JARGON

Emerging Companies

JARGON

The

BOOK

Second Edition

A Latham & Watkins Glossary

of Emerging Companies

Slang and Terminology

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The Book of Jargon

– Emerging Companies is one in a series of

practice area and industry-specic glossaries published by Latham

& Watkins. The denitions provide an introduction to each term and

may raise complex legal issues on which specic legal advice is

required. The terms are also subject to change as applicable laws

and customary practice evolve. As a general matter, this glossary was

drafted from a US practice perspective. The information contained

herein is not legal advice and should not be construed as such.

409A Valuation:

a third-party valuation of a company’s Common

Stock intended to satisfy the requirements of IRC Section 409A. Most

commonly, a company pays a third-party valuation ﬁrm to complete the

409A Valuation to help the Board determine the Fair Market Value of

the Common Stock. The Board then uses that Fair Market Value to set

the Exercise Price for grants of Options to Employees and other service

providers. Note that the Board may only rely on this 409A Valuation for

up to 12 months, and if signiﬁcant changes in the business occur before

12 months lapse, the 409A Valuation is no longer valid.

83(b) Election:

a tax election that can be made when a shareholder

receives an Equity grant that has a substantial risk of Forfeiture. Usually

83(b) Elections occur in Startups with grants of Restricted Stock, where

Vesting is applied. By making this election, a shareholder elects to pay

tax on the current value of the Equity above the Per Share Price paid at

the time of grant, instead of the value of the Shares when they actually

vest. The beneﬁt of this election is that at the time the shareholder

receives the Shares, the difference between current value and what the

shareholder paid is usually zero, and thus there is no immediate tax due

and any subsequent gain would be Capital Gains. By contrast, without

this election, the shareholder would then have to pay the tax on the gain

at the time any Shares vest (which could be monthly and the value could

continue to go up). If the value of the company’s shares increase over

time (which is the goal of all Startups, of course), the shareholder runs the

risk of having to pay tax on a greater amount down the line, and that tax

would be ordinary income instead of Capital Gains. This election is most

common in Early Stage companies where the value of Equity received is

small enough such that the taxable income to the shareholder or the Per

Share Price for the Equity is manageable. However, if the shareholder

stops working for the company and loses a portion of Shares that had not

yet Vested, the shareholder will not get back the amount paid up front to

make this election. It is always a good idea to run this type of tax decision

by a personal tax advisor.

Accelerator:

similar to an Incubator, but typically focused on shorter time

frames with the goal of quickly determining whether a business will be a

success or failure in order to minimize the loss involved.

Accredited Investor:

deﬁned under SEC Rule 501 of Regulation D,

covers the people and entities that may be offered and sold Securities

in a Private Placement without burdensome disclosure requirements

(Non-Accredited Investors technically may also participate but the

requirements to do so usually outweigh the beneﬁt of allowing it, so this

participation is rare). The term covers virtually all types of institutions

that are participants in the private placement market (such as Angel

Investors, Institutional Investors, Strategic Investors and VCs), and

also includes people who either have high net worth or income or are

sophisticated. See, by contrast, Crowdfunding.

Accredited Investor Questionnaire:

a questionnaire a company uses

to solicit enough information to determine if a potential Investor would

qualify as an Accredited Investor.

Accrued Interest:

the amount of Interest that has accrued and has not

yet been paid on an obligation, such as a Convertible Promissory Note or

other debt obligation.

Accruing Dividend:

a Dividend that automatically accrues without

any Board action. However, the Accruing Dividend may still only be

paid if and when the Board declares a Dividend or upon a Deemed

Liquidity Event. For example, if a party has a US$100 investment and

an 8% Accruing Dividend, then after year one the party would have an

Accrued Dividend of US$8 that would need to be paid if and when the

Board pays any other Dividend or when the corporation liquidates (for

example, upon a sale of the corporation). An Accrued Dividend is similar

to Accrued Interest, but for Equity. It may also have a compounding

feature. An Accruing Dividend is sometimes used as a way to provide a

minimum annual Return on Investment, but is not a very common term

for an Early Stage Startup. Also called a Cumulative Dividend.

Acquirer:

another name for a Buyer or Purchaser.

Acquisition:

generally, either the purchase or sale of a company.

Acquisition Agreement:

a generic name for any type of deﬁnitive

agreement that accomplishes a Business Combination or an Acquisition

of Securities or assets of another party.

Advisor:

in Early Stage companies, generally people who are not

Directors, Employees or Ofﬁcers, but might be useful to the company for

strategic advice, introductions to Investors or other third parties (such as

customers or vendors). Advisors often serve under an Advisor Agreement

with some type of equity grant that will Vest over the period of time the

individual serves as an Advisor. Advisors are generally expected to be

available when called upon (which may be sporadic or may be a few

hours a month) to provide general advice to the CEO and/or Board as

needed.

Advisory Board:

if a company has multiple Advisors it sometimes forms

an Advisory Board that includes all Advisors. This Advisory Board doesn’t

usually meet, and is mostly in name only.

Advisor Agreement:

an agreement under which an Advisor serves,

which generally includes an equity grant with Vesting (typically Straight

Line Vesting, such as monthly over two years), and provisions providing

certain obligations such as conﬁdentiality and the Assignment of

Intellectual Property.

Affiliate:

deﬁned slightly differently in different types of agreements,

but generally refers to a Subsidiary, corporation, Partnership or other

person controlling, controlled by or under common control with another

entity. The ofﬁcial securities law deﬁnition is found in SEC Rule 144 and

Rule 405.

Affirmative Covenants:

an agreement to afﬁrmatively do something (think

of these as the “Thou Shalt” covenants). These contractual provisions are

often found in an Investor Rights Agreement that itemize certain actions

the Issuer must take after an investment, such as paying taxes, providing

ﬁnancial and other information, complying with rules of special interest

to an Investor (such as Qualiﬁed Small Business Stock, or sometimes

environmental rules and the like). Compare Negative Covenant.

Allocation:

in the context of a Financing Round, the amount an Investor

will be able to invest in that round. As an example, if there are three

Investors and each one is able to invest up to 33% of the deal, each

allocation would be 33%, or US$3 million on a US$9 million offering.

Angel Investor:

afﬂuent individuals (as opposed to institutions) who

invest in Early Stage companies in amounts typically ranging from as little

as US$10,000 or US$25,000 up to about US$1 million. These Investors

help bridge the gap between Friends and Family Rounds and institutional

money. Angels sometimes invest together in groups to share investment

ideas and resources.

Angel Financing:

generally, a Financing Round where the Investors are

Angel Investors and the investment is typically in a pre-product ﬁrst or

second round Startup based on an idea or minimally viable product.

Anti-Dilution Adjustment:

an economic adjustment to existing Securities

that is triggered if a company sells Equity in a future Financing at a

price below the Per Share Price an Investor paid for such Securities in a

preceding Financing Round (see Down Round).

Anti-Dilution Protection:

see Anti-Dilution Provisions.

Anti-Dilution Provisions:

the provisions that affect the Anti-Dilution

Adjustment. These provisions typically provide for an adjustment to the

Conversion Ratio of Preferred Stock, so for example, instead of a share of

Preferred Stock being converted to a single share of Common Stock (the

typical starting Conversion Ratio), an adjustment might instead result

in a share of Preferred Stock being converted to two shares of Common

Stock. This adjustment allows the basic economics of a Preferred Stock

investment (such as the Liquidation Preference) to remain the same,

while giving the Preferred Stock a higher proportion of the corporation’s

Fully Diluted Capitalization to make up for the Down Round. The

overwhelmingly most common type of Anti-Dilution Provision in Venture

Capital Financings is the Weighted Average Anti-Dilution Protection,

which could be broad-based or narrow-based. More rarely, there is also

Full Ratchet Anti-Dilution Protection.

Assignment:

the transfer of rights and obligations under an agreement to

a new party. This transfer of rights commonly occurs when a Stockholder

transfers Shares and needs to assign the rights and obligations attached

to those Shares to the recipient. In most cases, the agreements that

provide for these Stockholder rights have provisions that dictate whether

Assignment is permissible and if the Issuer’s prior consent is required.

Bad Actor:

eligibility to conduct a Rule 506 Private Placement is dependent

upon, among other conditions, the absence of any “Bad Actors.” Bad

Actors may include the Issuer, the Issuer’s Directors and Ofﬁcers, certain

signiﬁcant Stockholders of the Issuer, and any person who has received or

will receive direct or indirect compensation for solicitation of Purchasers

in connection with such offering, among others. The circumstances that

render one a Bad Actor do not include being Keanu Reeves (at least in

this context), but rather include certain criminal convictions, restraining

orders and regulatory proceedings relating to false statements and certain

types of mail fraud in connection with the purchase or sale of a security.

See Latham & Watkins Client Alert Number 1569, “You Talkin’ to Me?”

(July 25, 2013).

Bad Actor Questionnaire:

a questionnaire which a company uses to solicit

the information needed to determine if a party may qualify as a Bad Actor.

Bad Actor Representations:

representations made by both the company

and Investors in a transaction agreement, typically a Stock Purchase

Agreement in Startups, conﬁrming the absence of any Bad Actors.

Balance Sheet:

a Financial Statement on which a company reports its

assets, liabilities and Equity as of a given moment in time. The Balance

Sheet is in contrast to an Income Statement, which depicts a company’s

situation over a period of time. The term Balance Sheet derives from the

accounting principle that a company’s assets must equal (or balance with)

its liabilities plus Stockholders’ Equity.

Bankruptcy:

a US federal court process under the Bankruptcy Code

whereby a company restructures or otherwise satisﬁes its Debt under the

supervision of a bankruptcy court.

Bankruptcy Code:

Title 11 of the United States Code.

Blue Sky Laws:

state, as opposed to US federal, securities laws. While

the exact origin of this term is not known, people often refer to a US

Supreme Court decision given by Justice McKenna in Hall v. Geiger-

Jones Co., 242 U.S. 539 (1917), which dealt with the constitutionality of

state securities regulations where he described the fraudulent schemes

at issue as “having no more basis than so many feet of ‘blue sky’.” Since

1996, most state securities regulation has been preempted (with certain

exceptions) by the federal securities laws; however, antifraud litigation

and notice ﬁlings for certain covered Securities still remain under state

jurisdiction. For a Startup conducting a Financing, it is important to

know each proposed Investor’s state of residency so that the Startup’s

legal Advisors can determine if any ﬁlings under Blue Sky Laws will be

required. If ﬁlings are required, this could result in certain information

about the Financing Round becoming publicly available.

Board:

shorthand for Board of Directors.

Board Meetings:

meetings of the Board of Directors. These can be regularly

scheduled meetings, a calendar of which is usually set at the beginning

of each year, or special meetings, which must be called in accordance

with the corporation’s Bylaws. For most Startups, Board Meetings are

often held over the phone or through in-person meetings (sometimes in

a coffee shop, college dorm, basement or garage) between the Founders

(who typically are the only Directors until a Financing takes place) and

representatives of signiﬁcant Investors who have rights to designate one

or more Board members.

Board Minutes:

a summary of attendees and matters addressed during

Board Meetings. The minutes of a Board Meeting should include any

speciﬁc resolutions presented to, and approved by, the Board during the

meeting. Minutes also generally include high-level detail of other matters

presented or discussed (typically just enough detail to trigger memories

of what was discussed, but not so much detail that the minutes would

stand as a record on their own).

Board Observer:

a person who attends and “observes” meetings of the

Board, usually pursuant to a contractual right that also includes rights

to receive the same materials that are delivered to the Board, subject to

certain exceptions (see Board Observer Rights).

Board Observer Rights:

a contractual right to attend Board Meetings of

the Issuer as a non-voting observer (as well as receive Board materials).

Board Observer Rights are often limited to permit exclusion of the Board

Observer in the event of a conﬂict of interest or to protect conﬁdentiality

or legal privilege. In Startups, Venture Capitalists may require this

right (often documented in a Management Rights Letter at the time of a

Financing) to help establish that they are VCOCs.

Board of Directors:

the governing body of a corporation appointed by

the Stockholders to oversee the general management of the corporation

on their behalf (that way the Stockholders can let the Board (and their

capital) work for them while Stockholders tend to other affairs). The Board,

in turn, appoints and has oversight over the Ofﬁcers of the corporation,

who manage the day-to-day affairs of the business. The Board (and

Ofﬁcers) owe Fiduciary Duties to the corporation to help ensure that the

hierarchy operates effectively without the need for the Stockholders to

involve themselves in the management of the business beyond the most

important decisions (like raising new capital or selling the business, and

the like).

Book Entry:

the internal ledger system a corporation uses to track its

Capitalization records. A Book Entry would be the only ofﬁcial record

of stock ownership for a corporation that has approved the issuance

of Uncertiﬁcated Shares for its equity issuances. Compare to Stock

Certiﬁcates.

Book Value:

the dollar amount stated for particular assets on a company’s

Balance Sheet.

Bootstrapping:

starting a company using your own funds or the funds of

immediate family members or other relatives or mentors. This method of

Financing, which is very common for Startups, is used to get a company

up and running quickly and cheaply before completing a Financing from

other third parties.

Bridge Financing:

usually a Convertible Debt Financing completed

just prior to a Preferred Stock Financing or in between Preferred Stock

Financings. Bridge Financing provides the corporation with a bridge to

such a Preferred Stock Financing. Often Bridge Financing occurs when

the company has received a Term Sheet or it is expected imminently and

the corporation needs funding to provide a sufﬁcient runway to get to that

Preferred Stock Financing without experiencing a cash crunch.

Broker-Dealer:

entities or individuals that are registered with the SEC

because they buy and sell Securities for themselves or on behalf of others,

acting as a broker when they execute orders on behalf of others and as a

dealer when they do so for their own account.

Burn Rate:

the net cash (i.e., expenses in excess of cash generated) which

a company uses over a speciﬁed period of time, usually expressed as a

monthly amount. This metric helps a company and its Investors determine

when they will need to raise funds again. For example, if a company has a

monthly burn rate of US$1 million and US$6 million in the bank, then the

company needs to raise money before six months, and since Financings

can take several months to complete (including investor meetings and the

like), then the company knows that it should be actively engaging in a

ﬁnancing process very soon to avoid running out of money.

Business Combination:

a name for any type of transaction that results

in the economic and legal combination of businesses and assets of two

or more entities, whether accomplished pursuant to operation of law (as

in a statutory combination or, Merger), or by an Acquisition of assets or

Securities by one entity of another.

