at $0.00001, which keeps founder purchase prices and Delaware franchise tax low. See Par Value for Startup Stock: What It Is and What to Set It At.
Tax treatment in which the business itself pays no income tax and its profits and losses flow through to the owners' personal returns, as with LLCs and S corporations by default. See S Corp vs LLC: Which Is Best for Your Startup?.
A government grant that lets the owner stop others from making, using or selling an invention, generally for 20 years from filing, in exchange for publicly disclosing it. The US awards patents to the first inventor to file, and a public disclosure gives you one year to file in the US while many other countries give no grace period. See Startup Patents: Are They Worth It?.
A financing term that requires existing preferred investors to buy their share of a new round or lose some of their rights, usually by having their preferred converted to common. It's rare in healthy rounds and comes up mostly in down rounds and bridges. See What Is a Down Round In Startup Funding?.
A promise by an individual, usually a founder, to pay a company's debt or perform its obligation, such as an office lease, credit card or loan, if the company doesn't. It removes the corporate form's protection for that obligation, so read leases and credit applications for one and avoid signing where you can. See Am I Personally Liable for My Startup's Debts? Veil Piercing, Insolvency and Hibernation.
The slide presentation a founder uses to pitch investors. Statements in it count as statements made in a securities offering, so keep facts accurate and label projections, and don't expect investors to sign an NDA to see it. See NDA: What It Means for Startups.
The version of the SAFE that Y Combinator released in 2018, in which the valuation cap is measured after all the SAFE money, so each investor's ownership at conversion is fixed and known in advance. It's the default instrument for pre-seed and most seed rounds. See SAFE (Simple Agreement for Future Equity): What It Is and How It Works and Founder Guide to SAFEs.
The value of a company immediately after a financing, equal to the pre-money valuation plus the new money invested. An investor's ownership percentage equals its investment divided by the post-money valuation. See Valuation Cap: What It Is and How to Set One on a SAFE.
A class of stock sold to investors in priced rounds that carries rights common stock doesn't, such as a liquidation preference, anti-dilution protection, protective provisions and often board seats. It converts into common, automatically at an IPO or when the holders choose. See Preferred Stock vs Common Stock: What Startup Founders Should Know.
The original SAFE that Y Combinator released in 2013, in which the valuation cap is measured before the SAFE money, so each additional SAFE dilutes the earlier SAFE holders along with the founders and no one knows their ownership until the priced round. YC replaced it with the post-money SAFE in 2018, which is the form to use today. See SAFE (Simple Agreement for Future Equity): What It Is and How It Works.
The value placed on a company immediately before new money comes in. Investors often require an option pool increase to come out of the pre-money valuation, which lowers the effective price founders receive. See Option Pool Shuffle: How the Option Pool Lowers Your Valuation and How to Negotiate It.
A public statement of what personal data a company collects, how it uses and shares it, and what choices users have. California and other states require one for most websites and apps that collect personal information, and regulators can act against a company whose practices don't match what its policy says. See Does My Startup Need a Privacy Policy? What It Must Include.
An LLC equity interest that shares only in the company's growth in value after the grant date, used to give equity to employees and other service providers of an LLC taxed as a partnership. Corporations can't grant them, and the tax treatment depends on how the grant is structured, so talk to a tax advisor. See Alternative Equity Compensation: Guide for Startups.
An investor's right to buy enough shares in future rounds to keep its ownership percentage. It's usually given to major investors in a priced round, and sometimes to SAFE investors by side letter. See Pro Rata Rights: Everything Startup Founders Need to Know.
Veto rights for preferred stockholders over specific company actions, such as selling the company, creating senior stock, changing the charter or taking on significant debt, written into the certificate of incorporation. See Protective Provisions: What They Are and What Founders Should Negotiate.
Delaware's form of benefit corporation: a for-profit corporation whose charter names a specific public benefit and whose directors must balance stockholders' financial interests, the interests of those materially affected by the company, and that benefit. It must report on its benefit to stockholders at least every two years. See Founder Guide to Public Benefit Corporations.
A company whose securities are registered with the SEC and trade publicly, which brings periodic reporting, governance rules and liability that private companies don't face. See Preparing for an IPO: What Founders Should Get Right Early.
A sale of securities to the general public that is registered with the SEC, such as an IPO. Startups instead raise money in private offerings under exemptions such as Regulation D. See Can My Startup Raise Money From Non-Accredited Investors?.
A change to an acquisition price after closing, usually for differences between the target's actual working capital, cash or debt at closing and the estimates used to set the price. Sellers should understand the formula, because adjustments come out of their proceeds, often from an escrow. See How Do I Read an Acquisition LOI? The Economics That Matter and Escrow, Holdbacks and Indemnification: How Much of the Purchase Price Do I Actually Get?.
Stock in a US C corporation that, if a long list of requirements is met, lets the holder exclude some or all of the gain from federal income tax on a sale under Section 1202 of the tax code. For stock issued after July 4, 2025, the company must have $75 million or less in gross assets at issuance, and the exclusion phases in after three, four and five years of holding. Whether your stock qualifies is a question for your tax advisor. See QSBS (Section 1202): What Startup Founders Should Know.
The defined event in a convertible note, usually a priced equity round raising at least a set amount, that automatically converts the notes into the new stock. A smaller round doesn't convert the notes automatically, so set the threshold at a size you can realistically raise. See Convertible Notes: What They Are and How They Work.
The minimum number of directors, or of shares, that must be present for a meeting to act. Under Delaware law a board quorum defaults to a majority of the total number of directors and a stockholder quorum to a majority of the shares entitled to vote, and the charter or bylaws can set a different number but not less than one third. See Startup Bylaws: What They Are and How They Work.
Approving a corporate act after the fact, such as stock issued or SAFEs signed without proper board approval. Under Section 204 of the DGCL, the board adopts resolutions ratifying the defective act, stockholders approve it where the original act needed their vote, and stockholders get notice, after which the act is treated as valid from its original date. See What Does My Startup's Board of Directors Need to Approve?.
A restructuring of a company's capital, such as converting preferred stock to common, a reverse stock split or exchanging existing securities for new ones, usually as part of a down round or rescue financing. It can heavily dilute existing holders, especially the common, so the board's process and approvals matter. See What Is a Down Round In Startup Funding?.
Rights that let preferred investors require the company to buy back their shares after a set number of years, usually at the original price plus any unpaid dividends. They're uncommon at seed and Series A, hard for a startup to honor, and worth declining. See Founder Guide to Series A.
An additional equity grant to an existing employee, usually once much of their first grant has vested or after a promotion, to keep their unvested equity meaningful. It comes from the option pool, needs board approval and, for options, a current 409A valuation, and it starts its own vesting schedule. See Equity Refresh Grants: When and How Should a Startup Give Them?.
The person or company, with a physical address in the state of incorporation, that accepts lawsuits and official state notices on the company's behalf. Every Delaware corporation must have one. See Registered Agent: What It Is and Why It Matters for Your Startup.
Investors' rights to have the company register their shares with the SEC so they can sell them publicly, which matters mostly after an IPO. They include demand rights, piggyback rights to join a registration the company is already doing and later short-form (Form S-3) rights, and they sit in the investors' rights agreement. See Series Seed vs. NVCA Documents: A Guide for Startup Founders.
The SEC exemption that lets a company raise up to $5 million in 12 months from the public, including non-accredited investors within investment limits, through a single SEC-registered funding portal or broker-dealer. It comes with disclosure and annual reporting duties, and many companies use a crowdfunding vehicle so the investors appear as one holder. See Equity Crowdfunding: What Startup Founders Should Know.
The SEC rules that let companies sell securities in private offerings without registering them. Most startup rounds rely on Rule 506(b), which bars general solicitation, and some use Rule 506(c), which allows it if every investor is a verified accredited investor. See Can I Talk About My Fundraise on LinkedIn or at Demo Day? General Solicitation Explained.
Statements of fact a party makes in a contract, such as a company's statements in a stock purchase or acquisition agreement about its capitalization, IP, contracts and liabilities. If one proves untrue, the other side may have a claim, so exceptions belong in the disclosure schedule, and in an acquisition the indemnification terms decide how much a breach can cost the sellers. See Escrow, Holdbacks and Indemnification: How Much of the Purchase Price Do I Actually Get?.
An insurance policy, usually bought by the buyer in an acquisition, that covers losses from breaches of the seller's representations and warranties. With a policy in place, the sellers' indemnity escrow is usually much smaller, because the buyer looks mainly to the insurer after a retention. See Escrow, Holdbacks and Indemnification: How Much of the Purchase Price Do I Actually Get?.
The company's right to buy back a holder's shares, most often the unvested shares of a founder or employee who leaves, usually at the price the holder paid. It must be exercised within the window set in the stock purchase agreement, and its lapse over time is what vesting means for restricted stock. See Unvested Shares: What They Are and How They Work.