Business Judgment Rule:

the default standard of judicial review of Board

decisions under Delaware and almost all other US state corporation laws

and, as applicable, under certain national corporate laws. The Business

Judgment Rule, as typically formulated, means that, in reviewing a

plaintiff’s claim that a Board of Directors breached its Fiduciary Duty to

its Stockholders, a court will presume that the Board acted in Good Faith,

with due care and with loyalty to the corporation and its Stockholders.

The plaintiff ordinarily bears the burden of proof of rebutting the

presumptions inherent in the Business Judgment Rule. The related

substantive formulation of the Business Judgment Rule is that a court will

not second-guess a Board’s judgment unless the actions of the Board lack

any rational basis.

Business Plan:

a plan that looks forward and models (to the best of a

company’s ability) how the company’s business will look over a period of

time, which for venture-backed companies could be anywhere from six

months up to two or three years (of course longer-term models are harder

to predict in fast-growing and fast-changing enterprises). The business

plan can be simple or very detailed. For Early Stage companies whose

ﬁnancial metrics are difﬁcult to predict, the Business Plan will likely be

less detailed than for Late Stage companies with more predictability.

Buyer:

another name for an Acquirer or Purchaser.

Bylaws:

one of the primary governing documents (second to the Certiﬁcate

of Incorporation) for a corporation, in which most of the rules for the

day-to-day operations of a corporation are set forth. Bylaws typically

include procedures for how Ofﬁcers are selected, how Board members

may be appointed, how Board Meetings and Stockholder meetings may

be called/conducted, etc. Think of the Certiﬁcate of Incorporation as the

Constitution and the Bylaws as the laws or rules.

C Corporation:

the default tax treatment of a corporation as an entity

separate from its owner and taxed on its own income. Such entities include

those organized as a US federal or state law corporation, an association,

or other business entity that is taxable as a corporation under the IRC, but

does not include any entity that has elected S Corporation status. Foreign

corporations and Limited Liability Companies are generally treated as C

Corporations for US tax purposes, though some may elect to be treated

as Partnerships or disregarded entities. Almost all corporate Startups that

VC’s invest in are C Corporations, since S Corporations may not have

entities as owners and since VC funds generally prefer not to invest in

LLCs.

Cap Table:

a record of the Stockholders of a corporation that reﬂects

ownership of the various classes and series of Stock that exist. A Cap

Table can also include holders of other Equity, such as Warrants, Options

and Convertible Security.

Capital Call:

when a Venture Capitalist will ask its Limited Partners

to transmit previously committed funds for the purpose of making an

investment in a Portfolio Company.

Capital Gains:

the gain made on capital investments. When a Stockholder

sells Stock in a company that he/she invested in, the gains made would

generally be considered Capital Gains.

Capital Markets:

a broad term that refers to the market for raising money

through securities offerings.

Capitalization:

how a company has been capitalized. In a Startup context,

Capitalization normally refers to the type and number of shares of a

company’s Equity. Normally, Startups backed by VCs issue Common Stock

(initially to Founders), Options to purchase Common Stock (generally to

Employees, Advisors and Consultants) and Preferred Stock (generally to

Investors) (in various series/classes based on the Financing Round). A

company typically keeps track of its Capitalization using a Cap Table.

Some forms of Debt, especially Convertible Promissory Notes, are often

also tracked in the Cap Table.

Cash Flow Statement:

a Financial Statement in which a company reports

its incoming and outgoing cash ﬂows during a speciﬁed time period

(typically monthly, quarterly or annually).

Cash Position:

the amount of cash a company has at a speciﬁc time. If a

company’s Cash Position and Burn Rate are known, the information can

be used to determine roughly when the company will need funds in order

to continue to operate.

Centaur:

a Startup worth at least US$100 million.

CEO:

acronym for Chief Executive Ofﬁcer.

Certificate of Good Standing:

a document ordered by a corporation from

the secretary of state of the jurisdiction of the corporation’s Incorporation

(or any additional jurisdictions in which the corporation is qualiﬁed to do

business) in connection with a Closing. The document certiﬁes that the

corporation and its Subsidiaries are good corporate citizens (i.e., that all

fees, taxes and penalties owed to the state have been paid, annual reports

have been ﬁled, no articles of dissolution have been ﬁled, etc.).

Certificate of Incorporation:

a document that the Sole Incorporator of a

corporation must ﬁle with the secretary of state in the state of Incorporation

in order to create the corporation as a legal entity. The Certiﬁcate of

Incorporation often sets forth the name, address and business purpose

of the corporation along with the number and type of Shares that the

corporation is authorized to issue. The Certiﬁcate of Incorporation for a

Startup is typically a fairly short document at the time of Incorporation.

However, down the road, when the corporation completes a Preferred

Stock Financing, the Certiﬁcate of Incorporation grows in length and

complexity, as it is where the terms of the Security (such as Liquidation,

Dividends, Redemption Rights, Conversion Rights and Protective

Provisions) are included.

CFO:

acronym for Chief Financial Ofﬁcer.

Change of Control:

generally refers to the sale of a company, but Change

of Control can also result from a partial sale of the company — such as a

turnover of more than 50% of the current Stockholders to a third party, or

the sale of substantially all of the company’s assets.

Chapter 11:

part of the US Bankruptcy Code and the part most often

discussed. Chapter 11 governs Reorganizations of bankrupt companies in

an attempt to turn them around and ensure their survival.

Charter:

another name for the Certiﬁcate of Incorporation.

Chief Executive Officer (CEO):

the highest-ranking executive Ofﬁcer of

a company, in charge of managing the day-to-day affairs of the company.

In Startups, the role of CEO is often held by the same Founder who serves

as the company’s president and a member of the Board.

Chief Financial Officer (CFO):

the senior Ofﬁcer of a company, primarily

responsible for managing the company’s ﬁnancing and (usually)

accounting activities. In Startups, the role of CFO, if not an ofﬁcial title,

is often held by the same Founder who serves as the company’s treasurer

and is a member of the Board.

Cliff Vesting:

time-based Vesting of shares in an equity instrument where,

typically, no shares vest until a pre-determined date on which a large

chunk of shares vest at one time. The most common example Startups use

is the standard Vesting Schedule in which Equity is granted with a total

four-year Vesting Schedule that includes a one-year “cliff.” This Vesting

Schedule means that the ﬁrst 12 months of Vesting all happen on the one-

year anniversary of the Vesting Commencement Date (the moment of the

Cliff Vesting) rather than on a monthly basis in that ﬁrst year. Compare

Straight-Line Vesting.

Closing:

the consummation of a transaction, when any remaining

documents are signed and the money changes hands. Plan on staying

up late working the night before (see Pre-Closing). If the Closing goes

smoothly, plan on celebrating once all wires have been received.

Closing Certificates:

the certiﬁcates that must be signed and delivered

prior to Closing. These typically include an Ofﬁcers Certiﬁcate and a

Secretary’s Certiﬁcate.

Closing Checklist:

the document which lists the various pieces of paper

that need to be signed and delivered as Closing Conditions and in

connection with the Closing.

Closing Conditions:

the conditions that need to be satisﬁed on or prior to

the Closing of the relevant transaction. In VC Financings, these conditions

are typically found in the Stock Purchase Agreement.

Closing Date:

the date on which the Closing occurs.

Common Director:

Preferred Stock Financings usually include a right for

the Preferred Stockholders to designate a Board seat. Often — although

not always — the Common Stockholders, i.e., the Founders (as the

Founders hold the vast majority of the Common Stock in most Startups),

will also have a continuing right to designate one or more Common

Directors. The right to designate any Common Director is typically set

forth in the Charter and in the Voting Agreement and often will require

that the CEO serve as a Common Director.

Common Stock:

the Equity slice of a corporation that sits at the bottom

of the Waterfall. In Startups, this is the class of Equity typically owned by

Founders and Employees. Common Stockholders have Voting Rights by

statute.

Common Stockholders:

holders of Common Stock.

Condition Precedent:

another term for Closing Conditions.

Confidentiality Agreement:

a written agreement stating that the disclosure

of certain information is only being provided for speciﬁc limited purposes,

entered into before any disclosure is made and where the recipient of

such information agrees to keep it conﬁdential. Also commonly called

Non-Disclosure Agreements. A Conﬁdentiality Agreement can be

one-way (only one party to the agreement is providing conﬁdential

information) or multi-party (two or more parties to the agreement are

providing/receiving conﬁdential information). Startups most commonly

enter into Conﬁdentiality Agreements prior to the commencement of a

Due Diligence process (for either a potential Financing or Merger) or

prior to beginning discussions with third parties in regard to potential

business relationships.

Consultant:

an individual or entity that works for a company under contract

as an independent contractor and not an Employee. This classiﬁcation

can be tricky to make, especially for a Startup. The consequences of

misclassifying someone as a Consultant instead of an Employee can be

signiﬁcant. Consult legal advisors when assessing this area.

Consulting Agreement:

contract under which a Consultant provides

services to a company. Consulting Agreements typically include,

among other terms, compensation terms (including the grant of Equity,

if applicable), a schedule of work to be completed, the duration of the

relationship, provisions providing for conﬁdentiality obligations, and

the Assignment of any Intellectual Property created while performing

services for the company.

Conversion Discount:

the discount that is typically offered to the holders

of Convertible Debt who invest in Early Stage companies or in companies

doing a Bridge Financing. The holders of the Convertible Debt lend

money in exchange for the right to have their loan converted into Equity

at a discount in a future Equity Financing. This discount is typically

documented in a Convertible Promissory Note and usually ranges from

10-20% (but may exceed this amount in rare cases or if the Valuation

of a company in the Equity Financing is signiﬁcantly higher than a

Valuation Cap). A Conversion Discount is often provided as a sweetener

to encourage Investors to take the risk associated with investing in an

Early Stage company.

Conversion Price:

typically either (i) the price at which Preferred Stock

will convert into Common Stock (upon certain pre-determined triggers

set forth in the Charter) or (ii) the price at which a Convertible Promissory

Note will convert into Preferred Stock in a Qualiﬁed Financing. See

Conversion Discount.

Conversion Ratio:

the ratio at which Preferred Stock converts into

Common Stock. This Conversion Ratio is the Conversion Price divided by

the Original Issue Price.

Conversion Rights:

the rights Preferred Stockholders hold to have their

Shares of Preferred Stock converted into Common Stock. Conversion

Rights usually also include Anti-Dilution Protection so that a Preferred

Stockholders’ Shares will convert into more Shares of Common Stock if

there is a Down Round that triggers an Anti-Dilution Adjustment.

Convertible Debt Financing:

the type of Financing Early Stage companies

most commonly use because Convertible Debt Financing does not

require the company to set a Valuation at which to sell Equity. This type of

Financing is a loan that an Investor provides a Startup company, typically

documented as a Convertible Promissory Note. Such a note is convertible

in the future into Preferred Stock (usually with a Conversion Discount)

when a company does a Qualiﬁed Financing. Sometimes instead of a

Conversion Discount, a Convertible Debt Financing may include the

issuance of Warrants with the Warrant Coverage essentially providing

the same (or an additional) sweetener for the Investor that a Conversion

Discount would offer. In addition to a Convertible Promissory Note, this

type of Financing may also, but does not need to, include a Note Purchase

Agreement.

Convertible Promissory Note:

the instrument that evidences a

Convertible Debt Financing. This note is usually a very simple document,

which is why it is so ideal for Startups, because the cost and time involved

in preparing and negotiating a Convertible Promissory Note are minimal

(and signiﬁcantly less than the cost and time that would be involved in

preparing and negotiating the documents for a Preferred Stock Financing).

In rare circumstances the Convertible Promissory Note may be secured.

Convertible Security:

a Security that is convertible into another type of

Security, often Common Stock.

a form of protection provided to the authors of “original

works of authorship,” which can include literary, musical, architectural,

pictorial, graphic, sculptural, audiovisual and other types of creations.

tangible form and no publication, registration or other action is required

to secure the Copyright (although there are certain advantages to formal

registration). Copyright gives the owner the exclusive right to, among

other actions: reproduce the Copyrighted work, prepare derivate works,

distribute copies or phono-records of the Copyrighted work, perform and

display the Copyrighted work publically or authorize others to do the

same. Copyright is a form of Intellectual Property. Copyright protection

does not extend to works that have not been ﬁxed in tangible form, works

that are not original or things such as ideas, procedure, process or names,

titles, short phrases, slogans and listings of contents or ingredients.

Co-Sale Rights:

contractual rights that one Stockholder in a company

(usually a Preferred Stockholder) must sell a certain number of his/her

Shares alongside another Stockholder (usually a Founder) who wants to

sell some of his/her own Shares. Co-Sale Rights are typically documented

in the ROFR Agreement entered into at the time of a Preferred Stock

Financing. Also sometimes called Tag Along Rights.

Counterparts:

under many legal systems, including those of California,

Massachusetts, New York and Delaware, not all signatories to an

agreement need to sign the same hardcopy document; each separate

signature page that is executed is known as a Counterpart and together

they create a binding agreement.

Covenant:

legalese for an agreement to do something (Afﬁrmative

Covenants), not to do something (Negative Covenants), or to maintain

something (Maintenance Covenants).

Crowdfunding:

the practice of funding a project by raising small amounts

of money from a large number of people, most commonly through the

use of Internet platforms such as Kickstarter, Indiegogo, etc. Until

recently with the adoption of Regulation Crowdfunding, companies

using Crowdfunding did not offer Equity in exchange for the monetary

contributions received, but rather typically offered advance product

orders, free samples or other non-security-based rewards.

Cumulative Dividend:

another name for an Accruing Dividend.

Cumulative Voting:

a relatively uncommon structure for a Stockholder

voting for members of the Board of Directors. Cumulative Voting entitles

each Stockholder to the number of votes equal to the total number of

Directors to be elected, and the Stockholder has the right to allocate as

many of its votes as it wishes for one, some or all candidates. Under this

system, an organized minority of Stockholders could have the opportunity

to ensure the election of one or several selected nominees by cumulating

the aggregate votes for the chosen Director(s). This type of voting is

extremely rare in Startups and often the Charter explicitly provides that

Cumulative Voting will not be allowed.

Data Room:

where Due Diligence materials are located. Originally a Data

Room was a physical location, such as a room set aside in the building of

the Target Company, stacked with boxes of paper; these days it is a virtual

Data Room that can be accessed online. A well-done Data Room can be

critical to a smooth transaction, and can take a substantial amount of time

to populate (depending on the amount of existing documents a company

has — which tends to increase with the length of time a company has

existed — and the scope of the Due Diligence Request List received).

Early planning is key.

Deal Flow:

the rate at which Venture Capitalists and Angel Investors

receive business proposals or investment offers.