The agreement under which a founder or other early holder buys restricted stock, setting the price, the vesting schedule, the company's repurchase right and transfer restrictions. Founders usually pay for their shares at par, sometimes by assigning their pre-formation IP. See Restricted Stock Purchase Agreement (RSPA): What Startup Founders Should Know.
Shares issued up front that are subject to vesting and to the company's right to buy back unvested shares, at the price paid, if the holder leaves. Founders typically buy restricted stock at par with four-year vesting and a one-year cliff, and usually file an 83(b) election after talking to a tax advisor. See Restricted Stock (RSAs) in a Startup: What It Is and How It Works.
A promise to deliver shares in the future once vesting conditions are met, with nothing paid by the holder. Private companies usually make RSUs double-trigger, so they settle only after both time served and a liquidity event such as an acquisition or IPO. See RSAs vs RSUs: What's the Difference in Startup Equity?.
Cash or equity a buyer sets aside in an acquisition to keep key employees after closing, usually paid or vesting over one or more years. Whether it comes out of the purchase price or on top of it changes what stockholders receive, so pin it down in the LOI. See What Happens to My Employees in an Acquisition?.
The usual way founder stock vests: the founder owns all their shares from day one, and the company's right to buy back the unvested portion at the price paid lapses over time. Because the founder already owns the stock, it votes from the start, and the founder can file an 83(b) election within 30 days of the date the shares are issued, after talking to a tax advisor. See Unvested Shares: What They Are and How They Work.
The right of the company, and often its investors, to buy shares a stockholder plans to sell to a third party, on the same terms, before the third party can. Companies get it on employee stock through the equity plan and stock agreements, and investors get a secondary right in the ROFR and co-sale agreement. See Right of First Refusal (ROFR): What It Means for Startups.
The SEC rule that sets when holders can publicly resell restricted securities, such as stock acquired in a private placement, and how affiliates of the issuer can sell. Restricted stock of a company that has been reporting to the SEC for at least 90 days generally must be held six months before resale under the rule, and stock of a non-reporting company one year. See Getting Paid in Buyer Stock: What to Check Before You Accept It.
The Regulation D exemption most startup rounds use. It allows any number of accredited investors and up to 35 financially sophisticated non-accredited investors, but bans general solicitation, so offers should go only to people the company has a relationship with before the offer. See Can My Startup Raise Money From Non-Accredited Investors?.
The Regulation D exemption that lets a company publicly advertise its raise, as long as every purchaser is an accredited investor and the company takes reasonable steps to verify that. Under SEC staff guidance from March 2025, a minimum investment of $200,000 for individuals or $1,000,000 for entities, with written representations, can satisfy the verification requirement. See Can I Talk About My Fundraise on LinkedIn or at Demo Day? General Solicitation Explained.
The SEC exemption that lets private companies issue equity to employees, directors, consultants and advisors without registering it, within a 12-month limit equal to the greatest of $1 million, 15% of total assets or 15% of the outstanding class. Above $10 million in 12 months, the company must give recipients extra disclosure, including financial statements. See Startup Employee Equity: How to Grant It to Early Hires.
An instrument created by Y Combinator that gives an investor the right to receive stock in a future priced round, usually at a price set by a valuation cap or discount. It isn't debt, so it has no interest or maturity date. See SAFE (Simple Agreement for Future Equity): What It Is and How It Works and Founder Guide to SAFEs.
A corporation that elects to pass its income through to its owners for tax purposes. It can have no more than 100 stockholders, generally US individuals, and only one class of stock, so it doesn't work for a venture-backed startup. See S Corp vs C Corp: Which Is Best for Your Startup?.
A sale of existing shares by a stockholder, such as a founder or early employee, to another buyer, as opposed to the company issuing new shares. Secondaries usually need board approval and waivers of the ROFR and co-sale rights, and the price can raise tax and 409A questions. See Can Founders Sell Shares Before an Exit? Secondary Sales Explained.
The state office that accepts formation filings, annual reports and charter amendments and issues certificates of good standing. In Delaware, this is the Division of Corporations. See Delaware Entity Search: How to Look Up a Company or Check Your Startup Name.
The tax code section on golden parachutes, which can impose a 20% excise tax on the recipient and cost the company its deduction when sale-related payments to certain officers, large stockholders and highly paid service providers reach three times their average annual pay or more. A private company can generally avoid it with approval by more than 75% of disinterested stockholders after full disclosure, and it's a question for your tax advisor before you sign. See How Do I Read an Acquisition LOI? The Economics That Matter.