Deal Structure:

the legal structure used for a transaction, which is

often driven by tax implications or other matters dictating the type of

documentation needed.

Debt:

an obligation owed by one party (the borrower or debtor) to a second

party (the lender or creditor). Debt is generally subject to contractual

terms such as the amount and timing of payments of principal and

Interest, events of defaults, Covenants, Maturity Date, Conversion Rights

(if applicable) and more. The most common types of Debt in Startups are

Convertible Promissory Notes and Venture Debt.

Decicorn:

a Startup with a valuation of at least US$10 billion. Even rarer

than a Unicorn, and much more exciting than a Unicorpse.

Deemed Liquidation Event:

a term deﬁned in a corporation’s Charter

that basically means an exit event or the sale of all or substantially all

of the corporation’s assets, in each case triggering the company to pay

Liquidation Preferences.

Delaware General Corporation Law (DGCL):

the statute governing

corporate law in the State of Delaware found in Title 8, Chapter 1 of the

Delaware Code.

Demand Registration Rights:

a type of Registration Right that entitles the

holder, subject to certain agreed upon conditions, to force the Issuer to

conduct a registered offering of the Issuer’s Securities. The Issuer ﬁles

a Registration Statement with the SEC and takes such other actions to

conclude an offering pursuant to that Registration Statement. In Preferred

Stock Financings, Demand Registration Rights are typically found in the

Investors’ Rights Agreement. Compare Piggy Back Registration Rights.

DGCL:

acronym for the Delaware General Corporation Law.

Dilution:

when an existing Stockholder’s percentage ownership in a

company is reduced because a new Investor buys Shares in the company

or additional Equity is otherwise issued to a third party. For example, if

an existing Stockholder owns one share of a company that has 10 shares

outstanding, the existing Stockholder would own 10% of the total number

of shares (one out of 10), but if the company issued to a new Stockholder an

additional 10 shares then the existing Stockholder would only own 5% of

the total number of shares (one out of 20). The existing Stockholder would

in this example suffer 5% Dilution of its Share ownership. This Dilution

doesn’t necessary mean that the value of the existing Stockholders Shares

has decreased, since the overall value of the company might actually

(hopefully) have increased.

Director:

a member of the Board elected by a corporation’s Stockholders.

Disclosure Schedule:

a schedule prepared in connection with a transaction

agreement, typically a Stock Purchase Agreement or Note Purchase

Agreement in Startups, that discloses exceptions to statements that the

Startup makes in the agreement (called Representations and Warranties)

regarding the company and its affairs. Also sometimes referred to as a

Schedule of Exceptions.

Disinterested Director:

a Director who does not have a ﬁnancial or other

interest in the matter that is being considered for approval by the Board

of Directors.

Distribution:

the delivery of some sort of compensation or other value

(this can be cash, Stock or even a company asset) to the Stockholders in

a company because the Stockholders hold Shares (could also be used to

describe the Redemption or repurchase of a single person’s Shares).

Dividend:

a type of Distribution, typically provided for in the Certiﬁcate

of Incorporation of a corporation.

Double Trigger Acceleration:

when the Vesting that applies to either

Stock or an Option can be accelerated upon the occurrence of two events,

both of which must occur for the acceleration to be triggered. The ﬁrst

triggering event is usually a Change of Control of the company, and the

second triggering event is the termination of a Stockholder’s employment

without “cause” (a term deﬁned in either the Option Agreement, Equity

Incentive Plan or RSPA) or terminating a Stockholder’s employment for

“good reason” (a term deﬁned in either the Option Agreement, Equity

Incentive Plan or RSPA).

Down Round:

when a company completes an Equity Financing at a Per

Share Price that is lower than the price at which Shares were sold in the

previous Financing. Startups generally do not like Down Rounds because

of the optics of the company’s value decreasing and the fact that a Down

Round typically means the Investor coming in can negotiate for much

more investor-friendly terms. Existing Investors are often displeased, and

a Down Round may also increase the difﬁculty of recruiting Employees. A

Down Round often triggers Anti-Dilution Protection rights.

Drag Along Rights:

allows a majority Stockholder to require that a minority

Stockholder vote to approve a sale of the company to a third party. The

idea is that a majority Stockholder may not be able to recognize the full

value of the Stockholders stock holdings unless the majority Stockholder

can sell the entire company to a third party by “dragging” along minority

Stockholders. Drag Along Rights generally provide that the minority

Stockholder enjoy some protections against abuse, including receiving

the same terms in the sale as the majority Stockholder. In Preferred

Stock Financings, Drag Along Rights are typically found in the Voting

Agreement. Compare Tag Along Rights.

Due Diligence:

what lawyers, bankers and Investors do to learn about a

company. In a VC Financing, Investors (and their lawyers) conduct Due

Diligence so they can understand what they are investing in. Due Diligence

activities are broad and range from a review of relevant documents (often

housed in a Data Room) and Financial Statements to on-site visits and

interviews with management, outside accountants, counsel, customers

and suppliers. In Capital Markets transactions, the bankers and lawyers

conduct Due Diligence in order to establish a Due Diligence Defense.

Due Diligence Defense:

the Underwriters’ principal defense in Securities

offerings lawsuits. The securities laws impose liability on certain persons

and entities for damages resulting from any material untrue statement

contained in, or omitted from, a Registration Statement. Issuers are strictly

liable for the information in the Registration Statement, but other entities

(including Underwriters and the Board) involved in the offering can

avoid liability by demonstrating a Due Diligence Defense. Speciﬁcally,

Underwriters and the Board have an afﬁrmative defense to liability if

they have relied on experts for the Expertized Parts of the Prospectus and

conducted a “reasonable investigation” for the other portions. Similar

defenses are available to Rule 10b-5 claims made with respect to Rule

144A Financings and Regulation S offerings.

Due Diligence Request List:

a list Investors provide to a company that

they are considering investing in. The list requests certain information in

order to conduct their Due Diligence. Depending on the type of company

and the length of its existence, the depth of the Due Diligence Request

List can vary and the process of preparing the response can either require

a great deal of work or a lot of “not applicable” responses.

Duty of Candor:

a Fiduciary Duty of Directors under Delaware judicial

decisions that requires the Board of Directors to provide Stockholders

with all the material information necessary to decide how to vote on a

matter.

Duty of Care:

customarily articulated using the so-called objective

“reasonable man” standard — that in making a decision a member of

the Board of Directors must use the same degree of care as a reasonable

business person would do in the conduct of his/her own business affairs.

Under Delaware statutory law and judicial decisions, Directors clearly

have an obligation to understand the situation and relevant facts, laws,

etc., but in doing so are entitled to rely on Ofﬁcers and other Directors

of the corporation and on Advisers whom they reasonably believe are

knowledgeable in the area. The seminal Delaware case on the Duty of

Care is Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985), often referred to

simply as Van Gorkom. See also Duty of Loyalty.

Duty of Loyalty:

encompasses both conﬂicts of interest (and how to guard

against them) and the requirement that the Board of Directors act in Good

Faith in what they believe is the best interests of the corporation and its

Stockholders.

D&O Insurance:

liability insurance payable to the Directors and Ofﬁcers

of a corporation or other entity to offset indemniﬁable losses they have

suffered as a result of speciﬁed acts or failures to act in their capacities as

Directors or Ofﬁcers. D&O Insurance also typically covers reimbursement

of the costs associated with defending a lawsuit. Startups often agree to

obtain D&O Insurance as a condition to a VC Financing.

Early Stage:

in a company’s life cycle, the stage from the legal formation

of a company until shortly before the second round of Preferred Stock

Financing. However, this is a very subjective classiﬁcation — some people

think anything prior an IPO is Early Stage.

Earnout Provisions:

a provision in connection with the sale of a company

that provides for the possibility of additional consideration to the Sellers

based upon the achievement of certain Milestones or other metrics

following the Closing. These provisions can be useful to help bridge a

Valuation gap between a Buyer and a Seller. However, Sellers should

discount the possibility of actually collecting an earnout as they often are

not achieved.

EGC:

acronym for Emerging Growth Company.

Elevator Pitch:

the 30-second version of a Pitch (short enough to make on

an elevator ride) as to why a Startup is a good idea and would make for a

good investment.

Emerging Growth Company (ECG):

a new category of Issuer created by

Title I of the JOBS Act. To qualify as an EGC, a company must not have

priced its IPO prior to December 9, 2011 and must have annual revenue

for its most recently completed ﬁscal year of less than US$1 billion.

Qualiﬁcation as an EGC allows the Issuer to utilize the so-called “IPO

on-ramp,” a transition period from private to Public Company that eases

certain burdens of the IPO process by scaling back ﬁnancial disclosure

requirements, permitting conﬁdential SEC submissions and pre-ﬁling

offers to Institutional Investors and allowing research analysts to publish

reports on EGCs immediately after they become public companies. See

Latham & Watkins Client Alert No. 1308, The JOBS Act Establishes IPO

On-Ramp (March 27, 2012). See also Latham & Watkins publication, The

JOBS Act, Two Years Later: An Updated Look at the IPO Landscape (April

5, 2014).

Employee:

a person who is hired for a wage or salary to perform work

for and under the direction of an employer. It is important to determine if

one is acting as Employee (rather than as a Consultant), as one’s status as

an Employee comes with some legal issues and requirements, including

employer liability for the actions of the Employee, minimum wage

requirements, tax withholding and reporting obligations, union eligibility

and worker’s compensation, among other things.

Employee Stock Option Plan (ESOP):

a plan, often referred to instead

as an Equity Incentive Plan or a stock incentive plan, pursuant to which

the company may grant Options to purchase its Stock and other forms of

Equity compensation such as Restricted Stock, to Employees, Directors

and Consultants. By granting Equity under such a plan, there are certain

tax beneﬁts that are available to certain recipients of these awards if the

plan is structured in a way that is consistent with IRC requirements. The

use of this type of a plan also provides companies with a way to issue

Equity to service providers under an exemption from the registration

requirements of US federal and state securities laws.

Employer Tax Identification Number (EIN):

the number assigned by

the Internal Revenue Service to a company to identify it for tax purposes

(similar to an individual’s social security number).

Employment Agreement:

not very common in Startups (other than

Offer Letters, which aren’t really the same thing) and are typically only

seen at the executive level in Late Stage companies. An Employment

Agreement typically covers compensation (both cash and Equity), bonus

amounts or eligibility, vacation and any other plans that apply. It may

also include severance provisions and whether any of the Equity granted

will be subject to Vesting, Double Trigger Acceleration or Single Trigger

Acceleration.

Employee Retirement Income Security Act of 1974 (ERISA):

the

fundamental federal statute regulating pension and welfare plans (such

as 401(k)s, medical and dental plans, life and disability insurance etc.)

covering most classes of Employees.

Enterprise Value:

means the value of a business on a debt-free, cash-

free basis, i.e., irrespective of the sources of capital used to ﬁnance it.

Enterprise Value can be thought of as the price a Buyer would have to

pay to buy a company and pay off all the Debt. For example, if the market

Capitalization (or Equity Value) of a company is US$95 million, and the

company has US$10 million in Debt and US$5 million in cash, a Buyer

would have to pay US$95 million to the Equity holders, and another US$5

million to pay off the net Debt (using existing cash to pay off the other

US$5 million of Debt). Thus the Buyer’s total price to buy the company

with no Debt or cash immediately after Closing would be would be

US$100 million.

Equity:

a Security that represents an ownership interest in an entity.

Equity Financing:

a Financing in which a company receives funds from

Investors in exchange for Equity in the company. The Equity issued to

Investors can be either Common Stock or Preferred Stock, but is most

commonly Preferred Stock in Startups.

Equity Incentive Plan:

see Employee Stock Option Plan.

Equity Value:

the Enterprise Value plus the cash, and minus the Debt.

For example, if the Enterprise Value of a company is US$100 million and

the company has US$10 million in Debt and US$5 million in cash, the

Equity Value would be US$95 million. Think of a Buyer paying US$100

million for the business. The Buyer would be able to use the existing

cash to pay the Debt down to US$5 million, and then US$5 million of

the US$100 million purchase price to pay off the remaining Debt in full.

The remaining US$95 million would be available to be distributed to

the equity holders. Or thought of another way, the Buyer could offer a

purchase price to the equity holders of US$95 million with an agreement

to assume the net debt of US$5 million.

Exchange Act:

see Securities Exchange Act.

Exercise Price:

the Per-Share Price that must be paid to exercise a right

under an Option or Warrant to purchase the Stock and receive shares of

that Stock subject to the Option or Warrant.

Exit:

the opportunity for Investors to have Liquidity on their investment.

Normally, the Exit for an investment in a Private Company occurs through

either a Change of Control or IPO (since Shares are more readily tradeable

once a company is public, providing Liquidity to the private Investors).

Exit Strategy:

strategy that company management employs to get

Liquidity for its Investors through an Exit. Investors will rarely enter

without an Exit Strategy.

Expertized Parts:

generally, the audited Financial Statements contained

in the Registration Statement. Under applicable securities laws, the

Underwriters and Board can avoid liability for the expertized portion

of the Registration Statement if they can show they had no reasonable

grounds to believe, and no actual belief, that such statements were untrue

or omitted material facts. Note that unaudited Financial Statements are

not expertized.

Fair Market Value:

for Stock, the current value that a third party would

pay for Shares in a company on a per share basis in an “arm’s length”

transaction, usually without regard to any discounts for lack of a trading

market or minority interests. For shares of Common Stock in a Startup, the

Fair Market Value is usually determined by the Board or an independent

third-party valuation ﬁrm through a 409A Valuation.

FCPA:

acronym for the Foreign Corrupt Practices Act. This statute

prohibits US companies from bribing foreign governmental ofﬁcials in

exchange for contracts, concessions or other beneﬁts conferred by the

foreign government.

Fear of Missing Out (FOMO):

Just ask a teenager, often used to describe

an Investor’s decision to invest in a Startup based on a fear of missing out

on the next big thing.

Fiduciary:

a party with a duty to act solely in the interests of another

party. Ofﬁcers and Directors of a corporation serve as ﬁduciaries for the

corporation’s Stockholders and as such owe Fiduciary Duties to such

Stockholders.

Fiduciary Duties:

see Fiduciary. See also, e.g., Duty of Candor, Duty of

Care and Duty of Loyalty.

Final Closing:

in a transaction with multiple Closings, Final Closing is the

last Closing.

Financial Statements:

the Income Statement, Balance Sheet and Cash

Flow Statement of a company.

Financing:

a transaction in which a company receives funds from

Investors, in exchange for Equity or Debt. The payoff after many calls,

emails, texts and meetings with potential Investors, countless Pitches and

other hard work.

Financing Round:

generally describes the type of Financing by referring

to the nature of the Investors (i.e., an “Angel Round” or “Friends and

Family Round”) or to the Security being sold in a Financing (i.e., an

“Equity round or “Convertible Promissory Note round”). When Equity is

sold, the particular Financing Round is normally identiﬁed by the series

of Stock being issued in a particular Financing, such as a Series Seed

Round, Series A Round, Series B Round, Series C Round, Series D Round,

etc.

Finder:

someone who uses his/her connections and resources to ﬁnd

Investors to put money in a company. Companies should be careful if they

pay any compensation to a Finder based on the success of a Financing —

subject to limited exceptions, such Finders are required to be registered

as Broker-Dealers with the SEC.

Follow-on Offering:

a public offering of Common Stock by a public Issuer

subsequent to their Initial Public Offering.

FOMO:

acronym for Fear of Missing Out.

Foreign Qualification:

when a corporation is doing business in a state

that is not its state of Incorporation, the corporation needs to ﬁle an

application to qualify to do business in that “foreign” state. Whether a

Foreign Qualiﬁcation is necessary depends on the level of business the

corporation is conducting in the foreign state (things like presence of an

ofﬁce or Employees in a state typically trigger this requirement). Since

each state has its own rules and requirements, it is a good idea to consult

with your legal or tax advisors when deciding where you should apply for

Foreign Qualiﬁcation.

Forfeiture Provisions:

refers to provisions found in a Restricted Stock

Purchase Agreement, which provide that when a Stockholder is no longer

employed or providing services to the company, any unvested shares

will automatically be forfeited back to the company for no additional

consideration at the time such services end. Forfeiture Provisions are

typically seen when the Restricted Stock is issued to the Stockholder in

consideration for services or at nominal cost. Compare to Repurchase

Provisions.

Form D:

a securities law ﬁling made with the SEC after a Financing to

procure a safe harbor exemption under Rule 506 under the Securities Act

(i.e., Reg D). Startups should understand that once made, this ﬁling is

publicly available through the SEC’s EDGAR system and may be picked

up and written about in the press.

Form S-1:

the SEC form Registration Statement ﬁled by an Issuer in

connection with an Initial Public Offering.

Founder:

one of the initial Stockholders of a company who brings

Intellectual Property or other valuable contributions to the company to

get the business started. The Founders also typically serve as the initial

Ofﬁcers and Directors of the company. Despite the common misconception,

being called a Founder does not bring with it any additional rights above

those held as a result of the Equity or positions held within the company.

Founder is not a legal term.

Founder Representations:

representations made by a Founder in a Stock

Purchase Agreement. These representations are typically only seen, if

at all, in early Financing Rounds (like a Series Seed or Series A round)

and are not common in subsequent rounds. Investors sometimes request

these representations in early Financing Rounds where the Founders

are essentially the entire company and are aware of every facet of its

business, which becomes less and less true as a company grows.

Founders’ Shares:

Equity held by Founders, which is typically Common

Stock in a Startup.

Freemium:

a pricing strategy that offers a basic version of a product to

users for free with the goal of selling them additional features for a fee.

Friends and Family Round:

generally, one of the ﬁrst Financing Rounds

that a Startup completes. Usually the Investors in a Friends and Family

Round invest smaller amounts, and this investment is often structured as

Convertible Debt Financing (allowing the company to postpone valuing

itself too early). Also, as the name describes, most Investors in this type

of Financing Round are friends and family members of the Founders. So

while friends and family members may be more willing to invest because

of their relationship to the Founders, the friends-and-family relationship

dynamic can also put extra pressure on the Founders who do not want to

let these people down.

Full Ratchet Anti-Dilution Protection:

the most drastic type of Anti-

Dilution Protection; very rarely seen in VC Financings. Full Ratchet Anti-

Dilution Protection means that if a company sells Shares at a price below

that paid by Investors in the company’s most recent Financing, then the

Investors with Full Ratchet Anti-Dilution Protection have their Conversion

Ratio adjusted so that when their Shares of Preferred Stock convert

into Common Stock they would receive the same number of Shares of

Common Stock as if they had originally purchased their Shares at the

new lower price. Full Ratchet Anti-Dilution Protection could result in a

signiﬁcant transfer of ownership from holders of Common Stock (usually

Founders) to holders of Preferred Stock, and can be counter-productive

if the Dilution to the Founders leaves them without sufﬁcient incentive

to continue to build the business. Compare to Weighted Average Anti-

Dilution Protection.

Fully Diluted:

a way of describing the total Equity of a company that

includes both the Outstanding Shares and all Options, Warrants and any

other Convertible Securities. Fully Diluted is often used in the context of

determining what percentage of a company one person holds — if you

describe percent ownership on a Fully Diluted basis, that simply means

you’ve included all Convertible Securities (as if they have converted) in

the denominator, as opposed to just the Outstanding Shares.

Fully Diluted Earnings Per Share:

an amount equal to the revenue of a

company divided by the total number of shares on a Fully Diluted basis.

GAAP:

acronym for “generally accepted accounting principles.” GAAP

represents a set of authoritative standards for recording and reporting

accounting information in a given jurisdiction.

General Partner:

in a Partnership, a partner that may have personal

liability for the liabilities and obligations of the Partnership (but see

Limited Liability Limited Partnership). If a Partnership is not a Limited

Liability Partnership or a Limited Partnership, its partners will be General

Partners by default.

Good Faith:

acting honestly and fairly towards one’s counterparties.

Similar to acting reasonably. Good Faith is also a critical component of a

Director’s Duty of Loyalty.

Good Standing:

a corporation that has ﬁled all annual reports, has no

articles of dissolution ﬁled and is current with all fees, taxes and penalties

owed to the state in which it is Incorporated or qualiﬁed to do business as

a Foreign Qualiﬁcation.

Governing Law:

the law that governs a particular agreement and all

disputes that may arise as a result of the agreement. Governing Law is

usually found in the miscellaneous section of a contract, which comes at

the very end of a contract.

Growth Equity Investment:

investment in the Equity of a company that

you expect to grow rapidly.

Holding Company:

a company that sits on top of (or “holds” the Equity

of) the Subsidiary that is below it. This concept sometimes connotes a

company that does nothing else (i.e., has no operations).

Holding Period:

period of time in which a Stockholder must hold its

Shares in a company for a speciﬁed reason. Some examples include tax

holdings periods (i.e., for either short-term or long-term Capital Gain

treatment), Vesting periods or a reference to securities laws that require

the holding of Shares for certain time periods to be able to resell without

registration under the Securities Act.

Incentive Stock Option (ISO):

a type of Option that can be granted under

an Equity Incentive Plan to Employees only. ISOs qualify for special tax

treatment under the IRC. ISOs generally are not taxed upon grant or

exercise, but rather upon disposition of the Shares acquired upon exercise

of the ISO as long as certain conditions are met. Also known as a way to

attract young bright employees.

Income Statement:

a Financial Statement on which a company reports its

results of operations over a period of time (usually monthly, quarterly or

annually). Also commonly referred to as a Proﬁt and Loss Statement, or

P&L Statement. Think of an Income Statement as a movie and a Balance

Sheet as a snapshot as of a speciﬁc moment in time (usually the last day

of the period being reported).

Incorporation:

the act of ofﬁcially forming a corporation by ﬁling a

Certiﬁcate of Incorporation with the secretary of state of the state of

Incorporation.

Incubator:

organization set up to help Startups with their initial

investments and strategies. Incubators typically assist by providing their

Startups with ofﬁce space, management support and other resources.

Incubators often require a percentage of the Startup’s Equity in exchange

for their assistance and investment. Similar to an Accelerator, but

Incubators are generally more willing to give companies a longer runway

for development.

Inculator:

a hybrid between an Accelerator and Incubator, essentially

providing the same services but at a slightly longer timeline than an

Accelerator, and shorter than an Incubator.

Indemnification Agreement:

an agreement in which a company agrees to

indemnify its Directors and Ofﬁcers for actions taken in their capacity as

such in order to reduce the potential for personal liability. Startups typically

enter these agreements in connection with their ﬁrst Equity Financing.

Information Rights:

rights a company gives to certain Investors (usually

“Major Investors” (e.g., those that make investments above a speciﬁed

threshold typically set forth in an Investor Rights Agreement)) to receive

regular Financial Statements and have access to inspect the books and

records of a company. See also Inspection Rights.

Initial Close:

in a transaction with multiple Closings, Initial Close is the

ﬁrst Closing.

Initial Public Offering (IPO):

the ﬁrst Registered Public Offering of shares

of Common Stock of a company. Following an Initial Public Offering (also

known as an IPO) in the US, a company becomes an SEC Reporting

Company (if it wasn’t already).

Inside Round:

a Financing Round led by existing Investors in the company.

Inspection Rights:

a type of Information Right given to certain Investors

(usually Investors that make investments above a speciﬁed threshold

typically set forth in an Investor Rights Agreement) to have access to

inspect the books and records of a company and meet and talk to certain

executives of the company.

Institutional Investor:

Investors that are organized for the purpose of

investing in multiple companies.

Intellectual Property:

property that a company owns that while not

physical, is of value for its inherent intellectual worth. Examples include

Copyrights, Patents, Service Marks, Trademarks and Trade Secrets.

Interest:

additional amount added to a loan that accrues over time

(typically expressed as a percentage), which the company needs to repay

to the lender.

Internal Rate of Return (IRR):

the compounded rate of return of an

investment. As an example, if you invest US$100 on day one, and on Day

365 you liquidate your investment and receive US$150, then your IRR

was 50%. Investment funds generally have an IRR hurdle they target for

investments. For example, if an IRR hurdle is 25%, then an Investor would

want their investment to return an annual compounded return equal to at

least 25%, and prior to an investment the Investor would want to calculate

the total expected exit value, total investment amount and total time to

Exit and work backward to see if the investment would, based on those

assumptions, yield an IRR that meets their investment hurdle.

Internal Revenue Code (IRC):

the federal statutory tax law in the United

States, published as Title 26 of the Unites States Code.

Investment Letter:

letter laying out the terms of an Investors proposed

investment in a company, similar to a letter of intent or a Term Sheet.

Investment Representations:

representations made by Investors to the

company in connection with their investment (usually found in a Stock

Purchase Agreement or other Equity or debt grant documentation), which

typically relate to securities law compliance and Accredited Investor

status.

Investor:

a person or entity who puts money in a company either to

purchase Equity or make a loan to the company and get repaid or

converted into Equity upon a triggering event in the future.

Investor Rights Agreement:

an agreement that a company typically enters

into when it issues Preferred Stock to Investors in a VC Financing, which

sets out, among other things, certain Registration Rights, Information

Rights and Participation Rights for Investors.

IPO:

acronym for Initial Public Offering.

IRC:

acronym for Internal Revenue Code.

Issue Price:

the gross price at which Shares of Stock are sold, usually

expressed on a per Share basis.

Issued Shares:

the number of Shares of Stock actually sold by a company

and held by Stockholders, excluding Shares that may be issued at a later

time upon the conversion/exercise of Options, Warrants, Convertible

Promissory Notes or other Convertible Securities.

Issuer:

the company that is the Seller (or Issuer) of Securities.

JOBS Act:

the Jumpstart Our Business Startups Act, signed into law in

April 2012. The JOBS Act made signiﬁcant changes to the US securities

laws. Most signiﬁcantly, Title I of the JOBS Act provides for an IPO on-

ramp, streamlining the IPO process for EGCs, a new category of Issuer.

The other Titles of the JOBS Act introduced a number of additional

changes to the securities laws, including directing the SEC to (1) modify

Regulation D under the Securities Act to remove prohibitions on “general

solicitation” in connection with Rule 506 offerings to Accredited Investors

and (2) expressly permit general solicitation in connection with Rule 144A

Financings. See Latham & Watkins publication, The JOBS Act, Two Years

Later: An Updated Look at the IPO Landscape (April 5, 2014).

Key Employees:

which Employees are considered Key Employees

is a determination that is typically made in connection with an Equity

Financing, where this term is deﬁned in the Transaction Documents in

order to establish which Employees are making certain Representations

and Warranties or are bound by certain Covenants. This group typically

includes Founders or high-level Employees whose knowledge of the

company or services are key to the company’s success.

Key Man Insurance:

life insurance policies taken out on certain key

executives. This type of insurance may be required as a Condition

Precedent to a VC Financing (or as an Afﬁrmative Covenant in an Investor

Rights Agreement). No doubt should be called Keyperson Policy.

Knowledge Qualifier:

a term included (and typically negotiated for) in

a Representation and Warranty that a company makes in an Acquisition

Agreement, Stock Purchase Agreement, or other agreements with

Investors. This term qualiﬁes the Representation and Warranty being

made by the knowledge of certain speciﬁed individuals who have relevant

knowledge in order to restrict the companies assumed liabilities. The

exact Knowledge Qualiﬁer is to be deﬁned in the relevant agreement.

Late Stage:

a company that has gone through several Financing Rounds,

but has not yet had an Exit.

Launch:

when a startup begins offering a product or service to the public.

A Launch typically follows a beta or testing period of the same product or

service during which the startup tries to resolve any issues.

Lead Investor:

Investor who takes the roll of negotiating the Transaction

Documents with the company on behalf of all Investors so that the

company doesn’t get bogged down negotiating the round with multiple

Investors. Lead Investor is not a legal title, but more of an implied or

agreed upon role.

Legends:

statements placed on the back of Stock Certiﬁcates identifying

certain restrictions or rights applicable to the Shares, a common example

of which are Transfer Restrictions.

Leverage:

the bargaining power that a company or an Investor (or any

other party) has with respect to one another. If a company needs money

fast and has few available options, an Investor would have Leverage over

the company. Conversely, a hot Unicorn with lots of Investors lined up

at the door would have Leverage over the Investors, who will take less

attractive terms just to get into the investment. See also FOMO.

Limited Liability Company:

a type of company and organizational form

that combines many of the attributes of a corporation with attributes of a

Partnership. Like corporations, the Equity holders in a Limited Liability

Company (called members) generally do not have personal liability for

the company’s liabilities and obligations. Like Partnerships (and unlike

corporations), Limited Liability Companies are by default pass-through

entities for tax purposes (although they can elect to be taxed like taxable

corporations) and can by agreement decide on what rules the company

must follow, including whether or not the Directors (called managers)

have Fiduciary Duties to the members.

Limited Liability Limited Partnership:

a type of Limited Partnership

where the General Partner is not personally liable for the liabilities and

obligations of the Partnership. To qualify as a Limited Liability Limited

Partnership, a Limited Partnership generally has to comply with the

applicable statutory requirements in its state or other jurisdiction of

formation.