The federal law that regulates trading in securities after they're first sold, created the SEC and sets reporting duties for public companies. Its antifraud rule, Rule 10b-5, also applies to private startup fundraises.
A lender's legal claim on a borrower's property as collateral, which lets the lender take that property if the loan isn't repaid. Venture lenders usually take a security interest in all company assets, sometimes including IP, and record it by filing a UCC-1 financing statement.
The order in which series of preferred stock are paid in a sale. In a senior, or stacked, structure the later series are paid their full preference before earlier series receive anything, while pari passu series share in proportion to their preferences. See Liquidation Preference: What It Is and How It Works.
The agreement a departing employee signs, usually in exchange for severance, that releases the company from claims and confirms their continuing confidentiality obligations. A release is enforceable only if the employee gets something they weren't already owed, and releasing age discrimination claims of employees 40 and older requires at least 21 days to consider (45 in a group layoff) and 7 days to revoke. See Startup Severance: Is It Required, and What's Standard?.
A class of founder stock that works like common stock but can be converted into the preferred stock sold in a later financing, letting a founder sell some shares to investors in that round. It's uncommon today and isn't the same as super-voting founder stock, which venture-track companies should avoid. See Founders Preferred Stock: What It Is and How It Works.
A priced equity round in which investors buy a new series of preferred stock, named in sequence: Series Seed or Series A, then Series B and onward. See Startup Funding Stages: What's the Difference? and Founder Guide to Series A.
A contract under which one party provides services to another, setting scope, fees, deliverables, IP ownership, confidentiality, liability limits and termination rights. See How Do I Negotiate Customer Contracts as a Startup? The Terms Worth Fighting For.
In equity plans and tax rules, anyone who performs services for the company, including employees, directors, consultants and advisors. Plans use the term to define who can receive grants and when someone's service ends. See Employee Stock Option Plan (Equity Incentive Plan): How Startups Set One Up.
A separate agreement between the company and one investor granting rights not in the main deal documents, such as pro rata rights, information rights or a management rights letter. Keep a list of them, because they bind the company in later rounds. See What Comes After Fundraising? A Post-Closing Checklist for Startups.
The risk that an existing investor's decision not to lead or join your next round leads other investors to assume it knows something bad. It's the main concern when a large multi-stage fund writes a small seed check that works as an option on your Series A. See Should I Take a Seed Check From a VC That Wants to Lead My Series A?.
Accelerated vesting that happens on one event, usually a sale of the company. Investors and buyers resist it for employees because it removes the incentive to stay after the deal. See Single Trigger vs Double Trigger Acceleration.
An entity, usually an LLC, formed to pool money from several investors into a single investment, so it appears as one line on the cap table. It saves the company managing many small holders, but review its documents and know who manages it and how it votes its shares. See 6 Types of Investors in Startups.
A restructuring in which the owners of a foreign company exchange their shares for shares of a new Delaware parent, so the foreign company becomes its subsidiary. Founders outside the US do it to raise from US investors, and it can have tax consequences in both countries, so get tax advice in each before you start. See Startup Flip: How a Foreign Company Moves Under a Delaware Parent.
A written approval that lets stockholders act without a meeting. Unless the charter prohibits it, Delaware lets holders with at least the votes needed to approve an action at a meeting approve it by written consent, and the company must promptly notify the stockholders who didn't sign. See What Do Stockholders in My Startup Need to Approve?.
The person or firm appointed in an acquisition to act for all the selling stockholders after closing, handling escrow releases, working capital disputes and indemnification claims. It's paid from an expense fund held back from the price at closing. See Escrow, Holdbacks and Indemnification: How Much of the Purchase Price Do I Actually Get?.
The main agreement in a priced round under which investors buy preferred stock, setting the price, the closing mechanics and conditions, and the company's representations and warranties, with exceptions listed in a disclosure schedule. In the NVCA set it's signed alongside the amended and restated charter, the investors' rights agreement, the voting agreement and the ROFR and co-sale agreement. See Founder Guide to Series A.
An acquisition in which the buyer purchases the company's shares directly from its stockholders, so the company, with its contracts and liabilities, becomes the buyer's subsidiary. Because each holder has to agree to sell, it suits companies with few stockholders, and venture-backed companies usually use a merger instead. See Startup Acquisitions: The 3 Types of Deals and How a Sale Works.