Limited Liability Partnership (LLP):

a type of Partnership that combines

many of the attributes of a corporation with attributes of a Partnership,

in which some or all of the partners have limited liability. To qualify as a

Limited Liability Partnership, a Partnership generally has to comply with

the applicable statutory requirements in its state or other jurisdiction of

formation.

Limited Partner (LP):

a partner in a Limited Partnership or Limited Liability

Limited Partnership that generally does not have personal liability for the

liabilities and obligations of the Partnership.

Limited Partnership:

a Partnership with Limited Partners and at least

one General Partner. To qualify as a Limited Partnership, a Partnership

generally has to comply with the applicable statutory requirements in its

state or other jurisdiction of formation.

Liquidation:

typically either a Change of Control or the Bankruptcy

or insolvency of a company (where assets are sold and the proceeds

distributed to the owners/creditors through a statutory process).

Liquidation Amount:

aggregate amount of proceeds that are distributed

to the Stockholders of a company in connection with a Liquidation.

Liquidation Preference:

amount that a group of Stockholders are entitled

to receive upon Liquidation, in preference to other groups of Stockholders,

under the terms of the company’s Charter.

Liquidity:

the ability to sell Shares of Stock and receive cash or other

liquid assets (such as Public Company Stock).

Loan and Security Agreement:

in Startups, generally the transaction

agreement entered into between a company and a bank for a Venture

Debt Financing.

Lock-Up:

a period of time during which a Stockholder is not permitted to

sell its Shares following a public offering, usually a 90 or 180-day period,

depending on the type of offering that starts the Lock-Up period. The

purpose of the Lock-Up is to help stabilize the Stock price following the

offering by controlling supply of Shares that are trading in the market.

See also Market Standoff Agreement.

Lock-Up Agreement:

the letters signed by Ofﬁcers, Directors and other

insiders setting forth the terms of their Lock-Ups. These are usually

negotiated in connection with the Underwriting Agreement (which is

where the Issuer’s Lock-up can generally be found). In Startups, Lock-Up

provisions are often included in the Investor Rights Agreement or other

equity grant documentation.

LP:

acronym for Limited Partner.

MAC:

acronym for Material Adverse Change.

MAE:

acronym for Material Adverse Effect.

Maintenance Covenants:

legalese for an agreement to maintain

something. In Startups, this type of Covenant is typically found in an

Investor Rights Agreement or Loan and Security Agreement and requires

the company to maintain a certain state of affairs, for example, to maintain

certain levels of insurance.

Major Investor:

an Investor that invests or loans the company an amount

of money that meets or exceeds a speciﬁed threshold (set forth in the

Transaction Documents) that then entitles the Investor to special rights

(such as Information Rights).

Management Carve-Out Plan:

a type of plan sometimes adopted by the

Board of Late Stage Startups to provide a bonus to members of management

and Employees based on a predetermined percentage of the proceeds

generated from the sale of the company. A Management Carve-Out Plan

is often used as an incentive tool especially in circumstances where the

Equity held by such management members has been signiﬁcantly diluted

over time or is underwater. However, this type of plan is very case-speciﬁc

and can be a sensitive topic to raise with Investors (since they are being

asked to supplement already granted Employee Equity with additional

incentives).

Management Rights Letter:

letter that certain Investors (common

especially for VCs) request in connection with a Financing pursuant to

which they are entitled to receive Information Rights (and sometimes

Observation Rights) that may be required for the fund associated with the

Investor to be considered a VCOC.

Management Team:

a group of Employees, who are typically at the

executive level and are in charge of carrying out the day-to-day operations

and implementing strategy the Board sets for company.

Mandatory Conversion:

generally refers to the conversion of Preferred

Stock upon the occurrence of certain speciﬁed events (as set forth in the

Charter), which most commonly are either an IPO subject to minimum

price and/or proceeds requirements (often referred to as a “Qualiﬁed

IPO”) or upon the vote by the holders of a speciﬁed threshold of Preferred

Stock.

Market Standoff Agreement:

another name for a Lock-Up. In Startups,

this type of provision is typically found in the Investor Rights Agreement,

as well as for Common Stock holders in their Stock Purchase Agreements.

Massachusetts Security Corporation:

any foreign or domestic corporation

organized or doing business in Massachusetts that is (i) engaged

exclusively in buying, selling, dealing in or holding Securities on its own

behalf and not as a broker and (ii) classiﬁed as a Security corporation

by the Commission of Revenue. This type of entity receives beneﬁcial

Massachusetts tax treatment.

Material Adverse Change (MAC):

just like it sounds, this phrase refers

to a “Material Adverse Change” in something — generally either the

business or the Debt or equity markets. Material Adverse Change is

an extraordinarily high standard in Acquisition Agreements (as of the

publication of this Book of Jargon no Delaware court had ever found a

MAC to have occurred). This term is used in two general contexts: either

(i) as a Condition Precedent (for instance, a Seller would not have to

Close on an Acquisition if there had been a Material Adverse Change

to the business); or (ii) as a qualiﬁer to Representations and Warranties

(for instance, the environmental Representation is limited to instances

where violations of the Representation could (or would) lead to a Material

Adverse Change). Also referred to as Material Adverse Effect.

Material Adverse Effect (MAE):

another name for Material Adverse

Change.

Materiality Qualifier:

shorthand for a word or phrase in Representations

and Warranties or in Covenants that limit their operation to material

events, changes or facts. An example would be insertion of the word

“material” in a Representation that a company has all licenses required

for the operation of its businesses. MACs and MAEs all include a

Materiality Qualiﬁer.

Maturity Date:

generally, in the Startup context, the date on which a

Convertible Promissory Note or other Debt outstanding must be repaid

in full.

Merger:

a process pursuant to a state corporate law by which a corporation

or other business entity (e.g., an LLC or LP) is combined by operation of

law with one or more other corporations or business entities. Typically,

the statute contemplates that each entity either be merged into another

entity, which is the legally surviving entity, or be the surviving entity into

which one or more other entities are merged.

Merger Agreement:

an agreement between two or more entities providing

for a Merger of at least one of the parties with or into one or more of

the other parties. More generically, another name for an Acquisition

Agreement. To become effective, a Merger Agreement almost invariably

requires approval by both the Board of Directors and the Stockholders of

each of the companies participating in the Merger.

Middle Market:

refers to companies with between US$50 million and

US$1 billion in revenue.

Milestones:

contractually agreed targets on the way to reaching some

ﬁnal target, the fulﬁllment of which triggers speciﬁc (agreed upon)

consequences. In Startups, subsequent Tranches of a Financing may be

contingent upon the achievement of speciﬁed Milestones, which would

be described in the Stock Purchase Agreement.

Milestone Closing:

a Closing in a Financing with multiple Closings that

is contingent upon the achievement of a speciﬁed Milestone.

Minimum Viable Product:

a product designed to allow the Startup team

to collect a signiﬁcant amount of validated learning about the product and

its development while expending minimum cost and effort.

NASDAQ:

the Nasdaq Stock Market, Inc. NASDAQ is the largest

electronic screen-based Equity Securities market in the United States.

NYSE and NASDAQ are the two principal market centers for buying and

selling Equity Securities in the United States.

NDA:

acronym for Non-Disclosure Agreement.

Negative Covenants:

legalese for an agreement not to do something.

These are contractual provision often found in an Investor Rights

Agreement or Loan and Security Agreement for Startups, which prohibit

the company from engaging in speciﬁed activities, such as issuing

new Preferred Stock, amending the Charter, making incurring new

Debt, selling assets or making Acquisitions. Think of these Negative

Covenants as the “Thou Shalt Not” covenants. Negative Covenants can

be highly customized to speciﬁc conditions and are often negotiated

heavily. Compare Afﬁrmative Covenant.

New York Stock Exchange (NYSE):

now part of NYSE Euronext, which

was formed in April 2007. In contrast to other exchanges, the NYSE still

conducts some of its transactions on a trading ﬂoor located on Wall Street.

No General Solicitation:

the prohibition of broadly marketing a

Securities offering in a Private Placement. While general solicitation is

now permitted in certain Reg D offerings as a result of rules adopted by

the SEC in July 2013 in connection with the JOBS Act, general solicitation

still has not been widely used in the Private Placement context because of

some of the procedural requirements that must be met.

No Shop, No Solicitation Clauses:

an agreement by one or both companies

involved in a Financing or Merger that they will only deal with the other

party involved and will not solicit other investments or bids or provide

information to other possible bidders or Investors during a certain period

of time.

Non-Accredited Investor:

an Investor that does not qualify as an

Accredited Investor.

Non-Compete Clause:

a contractual restraint on competition. In Startups,

this type of clause is more common on the East Coast than the West Coast

because of the limitations established by certain states, like California,

regarding the enforceability of this type of clause.

Non-Cumulative Dividend:

a Dividend that does not automatically

accrue.

Non-Disclosure Agreement:

another name for a Conﬁdentiality

Agreement.

Non-Participating Preferred:

Preferred Stock that has a Liquidation

Preference that gets paid in preference to the holders of Common Stock,

but after the Preferred Stockholder receives this amount it does not

participate in any assets distributed to the Common Stock unless the

Preferred Stockholder elects to convert into Common Stock (and in that

case, they forgo their Liquidation Preference and instead simply get what

the Common Stockholders receive).

Non-Qualified Stock Option (NSO):

a type of Option granted under

an Equity Incentive Plan, typically granted to a non-employee (such

as a Director or a Consultant), that does not qualify for the beneﬁcial

tax treatment provided by Incentive Stock Options under the Internal

Revenue Code.

Non-Solicitation Clause:

agreement not to poach or hire a company’s

Employees or customers. Certain states, like California, have limited the

enforceability of this type of clause.

Note Purchase Agreement:

similar to a Stock Purchase Agreement but

instead of Equity, this agreement provides for a loan to the company in

exchange for a Convertible Promissory Note, usually as part of a Bridge

Financing.

NYSE:

acronym for the New York Stock Exchange.

Observer Rights:

another term for Board Observer Rights.

Offer Letter:

generally, a letter provided by a company to a prospective

Employee setting forth the terms of the offer of employment being extend.

Typical terms included in an Offer Letter include, salary, bonus terms (if

any), whether Equity will be granted, and if so, whether Vesting will

apply, vacation days and any other company policies that would apply.

Officers:

the Employees who manage the day-to-day operation of the

company and are elected by the Board. In Startups, the Founders are

typically the ﬁrst Ofﬁcers of the company.

Officers Certificate:

a type of Closing Certiﬁcate that may be required

to be delivered at Closing, which is signed by an Ofﬁcer of the company.

The signing Ofﬁcer certiﬁes the accuracy of the company Bylaws and

Board and Stockholder resolutions adopted in connection with the

transaction and attached to the Ofﬁcers Certiﬁcate or the continued

accuracy of Representations and Warranties. In Startups, the Closing

Certiﬁcates required in a Preferred Stock Financing are set forth in the

Closing Conditions section of the Stock Purchase Agreement.

Opinion Letter:

a legal opinion from lawyers on a discrete matter which

will be relied on by another party (for Startups this is typically the Investor).

A typical example of an Opinion Letter would be an opinion given as to

whether a particular agreement is valid and enforceable in a particular

jurisdiction or whether a particular party (typically the Issuer) has the

capacity and authority to enter into certain agreements. In Startups an

Opinion Letter is typically only seen in Preferred Stock Financings and

the types of opinions that can be given are often very limited. Depending

on a company’s Leverage, recently some Investors have been willing to

forgo an Opinion Letter as a Closing Condition.

Option:

a contract issued by a company, typically pursuant to an Equity

Incentive Plan, allowing the holder to acquire Stock of the company under

certain circumstances (usually tied to Vesting over a period of continued

employment) upon the payment to the company of the Exercise Price. For

Startups, Option grants are a key means of attracting talent, incentivizing

Employees and providing adequate compensation (when cash is tight).

Option Agreement:

agreement that sets forth the terms and conditions of

an Option, including, among other things, the number of Shares subject

to the Option, the Exercise Price and the Vesting Schedule (if any).

Option Pool:

the number of shares of Common Stock set aside and

reserved for issuance under a company’s Equity Incentive Plan, which

can be increased over time by amending the Equity Incentive Plan (an act

requiring both Board and Stockholder consent).

Optional Conversion:

conversion of Preferred Stock at the Option of a

Preferred Stockholder. Compare to Mandatory Conversion.

Organizational Documents or Org Docs:

typically refers to a corporation’s

Charter and Bylaws.

Original Issue Price:

price at which Equity was originally issued, subject

to adjustment upon the occurrence of certain events set forth in the

Charter (such as Stock Splits, Dividends, Recapitalizations, etc.).

Outstanding Shares:

Shares of a company that are actually issued and

outstanding as opposed to reserved for future issuance (such as a reserved

Option Pool) or issuable pursuant to outstanding Options, Warrants or

other Convertible Securities that have not yet been exercised.

Oversubscription Privilege:

the ability for holders of Preemptive Rights

to purchase more than their speciﬁed Pro Rata Amount of Shares if other

holders do not elect to purchase their entire Pro Rata Amount.

Par Value:

the face value of shares of a company’s Stock as set forth in the

company’s Charter and the minimum amount per Share at which Stock

can be sold under the corporation statutes of most jurisdictions.

Pari Passu:

If your Latin is a little rusty, this means “on equal footing” or

equality of treatment, e.g., in a right of payment. In Startups, Pari Passu

typically describes classes of Preferred Stock that have the same rights (as

set forth in a company’s Charter).

Participating Preferred (with and without cap):

Preferred Stock that

receives both its Liquidation Preference and is then treated as if it was

converted to Common Stock and also gets to participate in any assets

distributed to the holders of Common Stock (or up to a certain speciﬁed

amount if there is a cap). Participating Preferred is the most Investor

friendly Liquidation Preference and allows the holders of Preferred Stock

essentially to get the best of all worlds. Compare to Non-Participating

Preferred.

Participation Rights:

right to participate in the Distribution of assets

to Common Stock upon a Liquidation held by holders of Participating

Preferred. “Participation Rights” is also a phrase used at times to refer to

Preemptive Rights.

Partnership:

a legal entity, which is an association of two or more

individuals or entities to carry on a business created under state law. A

Partnership is taxed as a pass-through entity (i.e., not separately taxed on

its own income) and is usually governed by a Partnership Agreement, the

mandatory contents of which are speciﬁed by the relevant law.

Partnership Agreement:

the agreement among partners of a Partnership

governing their relative rights and obligations among one another with

respect to the Partnership. See also Partnership.

Patent:

the grant of a property right to an inventor issued by the US Patent

and Trademark Ofﬁce in exchange for public disclosure of the invention.

The term of a new Patent is generally 20 years from the date on which

the Patent application was ﬁled. A Patent provides the owner with the

right to exclude others from making, using, offering for sale or selling the

invention in the US and the holder of the Patent must enforce this right.

A Patent is a form of Intellectual Property and applicants can seek either

a utility or design Patent depending on the nature of the invention. A

formal registration and payment of the associated registration fees are

required in order to receive a Patent.

Pay to Play:

provision pursuant to which Stockholders are required to

invest their Pro Rata Amount in future Financings or face a negative

consequence. These consequences can range from forced conversion to

Common Stock or conversion to Common Stock at a punitive Conversion

Ratio or the loss of other preferential rights provided to the Preferred

Stockholders.

Periodic Reports:

the annual report on Form 10-K and the quarterly

reports on Form 10-Q required to be ﬁled with the SEC by all US public

companies. US federal securities laws specify precisely who is required

to ﬁle these reports, but as a general matter, the reports are ﬁled by

companies that have completed an IPO, have Securities listed on an

exchange, or have a class of Securities registered under the Exchange Act.

Per Share Price:

price paid for one Share of Stock.

Piggyback Registration Rights:

Registration Rights that permit holders

of Private Securities to “piggyback” into a Registration Statement

originally ﬁled by the Issuer for a separate purpose. These rights give

the holder the ability to “jump onto” an offering that another party

(either the Issuer itself or another Security holder) initiated. In Startups,

these rights are typically set forth in the Investor Rights Agreement

entered into in connection with a VC Financing. Compare Demand

Registration Rights.

PIPE:

acronym for “private investment in public Equity.” In a PIPE

transaction, a Public Company issues Equity Securities to Institutional

Investors in a Private Placement and, if required for the relevant

jurisdiction, undertakes to register the Equity Securities for public resale

promptly after the transaction closes.

Pitch:

a presentation that entrepreneurs make to Investors or other

constituents to describe why the company is a good investment, often

focusing on a description of the company, its products or services, the

problem the company is trying to solve, the market opportunity, ﬁnancial

projections and what the funding will be used for, among other things. If

the pitch is a hit, you may enjoy a home run. See Elevator Pitch.

Pivot:

to change directions. For a startup this typically means when

the company decides to go after a different market or product or use a

product/service for a different purpose then originally intended.

Placement Agent:

in a Private Placement, the agent responsible for

introducing the Issuer to QIBs and Accredited Investors that may purchase

Securities of the Issuer on the terms and conditions set forth in the Private

Placement Memorandum (typically a Stock Purchase Agreement in VC

Financings) or the Note Purchase Agreement.

Portfolio Company:

a company that has been invested in by a Venture

Capitalist and now sits in that Venture Capitalist’s “portfolio” of

companies.

Post-Money Valuation:

the valuation of a company after giving effect

to a Financing. For example, if a company has a Pre-Money Valuation

of US$20 million and raises US$10 million, the Post-Money Valuation is

US$30 million (the Price Per Share in the last Financing multiplied by the

Fully Diluted Shares in a company immediately after that Financing will

also give you the Post-Money Valuation).

Pre-Closing:

the night before Closing when you complete all the work so

you can have a smooth Closing the next day. Don’t plan on getting much

sleep.

Pre-Seed Financing:

a relatively new investment choice, typically in the

six-ﬁgure or lower realm, that some Startups complete after or concurrent

with the Friends and Family Round and before Seed Capital is raised. With

some Seed Capital Investors raising larger amounts for larger Financings,

Pre-Seed Financing is becoming more common.

Preemptive Rights:

the rights given to existing Stockholders to have

ﬁrst refusal on the transfer of existing Shares or the issue of new Shares

by a company. In Startups, these rights are typically given to Preferred

Stockholders in a Preferred Stock Financing and are found in the Investor

Rights Agreement. Okay, technically Preemptive Rights in Delaware can

only exist in the Charter, but these rights are the contractual equivalent

and generally people still (incorrectly) refer to them as Preemptive Rights.

This is a Book of Jargon after all, so who are we to correct them?

Preferred Director:

the Director or Directors appointed by the Preferred

Stockholders pursuant to the designation rights typically provided to

Preferred Stockholders in a Preferred Stock Financing and set forth in the

Voting Agreement.

Preferred Stock:

Stock generally issued to Investors in connection with

a Financing that has preferential rights (rights not held by Common

Stockholders) that are set forth in the Charter and usually include rights

relating to Liquidation, Dividends, Anti-Dilution Protection and Voting

Rights, among other things.

Preferred Stock Financing:

a transaction in which a corporation receives

funds from Investors in exchange for shares of Preferred Stock, which

have certain speciﬁed “preferential” rights that are set forth in the

corporation’s Charter (usually as amended and/or restated in connection

with the Financing) and a set of transaction documents that typically

include a Stock Purchase Agreement, Investor Rights Agreement, ROFR

Agreement and Voting Agreement.

Preferred Stockholder:

a Stockholder that holds Shares of Preferred

Stock in a corporation.

Pre-Money Valuation:

valuation of a company prior to the receipt of

the investment in connection with a Financing calculated by taking the

Per Share Price to be paid by Investors and multiplying that amount by

the number of Shares outstanding immediately prior to the Financing

(including any proposed increase to the Option Pool).

Pre-Payment:

the repayment of a Debt obligation prior to the Maturity

Date. Pre-Payment is generally not allowed in connection with Convertible

Promissory Notes (lest a company be able to pay off notes that are about

to convert at an attractive price).

Private Company:

a company with Stock that does not trade in public

markets. The term is often used in counter-distinction to the term Public

Company. All Startup companies are Private Companies until they go

public in an IPO.

Private Equity:

a generic term sometimes used as shorthand for a Private

Equity sponsor and/or the business of raising and managing Private

Equity funds, which invest primarily in mature companies with the goal

of buying a controlling stake in a company to make operational and other

improvements prior to an Exit. By contrast, Venture Capital, although

technically also “Private Equity,” generally refers to the purchase of a

substantial (but usually minority) stake in a Startup viewed as having

high growth potential. See Venture Capital.

Private IPO:

a term coined to refer to a large private Financing (typically

with a raise of more than US$40 million), including Investors such as

mutual funds that are typically considered to be public market Investors,

completed by a Late-Stage company that would have traditionally

completed an IPO.

Private Placement:

a Private Placement of Securities (rather than a

Registered Public Offering) done pursuant to an exemption from Section

5 of the Securities Act. VC Financings and almost all Financings done by

Startups are Private Placements. See Section 4(a)(2) and Regulation D.

Private Placement Memorandum:

an information document prepared by

a company, sometimes with the assistance of external Advisors such as

lawyers and bankers, to market Securities of the company to potential

Investors. A Private Placement Memorandum is sometimes called an

offering memorandum.

Private Securities:

Securities in a Private Company.

Profit:

a ﬁnancial beneﬁt realized when the amount earned from a speciﬁc

activity exceeds the amount spent on such activity.

Proprietary Information and Invention Assignment Agreement:

agreement that all Startups should obtain from every Employee (including

the Founders) immediately prior to beginning work for the company,

pursuant to which the Employee agrees to assign any relevant inventions

to the company and to clarify that all work product and inventions created

while working for the company belong to company. This is critical to the

protection of a company’s Intellectual Property. Proprietary Information

and Investment Assignment Agreements are sometimes called conﬁdential

information and invention assignment agreements.

Pro Rata Amount:

an amount in proportion, or prorated. For Startups, Pro

Rata Amount is often used to refer to the amount of Stock one Investor

will be able to purchase in a Financing pursuant to its Preemptive Rights.

Prospectus:

a marketing document included in the Registration Statement

ﬁled with the SEC that registered or public offerings are effected through.

Plural is “Prospectuses.”

Protective Provisions:

a type of veto rights that is often negotiated for in

connection with a VC Financing that require the approval of the holders

of a speciﬁed amount of the Preferred Stock before the corporation can

take certain actions as set forth in the corporation’s Charter. These actions

often include amendments to the Bylaws or Charter, subsequent Equity or

Debt issuances and increases to the Option Pool. Protective Provisions are

one of the key ways VCs maintain some control over actions that could

impact their investment even if they don’t hold a majority of the Stock in

the corporation or control a majority of the Board.

Public Company:

a company with Shares registered under the Exchange

Act.

Purchaser:

another name for an Acquirer or Buyer.

Put Option:

a ﬁnancial contract between a Buyer and a Seller, where the

Seller has the right or Option to sell a speciﬁc quantity of a commodity,

Security or other ﬁnancial instrument to the Buyer at prices and within

time periods that are stated in the contract.

QIB:

acronym for Qualiﬁed Institutional Buyer.

Qualified Financing:

a Financing with negotiated parameters (e.g., must

raise at least US$4 million from third-party Investors) that must be met in

order to trigger the occurrence of a speciﬁed event, such as the automatic

conversion of Convertible Promissory Notes.

Qualified Institutional Buyer (QIB):

large Institutional Investors that must

have at least US$100 million invested in Securities or under management.

Qualiﬁed Institutional Buyers are the permitted Purchasers of Securities

in Rule 144A Financings. See Rule 144A.

Qualified Small Business Stock (QSBS):

capital Stock of a domestic C

Corporation that operates an active business satisfying various technical

requirements set forth in the Internal Revenue Code, which must

be reviewed on a case-by-case basis. For example, the corporation

must use at least 80% of its asset value in the active conduct of one or

more “qualiﬁed trades or businesses” (as deﬁned in the IRC), and the

corporation’s “aggregate gross assets” cannot exceed US$50 million

immediately after the Stock is issued. As a result, many Startups may

qualify and be eligible to issue QSBS. Many companies in the new and

emerging technology sector are potentially eligible to issue QSBS. From

a Stockholder’s perspective, the receipt of QSBS is beneﬁcial as there is a

certain level of gain exclusion from the sale of Stock if held for more than

ﬁve years (note that the level of gain exclusion may vary depending on

when the QSBS was acquired, but could be as much as 100% exclusion).

Ratification:

approval by the Board of an action that has already occurred.

Recapitalization:

an adjustment or reshufﬂing of a company’s

Capitalization, which may be treated as tax free under certain

circumstances. Sometimes called a Recap.

Redeemable Preferred:

Preferred Stock that has Redemption Rights

(either optional or mandatory) as set forth in a corporation’s Charter.

Redemption:

the repurchase of Shares upon the occurrence of certain

speciﬁed events at a predetermined price or formula set forth in a

corporation’s Charter.

Redemption Price:

the price paid for Shares in the event of a Redemption

as set forth in a corporation’s Charter.

Redemption Rights:

the right to Redemption held by certain Stockholders

as set forth in a corporation’s Charter. This right is often negotiated for

in connection with a Preferred Stock Financing, but is becoming less

common of late (and is rarely seen in West Coast VC Financings).

Registered Public Offering:

a Distribution of Securities that is not exempt

from registration with the SEC.

Registration Rights or Reg Rights:

rights of a Stockholder to force an Issuer

to register its Securities with the SEC. These rights enhance the Liquidity

of the Securities because registered Securities are freely tradable.

Registration Rights (or Reg Rights) can take several forms. Holders of

Equity Securities obtained in a VC Financing often have rights to demand

that the Issuer register its Securities or to piggyback onto an offering in

which the Issuer is already engaging. See Piggy Back Registration Rights

and Demand Registration Rights.

Registration Statement:

the document ﬁled with the SEC in connection

with a Registered Public Offering of Securities. The Registration Statement

contains the Prospectus.

Regulation A+:

recent amendments to Regulation A under the Securities

Act, which took effect on June 19, 2015. The purpose of Regulation A

was to lessen the burden of registration under the Securities Act for small

offerings. These amendments, among other things, increased the amount

of capital that can be raised in Regulation A offerings from US$5 million to

US$50 million over a 12 month period and created a two-tiered structure

for eligible Issuers. See L&W Client Alert – SEC Adopts Regulation A+

Rules (4/7/15) for more information about Regulation A+.

Regulation Crowdfunding:

ﬁnal rules adopted by the SEC on October

30, 2015, permitting companies to offer and sell Securities through

Crowdfunding. Regulation Crowdfunding enables Investors to purchase

Securities in Crowdfunding offerings, subject to certain limitations, and

require Issuers relying on Regulation Crowdfunding to disclose certain

information about their business and offering, as mandated by the JOBS

Act. Speciﬁcally, Regulation Crowdfunding permits an Issuer to raise a

maximum aggregate amount of US$1 million through Crowdfunding

offerings in a 12-month period and allow Investors to invest up to

US$100,000 across all Crowdfunding offerings in the course of a 12-month

period, depending on their annual income and net worth. As a result of

Regulation Crowdfunding, Issuers can now conduct Securities offerings

that are exempt from the registration requirements of the Securities Act,

yet that are open to all types of Investors, including ordinary retail, Non-

Accredited Investors. However, it is not clear to what degree Startups

will utilize Regulation Crowdfunding given the relatively low investment

limits, the complexity of the rules and the associated compliance costs.

Issuers may instead opt to rely on other available exemptions which Issuers

may use to raise capital through Crowdfunding, including SEC Regulation

A+ and Regulation D, Rule 506(c). See Latham & Watkins Client Alert No.

1893, “SEC Adopts Final Crowdfunding Rules” (November 10, 2015).

Regulation D or Reg D:

spells out the rules for a valid Private Placement.

Under the Securities Act, any offer to sell Securities must either be

registered with the SEC or made pursuant to an exemption. Regulation

D provides a safe harbor for sales of Securities in transactions “not

involving any public offering” within the meaning of Section 4(a)(2) of the

Securities Act (i.e., the most common exemption relied upon for Private

Placements). Since Regulation D was originally adopted, the availability

of the safe harbor has been subject to the condition that neither the Issuer

nor anyone on its behalf will engage in any form of solicitation. The JOBS

Act changed all this, and as of September 23, 2013, Rule 506(c) permits

general solicitation in Regulation D Private Placements where certain

conditions are met, including that the Issuer take “reasonable steps to

verify” that Purchasers are Accredited Investors. See Latham & Watkins

Client Alert No. 1569, “You Talkin’ to Me?” (July 25, 2013). See No

General Solicitation.

Regulation D Offering:

an offering of Securities made pursuant to Reg D.