A charter amendment that divides each outstanding share into more shares (a forward split) or combines shares into fewer (a reverse split), without changing anyone's percentage ownership. Since 2023, a Delaware company with only one class of stock outstanding can do a forward split, with a proportional increase in authorized shares, without a stockholder vote unless its charter requires one. See How Do I Increase My Startup's Authorized Shares?.
A right to buy more than an investor's pro rata share in a future round, for example to grow its stake from 5% to 7%. Decline it, because it takes allocation away from the next lead investor. See Pro Rata Rights: Everything Startup Founders Need to Know.
A broad offer to buy shares from many holders at a set price, such as a company buyback or an investor-led liquidity program. Even at a private company, it can fall under SEC tender offer rules that require a minimum offering period and disclosure to holders. See Can Founders Sell Shares Before an Exit? Secondary Sales Explained.
A short, mostly nonbinding summary of a financing's main terms, such as valuation, amount raised, liquidation preference, board seats and protective provisions. The definitive documents follow it closely, so negotiate the economics and control terms at this stage. See Series Seed vs. NVCA Documents: A Guide for Startup Founders and Founder Guide to Series A.
The contract that governs use of a company's website, app or software service, covering what users may do, payment, IP ownership, disclaimers, limits on liability and how disputes are resolved. Copying another company's terms leaves you with promises that don't fit your product, so draft them for your own business. See How to Draft Terms of Service for a Startup: What to Include and Can't My Startup Just Copy Someone Else's Terms of Service and Privacy Policy?.
A word, logo or other identifier that tells customers who stands behind a product or service. Rights come from use, but federal registration with the USPTO gives nationwide priority and stronger enforcement tools, so clear your name before you launch. See How Do Trademarks Work? What Startup Founders Should Know and How Do I Avoid Trademark Infringement When Choosing a Name for My Startup?.
Business information that has value because it isn't public, such as source code, algorithms or customer data, and that the company takes reasonable steps to keep secret. It stays protected for as long as it stays secret. See What Are Trade Secrets, and Why Do They Matter to Startups?.
Stock options whose exercise price is higher than the stock's current fair market value, usually after a down round or a lower 409A valuation, so exercising them makes no financial sense. A company can reprice or exchange them with board approval, and stockholder approval if the plan requires it, but repricing has tax and accounting effects to review first. See Underwater Stock Options: Can a Startup Reprice Them?.
The maximum company valuation at which a SAFE or convertible note converts. If the priced round comes in above the cap, the investor converts at the cap price and gets more shares per dollar than the new investors. See Valuation Cap: What It Is and How to Set One on a SAFE.
Investment by professionally managed funds in high-growth startups in exchange for equity, usually preferred stock. VCs need a few very large outcomes to return their funds, which shapes what they invest in and what terms they ask for. See Venture Capital 101: Is It Right for Me?.
Loans from specialized lenders to venture-backed startups, usually made alongside or soon after an equity round to extend runway. Lenders typically take warrants and a security interest in the company's assets, and the default provisions, especially material adverse change and investor abandonment clauses, deserve the closest reading. See Venture Debt: When Does It Make Sense and What's in the Term Sheet?.
The process by which equity becomes fully earned over time or on milestones. The standard is four years with a one-year cliff, then monthly, and if a founder leaves, the company can buy back unvested shares at the price paid, typically $0.00001 per share for founder stock. See Vesting Schedule: What It Means for Startup Founders and Unvested Shares: What They Are and How They Work.
An agreement among the company and its main stockholders, signed in a priced round, that commits them to vote their shares to elect the agreed board, such as two directors chosen by the common and one by the preferred, and usually contains the drag-along. It, not the bylaws, is what protects founder board seats. See Series Seed vs. NVCA Documents: A Guide for Startup Founders.
The federal law that generally requires employers with 100 or more full-time employees to give 60 days' notice of a plant closing or mass layoff. Several states, including California and New York, have their own versions that reach smaller employers or require longer notice. See How Do I Run a Layoff (Reduction in Force) at My Startup?.
A right to buy shares at a fixed price for a set period, often given to lenders in venture debt deals or to strategic partners. Warrants count in fully diluted shares. See Stock Warrants: What They Are and How Startups Use Them.
A copyright rule under which the employer, not the creator, owns a work an employee creates within the scope of employment. For contractors it covers only nine narrow categories of commissioned works, and only with a signed writing, and software usually isn't one of them, so contractor agreements also need a present assignment of IP. See Startup Contractor Agreement.
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