Regulation S or Reg S:

provides an exemption from the registration

requirements of the Securities Act for certain offshore transactions. Most

Rule 144A Financings also have a Reg S component to allow for offshore

sales. Rule 144A/Regulation S Financings do not have to be registered

with the SEC because the Purchasers are either QIBs buying pursuant to

Rule 144A or they are outside the US and buying pursuant to Reg S (yes,

US securities laws apply to a sale anywhere in the world).

Reincorporation:

moving a corporation’s state of Incorporation to another

jurisdiction.

Reorganization:

a generic term for some fundamental change in a

company’s Capitalization and/or in its ﬁnancial and legal obligations.

Representations and Warranties:

an assertion of fact in a contract (such as

an Acquisition Agreement, Merger Agreement, Note Purchase Agreement

or Stock Purchase Agreement). Representations and Warranties are

the means by which one party to a contract tells the other party that

something is true as of a particular date and if that something is not, then

the company will provide appropriate disclosures in the corresponding

Disclosure Schedule (or be liable for failure to disclose). Representations

and Warranties can also be used to allocate a risk of unknown facts and/

or future events if appropriately drafted to do so.

Reporting Company:

a company that ﬁles Periodic Reports with the SEC.

Repurchase Provisions:

provisions typically found in Restricted Stock

Purchase Agreements issued to Founders that provide the corporation

with the right to buy back any Shares that have not yet Vested when the

Founder leaves the corporation.

Restricted Securities:

Securities that have been issued on a private

(unregistered) basis and are not yet eligible for public resale pursuant to

Rule 144.

Restricted Stock:

Stock not registered for sale under the Securities Act. As

a result, the manner in which the Stock may lawfully be sold is restricted

to Private Placements and other non-regulated transactions. With

respect to equity compensation, Restricted Stock refers to Stock granted

or purchased by a Founder or other early Employee who is subject to

Vesting and either Forfeiture Provisions or Repurchase Provisions, usually

tied to continued service. Employees who join a Startup later on in its

life cycle typically receive Options instead of Restricted Stock as the Per

Share Price has usually become higher than most Employees would be

willing (or able) to pay upfront.

Restricted Stock Purchase Agreement (RSPA):

the equity grant

documentation typically used to issue Restricted Stock. This agreement

typically includes the number of Shares being purchased, the Per Share

Price, the Vesting Schedule, either Repurchase Provisions or Forfeiture

Provisions, a ROFR and any other restrictions. Founders normally receive

their initial Shares of Stock under an RSPA.

Return on Investment (ROI):

a calculation used to evaluate the efﬁciency

of an investment. ROI is the amount of proceeds received from the sale of

an investment less the cost of the investment, divided by the cost of the

investment. An ROI that a venture Investor might seek could range from

2x–10x depending on the stage of investment and level of execution and

market risk that lies ahead at the time.

Reverse Subsidiary Merger:

a Triangular Merger in which a Subsidiary

of the Buyer (usually a wholly owned Subsidiary created for this purpose)

is merged with and into the Target Company, and the Target Company

is the surviving company in the Merger. A Reverse Subsidiary Merger is

the preferred form of Triangular Merger because a Reverse Subsidiary

Merger avoids issues concerning the assignability of Target Company

contracts and similar rights to the Buyer or one of the Buyer’s Subsidiaries.

Also referred to as a Reverse Merger, Reverse Sub Merger and Reverse

Triangular Merger.

Right of First Refusal (ROFR):

the right held by a company to receive

notice if a Stockholder subject to this right wants to sell its shares to a

third party and to have the ability to purchase the offered Shares ﬁrst on

the same terms and conditions as proposed to the third party. Startups

typically have ROFR provisions applicable to all grants of Common Stock

(either found in a company’s Bylaws or equity grant documentation),

as a way to maintain control over who holds Stock in the company. In

VC Financings, VCs often require a ROFR Agreement that extends a

secondary ROFR to VCs (giving them the right to purchase the offered

Shares only after the company has ﬁrst passed on its ROFR). By contrast,

VCs typically do not agree to have their Shares subject to a ROFR.

Rights Offering:

offering of Equity made to Stockholders who have

Preemptive Rights or Participation Rights with respect to a particular

Financing and sometimes to other Stockholders who do not have such

rights, as well.

Road Show:

the trip around the country (or around the world), often on

private jets, that Issuers and bankers (but not lawyers) go on in order to

meet with potential Purchasers of the Securities being offered. A Road

Show is the heart of the marketing process in a Registered Public Offering.

ROFR:

acronym for Right of First Refusal.

ROFR Agreement:

an agreement that a corporation typically enters into

when it issues Preferred Stock to Investors in a VC Financing, which

sets out, among other things, the ROFR held by the corporation and the

Investors.

RSPA:

acronym for Restricted Stock Purchase Agreement.

Rule 10b-5:

the SEC rule regarding employment of manipulative and

deceptive practices. Rule 10b-5 is one of the most important SEC rules.

This rule seeks to prohibit fraud or deceit in connection with the purchase

or sale of any Security, including insider trading.

Rule 144:

a rule under the Securities Act creating a safe harbor from

Underwriter status for public sales of Restricted Securities.

Rule 144A:

provides a resale exemption from the registration requirements

of the Securities Act. The rule permits persons who purchase Securities in

Private Placements to resell them freely in the Secondary Market if (i) the

subject Security is not listed on a national securities exchange and (ii) the

sales are to Qualiﬁed Institutional Buyers. See Rule 144A Financings for

why this rule is so important.

Rule 144A Financings:

a transaction where an investment bank

buys Securities from an Issuer pursuant to a Private Placement and

immediately resells the Securities to QIBs in reliance on Rule 144A. Rule

144A Financings are attractive to Issuers because these transactions can

be consummated without SEC registration, allowing greater speed to

market.

Rule 405:

contains the deﬁnitions of many terms used in other Securities

Act rules. Sort of like the SEC’s Book of Jargon.

Rule 501:

contains the deﬁnitions and terms used in Reg D. Sort of like the

SEC’s Book of Jargon.

Rule 504:

exemption for limited offerings and sales of Securities not

exceeding US$1 million. Given the limitations of this exemption, Rule 504

is far less used than Rule 506.

Rule 505:

exemption for limited offers and sales of Securities not exceeding

US$5 million. Given the limitations of this exemption, Rule 505 is far less

used than Rule 506.

Rule 506:

one of the Section 4(a)(2) safe harbors within Regulation D

that permits a Private Placement of an unlimited amount of Securities.

Rule 506(b) requirements include that (i) the Issuer cannot engage

in any form of general solicitation and (ii) the Issuer may only sell to

Accredited Investors and up to 35 Non-Accredited Investors who have

sufﬁcient knowledge and experience in ﬁnancial and business matters to

make them capable of evaluating the merits and risks of the prospective

investment (but if there are any Non-Accredited Investors then there are

certain disclosure requirements, which Issuers tend to prefer to avoid due

to the cost and time associated with drafting such disclosure). However,

Rule 506(c) permits general solicitation provided all actual Investors are

Accredited Investors and the Issuer has taken reasonable steps to verify

that the Investors are Accredited Investors. Rule 506 exemptions are not

available if the Issuer or certain associated persons are Bad Actors. See

Reg D.

Runway:

how much time a company can function (usually measured in

months) until they run out of money (and thus need to raise additional

funding). Calculated by dividing the current cash by the monthly Burn

Rate.

S Corporation:

a corporation that has, with the consent of its Stockholders,

elected to be treated as a pass-through entity (i.e., not separately taxable

on its own income) for US federal tax purposes under the “small business

corporation” rules in Subchapter S of the Internal Revenue Code. The

Stockholders, limited to US individuals and certain trusts, thus include

their pro-rata share of the corporation’s income in their own tax returns.

Compare to a C Corporation.

SAFE Investment:

stands for “Simple Agreement for Equity (SAFE)”

and was developed to provide some of the same beneﬁts of Convertible

Promissory Notes, but rather than structured as Debt, SAFE Investments

are made in return for a contract to issue Equity in the future under certain

conditions. Many Institutional Investors and VCs have been hesitant to

use this form of investment due to the uncertainty that surrounds it as a

new investment structure.

Scalable:

the ability for a company to grow its market and product and

service offerings exponentially faster than the need to grow the supporting

infrastructure of the company. For example, a software company that has

already built the software is very “scalable” because the company can

easily add customers without very much additional cost to the company.

Schedule of Exceptions:

another name for Disclosure Schedule.

Secondary Market:

the market through which Stockholders can sell

Shares they hold in a Startup directly to other interested parties. Called

secondary because the primary market is when the Startup itself issues

Shares directly. Formal marketplaces have recently been created to

facilitate the increased interest for such a Secondary Market (NASDAQ

even just purchased one of these Secondary Markets).

Secondary Sale:

the sale by Stockholders of their shares to other

interested parties. For practical purposes, however, the numerous

Transfer Restrictions that apply to Stockholders in a Startup often make

such Secondary Sales very difﬁcult without the consent of other parties

in the Startup.

Secretary’s Certificate:

a Closing Certiﬁcate signed by the secretary of

the company. In connection with a VC Financing, this certiﬁcate typically

certiﬁes the true and complete copies of the company’s Charter, Bylaws

and Board and Stockholder resolutions approving the Financing.

Section 5:

a fundamental section of the Securities Act that requires,

absent an exemption, that a Registration Statement covering a Security

be ﬁled with the SEC before any offer is made, and be declared effective

by the SEC before any sale is made. Section 5 divides the world into

three distinct time periods: pre-ﬁling (when no offers can be made), pre-

effective (when no sales can be made) and post-effective (when sales can

be made).

Section 4(a)(2):

exempts from Section 5 of the Securities Act any offerings

of Securities in “transactions by an Issuer not involving a public offering.”

Section 4(a)(2) is the statutory origin of Private Placements. Regulation

D is the safe harbor that gives deﬁnition to this statutory provision. See

Regulation D.

Section 409A:

section of the IRC that deals with deferred compensation

and sets out rules by which certain Equity issuances and company

practices regarding Equity may be deemed deferred compensation and

therefore subject to onerous tax obligations. For Startups, Section 409A

most commonly comes in to play as it relates to the issuance of Options

and how the company should determine the Fair Market Value for the

Option grant and what factors to consider.

Securities:

negotiable ﬁnancial instruments that represent some type of

ﬁnancial value to the Issuer, such as Debt or Equity.

Securities Act:

the Securities Act of 1933, as amended, which governs the

registration of Securities.

Securities Exchange Act:

the Securities Exchange Act of 1934, as

amended, which governs the continuing reporting obligations of

companies with registered Securities.

SEC:

acronym for the US Securities and Exchange Commission.

Seed Capital:

money invested in an Early Stage company prior to its

Series A Financing for the company to pursue its Business Plan, often

based on having or creating a Minimum Viable Product. Called “seed”

to elicit the idea of providing the funds needed for a company to plant its

seed, which will hopefully grow into a successful enterprise over time.

Seed Financing:

Financing in which Seed Capital is raised by a company.

Seller:

another name for a Target Company or party selling assets or

Securities in a Business Combination.

Senior Debt:

not a speciﬁc type of Debt, but rather a general reference

to a Debt that is “higher” in the Capitalization of a company than other

Debt, such as Subordinated Debt. It is better to be Senior Debt than

Subordinated Debt.

Senior Securities:

not a speciﬁc type of Security, but rather a general

reference to a Security that is “higher” in the Capitalization of a company

than other Securities. As an example, in the event of a Liquidation,

holders of Senior Securities would be paid back prior to the holders of any

Securities that are junior to it because such Senior Securities are higher

on the Waterfall.

Service Mark:

similar to a Trademark, except a Service Mark is a word,

phrase, symbol and/or design that distinguishes the source of a service

rather than goods.

a unit in the Equity of a company.

Shell Corporation:

usually a corporation that has no individual Investors,

but rather its sole Stockholder is another corporation that has set up this

entity for a particular business objective.

Single Trigger Acceleration:

when the Vesting that applies to either

Restricted Stock or an Option is accelerated upon the occurrence of one

triggering event, which is often a Change of Control of the company.

Investors, like VCs, typically look less favorably upon this type of

acceleration (because it is less attractive to potential Buyers who often

want to see Vesting continue after an Acquisition) and will sometimes

require that the Equity grant documentation be amended to delete this

form of acceleration prior to a Financing. By contrast, Investors are

typically more willing to allow Double Trigger Acceleration provisions.

Small Business Administration (SBA):

a US government agency that

provides support to small businesses and entrepreneurs.

Small Business Innovation Research (SBIR):

a program run by the Small

Business Administration to help certain small businesses conduct research

and development through the use of contracts or grants.

Small Business Investment Company (SBIC):

a privately owned investment

company that is licensed by the Small Business Administration. Small

Business Investment Companies supply small businesses with Financing

(either Equity or Debt). SBICs provide a viable alternative to VCs for

many small enterprises seeking startup capital.

Sole Incorporator:

the person (typically one of the Founders) who sets

up a corporation by signing and ﬁling the initial paperwork with the

secretary of state of the state of Incorporation.

Special Purpose Entity:

can be used in a number of different contexts. For

example, a Special Purpose Entity can be an entity formed solely for the

purpose of participating in a transaction or company established within

a corporate group in such a way as to prevent the insolvency of that

company from affecting any other company within the group, often for

a limited corporate purpose. A typical example would be when a Special

Purpose Entity is set up for the purpose of acquiring or operating a

particularly risky asset or making investments. Also known as a “Special

Purpose Vehicle.” Special Purpose Entities are often used to accomplish

off-Balance Sheet arrangements.

Spin Off:

the division of a business into two or more separate legal entities.

Startup:

a new business which can be on any scale — but most Startups

start off small and hope to see signiﬁcant growth over time.

Statutory Voting:

vote required by statute as opposed to Voting Rights

established by contract.

Stock:

Shares in a company/corporation.

Stock Certificate:

instrument or piece of paper that represents the Stock

an Investor, Employee, Consultant or Director owns in a company. In the

old days, a Stock Certiﬁcate used to be an extremely important piece

of paper (often kept in a safe deposit box or held in a vault). Today,

with electronic records and tracking, having an actual Stock Certiﬁcate

is no longer as exciting (as evidenced by the shift in many Startups to

Uncertiﬁcated Shares).

Stock Purchase Agreement:

agreement by which an Investor purchases

and a company issues Shares of Stock (typically Preferred Stock, but can

also be used for the issuance of Common Stock). This agreement typically

includes, among other things, Representations and Warranties made by

the company, a list of Closing Conditions and a schedule of Investors

participating in the Financing.

Stockholder:

a person or entity who holds Stock in a company.

Stock Split:

where the existing Shares of a company are split to create

more Shares for the existing Stockholders, with the Stockholders’

proportionate shareholdings remaining the same. Used, for example, to

facilitate a Spin Off.

Straight-Line Vesting:

when a Vesting Schedule provides for linear

Vesting, or Vesting at a constant rate over time. A common example of

this type of Vesting for Startups would be monthly Vesting during the last

three years of a typical Vesting Schedule.

Strategic Acquisition:

where a Buyer purchases a Target Company for a

particular commercial reason, such as to create certain synergies with, or

to obtain particular assets expected to add value to, the Buyer’s existing

business interests. Buyers in Strategic Acquisitions frequently operate in

the same or related industries as the Target Company.

Strategic Investor:

an Investor who is not an Institutional Investor, VC

or Private Equity Investor, but rather an entity that invests in a company

for a particular commercial reason and is often in the same or a related

industry as the company it is investing in.

Subordinated Debt:

sits in-between Senior Debt and Equity in the

Capitalization. VCs providing Bridge Financing to a Portfolio Company

will be required to be subordinated to any other existing bank Debt.

Subscription Agreement:

this is an agreement by which an Investor

subscribes for the purchase of Shares of Stock from a company, similar to

a Stock Purchase Agreement.

Subsidiary:

a company that is owned by another company, which is the

Subsidiary’s parent entity.

Sweat Equity:

where a party receives an ownership interest in a business

or project in return for non-ﬁnancial contributions, such as their work or

effort (and, by proxy, their blood, sweat and tears). Founder Shares are

considered Sweat Equity.

Tag Along Rights:

the contractual rights of a minority Stockholder

to be included in (or to tag along in) a transaction where the majority

Stockholder is selling its interests to a third party. Compare Drag Along

Rights. Also referred to as Co-Sale Rights. In Startups, if Tag Along Rights

were negotiated for in connection with a Preferred Stock Financing, these

rights would typically be found in the ROFR Agreement.

Target Company:

commonly used name for the company or business

purchased in a transaction in which the economic buying and selling

entities are discernible.

[fill-in-the-blank]-tech:

a term used to describe the application of

technology to a speciﬁc industry. Some common examples include:

adtech, agtech, cleantech, edtech, ﬁntech, regtech, etc.

Tender Offer:

a unilateral offer by a Buyer to purchase a Target Company’s

Securities directly from the owners of those Securities, usually for all cash.

A Tender Offer, unlike a Merger Agreement, does not need the assent of

the Target Company, which is not a party to the transaction.

Term Sheet:

summary of a transaction’s principal terms. Term Sheets

are very common in Financings and are also very common for proposed

Acquisitions of non-public Target Companies, transactions which do not

require public disclosure of the negotiations. Investors typically provide

Startups with their proposed Term Sheet, which is then negotiated before

a decision is made to move forward with the Financing. Term Sheets are

rarely intended to be binding and ordinarily should contain a speciﬁc

provision to that effect. A Term Sheet is normally intended simply to

serve as a guide to assist in the preparation of deﬁnitive documents for

the transaction. There are instances, however, in which a party has tried,

sometimes successfully, to enforce a Term Sheet in court.

Traction:

when a product or service begins to be used or purchased,

essentially a proof of concept.

Trademark:

a word, phrase, symbol and/or design that distinguishes the

source of goods of one party from another party. In some cases, people

use this term to refer to both Trademarks and Service Marks. While

Trademarks in the US do not require federal registration, registration

does provide certain advantages.

Trade Secret:

a formula, device, technique, process or other important

component of a business that derives economic value from not being

generally known or ascertainable and over which a company takes

reasonable efforts to maintain its secrecy. A good example of a Trade

Secret is the Coca Cola recipe.

Tranche:

French for a slice or a portion, commonly used to describe

each time an investment is made in connection with a Financing that

has multiple Closings. As an example, if a Series A Financing has three

Closings, you could refer to this as a Financing with three Tranches.

Transaction Documents:

the principal documents involved in a particular

transaction. In a Preferred Stock Financing, the Transaction Documents

typically include a Stock Purchase Agreement, amended and restated

Charter, Investor Rights Agreement, ROFR Agreement and Voting

Agreement.

Transfer Restrictions:

restrictions that limit a Stockholder’s ability

to transfer Shares of Stock in a company typically set forth by statute,

provisions in a company’s Organizational Documents or provisions in the

Equity grant documentation. In Startups, most Common Stock is subject

to Transfer Restrictions in the form of a ROFR. Holders of Preferred Stock

may also be subject to a ROFR, although this is not very common for

VCs (it is more common, however, for Private Equity Investors holding

Preferred Stock to accept such restrictions).

Treasury Stock:

Issued Shares that are purchased by the Issuer and not

returned to the status of authorized but unissued Shares. Treasury Stock

thus remains issued but not outstanding (i.e., held by third parties).

Triangular Merger:

a Merger in which the Target Company and a

Subsidiary of the Buyer are merged, with the result that the Buyer

becomes the owner (usually of all the Equity) of the resulting merged

entity. Triangular Mergers are by far the most common Merger structure

because they do not impact any of the Buyer’s legal, corporate and tax

attributes.

Uncertificated Shares:

shares of Stock issued and recorded in Book Entry

form only, with no Stock Certiﬁcate issued. Now that Stock Certiﬁcates

aren’t as novel and “cool” as they were back in the day, this form of

issuance has become more common, especially in Startups, where

skipping Stock Certiﬁcates can not only save time and money, but reduce

administrative headaches.

Underwriters:

the investment banks that buy Securities in the initial

purchase from the Issuer and then immediately resell these Securities to

the public in a Registered Public Offering. More technically, and in brief,

Section 2(a)(11) of the Securities Act deﬁnes an Underwriter as any person

who has purchased a Security from an Issuer or a controlling person of an

Issuer with a view to distributing the Security.

Underwriting Agreement:

the contract pursuant to which Underwriters

agree to purchase Securities from an Issuer. In Rule 144A Financings and

Regulation S offerings, the comparable contract typically is referred to as

a purchase agreement.

Unicorn:

term coined in the last few years to refer to a Startup with a

Valuation more than US$1 billion. When this term was ﬁrst created,

Startups with this high valuation were rare, hence the mythical name.

Today, however, the existence of Unicorns has become much more

common, so maybe we should start referring to them as thoroughbred

horses instead (still valuable, but not as rare).

Unicorpse:

a Startup that was once a Unicorn, but is now valued at less

than US$1 billion or has since failed before going public.

Valuation:

the value of a company. This value can refer to either Enterprise

Value or Equity Value, which is often the same for Early Stage Startups

with little cash and no Debt. A VC discussing Valuation is almost certainly

referring to Equity Value.

Valuation Cap:

a term that could be negotiated for in a Convertible Debt

Financing, which essentially means that when the Convertible Promissory

Notes convert in a future Preferred Stock Financing there is a cap/limit on

the Pre-Money Valuation that will be used to determine the conversion

(essentially providing protection for those Investors who were willing

to come in early). As an example, if there is a US$10 million Valuation

Cap in a Convertible Note Financing and the Financing Round that will

trigger the conversion has a Pre-Money Valuation of US$20 million, the

holders of the Convertible Promissory Notes would convert into Preferred

Stock at the lower US$10 million Valuation because of the Valuation Cap

(which, in this example, means they enjoy a 50% discount off the price

paid by the new Investors in the Preferred Stock Financing and therefore

receive twice as many Shares than they would have received at the US$20

million Pre-Money Valuation).

VC:

acronym for Venture Capital or Venture Capitalist, as the case may

be.

VCOC:

acronym for Venture Capital Operating Company.

Venture Capital Financing or VC Financing:

a Preferred Stock Financing

led by Venture Capitalists.

Venture Capital:

risk capital in the form of Equity (or sometimes Debt)

that an investment institution provides to back a business, typically a

Startup, which is expected to grow quickly in value. Compare to Private

Equity.

Venture Capitalist:

person or investment ﬁrm that provides Early Stage

funding to a company in return for an Equity interest. Often Venture

Capitalists will bring technical or other expertise to the company. Most

Startups spend weeks, months or even years trying to network and get

meetings with VCs in order to Pitch their company in hopes of receiving

an investment. VCs are irreverently referred to sometimes as vulture

capitalists because they may take a large Equity position for a relatively

low price. See also Angel Investor and VC.

Venture Capital Fund:

the source of a Venture Capitalist’s investment

funds. Venture Capitalists typically form Venture Capital Funds pursuant

to existing law and then draw from this fund in order to make investments

in Portfolio Companies.

Venture Capital Operating Company:

a type of operating company that

satisﬁes certain requirements, including, among others, that at least 50%

of fund assets be invested in operating companies in which the fund has

direct contractual “management rights” in order to be deemed not to hold

plan assets subject to ERISA. VCOC’s typically require a Management

Rights Letter be executed in connection with all of its portfolio investments

in order to help maintain the VCOC classiﬁcation.

Venture Debt:

increasingly popular form of funding for Startups. There

are speciﬁc banks who play in this space.

Vesting:

a technique commonly used in relation to Options or Restricted

Stock granted to Employees and other service providers in Startups,

whereby the rights to exercise the Option or the ability to hold the

Restricted Stock free from the risk of Forfeiture/Repurchase Provisions

are released to the holder in a staggered manner, becoming exercisable

or held clear of restrictions at certain points over a speciﬁed time frame

or upon the occurrence of speciﬁed Milestones. Vesting is viewed by VCs

as the way to ensure that the very Founders these VCs are investing in

have skin in the game. As a result, while many Founders may not want to

apply Vesting on their shares, it is generally smart to put Vesting in from

the beginning, not only to make the company more attractive to potential

Investors, but also to minimize the risk of having to amend equity grant

documentation at the time of a Financing to add Vesting (which would

likely be on much less Founder-favorable terms). In addition, while all

Founders think they are the perfect team when they start out, sometimes

things don’t work out as planned. If there is no Vesting in place, then the

Founder who leaves the company gets to keep all of his/her shares even

though he/she is no longer working at the company — essentially getting

a “free ride.” By contrast, if Vesting is applied to the Founder Shares,

Vesting serves to protect the Founders who stay against the “free rider”

problem.

Vesting Commencement Date:

the date from which the Vesting Schedule

starts. For Employees, the Vesting Commencement Date is most commonly

the ﬁrst date of employment. By contrast, for Founders, this date is often

a prior date, representing the time at which the Founders began working

on the Startup (which can even be a date prior to Incorporation in order to

give Founders credit for work done in advance of Incorporation).

Vesting Schedule:

the schedule provided in the applicable equity grant

documentation (typically either an Option Agreement or Restricted

Stock Purchase Agreement) that sets forth the Vesting terms for the

grant. A typical Vesting Schedule provided to Employees in a Startup is

four years, with Cliff Vesting for the ﬁrst year and monthly Straight-Line

Vesting thereafter (i.e., 25% of the total Shares vest after year one and

monthly Vesting then occurs during years two through four, so that if

you leave the company at the end of year two, you will have only earned

half of your Shares).

Voting Agreement:

an agreement that a company typically enters into

when it issues Preferred Stock to Investors in a VC Financing, which

sets out, among other things, the rights of various parties to designate

Directors to the Board and includes the Drag-Along provisions.

Voting Right:

generally, a Stockholder’s right to vote on certain matters

pertaining to the company.

Warrant:

a Convertible Security setting forth a time period within which

the holders may buy Securities from the Issuer at a given price (the

“strike” or “exercise” price). Sometimes included as a sweetener in a

Convertible Debt Financing or Equity Financing or given to an entity as

consideration for services provided to a Startup (as only individuals, not

entities, can receive grants under an Equity Incentive Plan).

Warrant Coverage:

the percentage of the dollar amount of an Investor’s

investment that the issued Warrant represents. So if an Investor purchases

1 million shares at a price of US$1 per share for a total investment of

US$1 million and the terms of the Financing provide for 10% Warrant

Coverage, the Investor would then also receive a Warrant to purchase

100,000 shares at an Exercise Price of US$1 per share.

Waterfall:

sometimes called a “payment waterfall,” generally refers to the

order of application of funds or proceeds. Think of the funds in question

as water running down a ﬂight of stairs with a bucket placed on each

step — the water (money) ﬂows to the top step ﬁrst and ﬁlls that bucket

before the overﬂow continues on to the second step, and ﬁlls that bucket

before proceeding to the third step, etc. So, if your deal is that you get

paid before someone else, your proverbial bucket will be placed higher in

the Waterfall. The person most likely to be left with an empty bucket (or

in practice, an unpaid obligation) is, of course, whoever is at the bottom

of the Waterfall, which are the holders of Common Stock (most often held

by Employees and Founders) in Startups.

Weighted Average Anti-Dilution Protection:

the most common form of

Anti-Dilution Protection seen in VC Financings. Weighted Average Anti-

Dilution Protection applies a formula (see below) that adjusts the rate

at which Preferred Stock converts into Common Stock so that existing

holders of Preferred Stock will see their Conversion Price reduced (and

therefore be entitled to more shares of Common Stock upon conversion)

if the company issues Equity with a lower price per share in a later

Financing. There are two common ﬂavors of Weighted Average Anti-

Dilution Protection, broad-based and narrow-based. In broad-based, “A”

(see below) includes Common Stock issuable for outstanding Options,

reserved for issuance under the Option Pool and all other Convertible

Securities. By contrast, in narrow-based, “A” (see below) typically just

includes conversion of the actual Shares outstanding and not any Options,

Warrants or the Option Pool.

New Conversion Price = Old Conversion Price x ((A+B) / (A+C))

A = the number of shares of Common Stock outstanding immediately

prior to the new dilutive issuance.

B = the number of shares of Common Stock issuable for new amount

raised at Old Conversion Price.

C = the number of shares of Common Stock actually issuable for new

amount raised.

Written Consent:

a signed writing by either the Board or Stockholders of

a company that approves certain actions in lieu of voting at a meeting.

Written Consent of Directors:

the Board’s signed writing that approves

a course of action. Under many state corporation laws and most Bylaws,

Directors are permitted to act by Written Consent in lieu of voting at a

meeting, by a unanimous vote. For Startups, especially those in the Early

Stages, Written Consent of Directors is the most common way a Board

takes an action. More frequent formal Board Meetings start occurring

after the initial VC Financing, when a Venture Capitalist usually joins

the Board.

Written Consent of Stockholders:

a signed writing by Stockholders that

approves a course of action. Under many state or national corporation

laws and most Bylaws, Stockholders are permitted to act by Written

Consent in lieu of voting at a meeting, either by the same majority vote

that would be required at a meeting or by a unanimous vote. In Startups,

Stockholders almost always act by Written Consent and very rarely, if

ever, hold formal meetings.

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