LEGAL DEFINITIONS FOR FOUNDERS
Startup Legal Terminology
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Accelerated Vesting
: means a provision that allows stock options or shares to vest more quickly than the original schedule, often triggered by specific events such as the sale of the company.
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Acceleration Clause
: means a contract term that accelerates the vesting schedule of stock options or other benefits upon the occurrence of certain events, like a merger or acquisition.
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Accredited Investor
: means an individual or entity that meets specific financial criteria, allowing them to invest in private securities offerings not registered with financial authorities.
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Amended and Restated Certificate of Incorporation
: means a document that consolidates all previous amendments to a company's certificate of incorporation into a single, comprehensive document.
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Angel Investor
: means typically an individual (typically a a high-net-worth individual) who provides financial support to early-stage startups or entrepreneurs, usually in exchange for equity or convertible debt.
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Anti-Dilution Provisions
: means the clauses that protect investors from dilution of their ownership percentage in the event of future stock issuances at a lower price than they originally paid.
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Articles of Incorporation
: means Legal documents filed with the state to formally establish a corporation, outlining its basic information and structure.
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Audit
: means an independent evaluation of a company’s financial records.
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Authorised Shares
: means the maximum number of shares that a corporation is legally permitted to issue, as specified in its articles of incorporation.
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Bad Leaver
: means typically a shareholder or employee, who leaves a company under unfavorable circumstances, such as breaching their contract, engaging in misconduct, or being terminated for cause. This may trigger penalties or the forced sale of their shares, often at a reduced price.
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Board Meeting
: means a formal gathering of a company's board of directors.
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Bridge Financing
: means short-term funding intended to cover a company's expenses until it secures long-term financing or reaches its next funding round.
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Burn Rate
: means the rate at which a startup consumes its cash reserves to cover operating expenses, indicating how long the company can operate before needing additional funding.
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Buyout means
: the acquisition of a controlling interest in a company. This can occur through the purchase of shares, assets, or debt, and may involve management or external investors.
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Bylaws
: means internal rules governing the management and operations of a corporation, including procedures for meetings, elections, and duties of officers.
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Cap Table (Capitalisation Table)
: means a spreadsheet or document that details a company's ownership structure, including equity shares, convertible securities, and the percentages owned by each stakeholder.
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Cliff Vesting
: means a vesting schedule feature where no stock options or shares vest until a specified period has elapsed (the "cliff"), after which a lump sum vests.
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Common Stock
: means A class of stock that represents ownership in a corporation, typically granting voting rights and a residual claim on corporate earnings through dividends.
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Convertible Loan Note
: means A type of short-term debt that converts into equity, usually in conjunction with a future financing round.
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Covenants
: means legally binding promises or agreements in contracts, such as loan agreements, that stipulate certain actions the borrower must or must not take.
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Dilution
: means the reduction in existing shareholders' ownership percentages due to the issuance of additional shares.
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Dilution Protection
: means safeguards investors from the reduction of their ownership percentage in a company due to the issuance of additional shares during future funding rounds.
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Drag-Along Rights
: means Provisions that allow majority shareholders to compel minority shareholders to join in the sale of a company under the same terms.
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Due Diligence
: means the comprehensive appraisal of a business by prospective investors or acquirers to evaluate its commercial potential and identify any risks.
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Due Diligence Report
: means is a comprehensive assessment conducted before a merger or acquisition, to evaluate the financial, legal, operational, and strategic aspects of the target company, identifying potential risks and confirming the accuracy of information.
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Employee Stock Option Plan (ESOP)
: means a program that provides employees with the option to purchase company stock at a predetermined price, often used as an incentive.
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Equity Financing
: means raising capital through the sale of shares in the company, thereby diluting ownership but providing funds without incurring debt.
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Exit
: means the process by which an investor sells or disposes of their stake in a company, typically through methods such as a merger, acquisition, or public offering, to realize a return on their investment.
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Fully Diluted Basis
: means a calculation of the total number of shares that would be outstanding if all convertible securities, such as options and warrants, were exercised.
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General Meeting
: means a formal gathering of a company's shareholders
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Good Leaver/Bad Leaver
: means Terms defining the conditions under which a departing employee or founder retains or forfeits equity, depending on whether the departure is considered "good" (e.g., retirement) or "bad" (e.g., termination for cause).
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Incorporation
: means the legal process of forming a new corporation, which establishes it as a separate legal entity from its owners.
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Indemnity / Indemnification
: means A contractual obligation of one party to compensate another for certain costs and damages, often found in service agreements and mergers.
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Information Rights
: means the rights of investors to access certain information about the company's financials and operations, ensuring transparency.
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Intellectual Property Assignment Agreement
: means A contract in which employees or contractors agree to transfer ownership of any inventions or works created during their tenure to the company.
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IPO
: means is the process by which a private company offers its shares to the public for the first time, allowing it to raise capital and become publicly traded on a stock exchange.
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Liquidation Preference
: means the order and amount in which investors are paid back their investment upon the liquidation or sale of the company, before common shareholders receive any proceeds.
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Minority Shareholder
: means an individual or entity that owns less than 50% of a company's shares, and thus has limited control or influence over its decisions.
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Non-Disclosure Agreement (NDA)
: means a legal contract that establishes confidentiality between parties, protecting sensitive information from being disclosed to third parties.
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Option Pool
: means a reserved amount of a company's shares set aside for future issuance to employees, advisors, or directors as part of compensation packages.
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Ordinary Shares
: means (also known as common shares) represent ownership in a company, granting shareholders voting rights and a claim on dividends and assets, typically after “preferred” shareholders.
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Participating Preferred Stock
: means a type of preferred stock that entitles holders to receive their liquidation preference and then share in the remaining proceeds with common shareholders.
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Post-Money Valuation
: means the valuation of a company immediately after receiving an investment, calculated by adding the new investment amount to the pre-money valuation.
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Pre-Money Valuation
: means the valuation of a company prior to receiving a new investment, representing its worth before the influx of additional capital.
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Preference Shares / Preferred Stock
: means a class of ownership with a higher claim on assets and earnings than common stock, often with fixed dividends and priority in liquidation events.
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Pro Rata Rights
: means the right of existing investors to participate in future funding rounds to maintain their ownership percentage in the company.
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Protective Provisions
: means Rights that give investors the ability to veto or approve certain significant corporate actions, such as mergers or changes to the company's charter.
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Right of First Refusal (ROFR)
: means A contractual right that gives existing shareholders the opportunity to purchase shares before the company offers them to external parties.
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SAFE (Simple Agreement for Future Equity)
: means an agreement that provides investors with the right to obtain equity at a future date, often used as a simpler alternative to convertible notes.
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Seed Funding
: means the initial capital raised to start developing a business idea.
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Series A Investment Round
: means the first significant round of funding a startup raises from venture capitalists, typically after seed funding. It is used to scale operations, develop the product, and grow the business, often in exchange for equity.
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Series B Investment Round
: means the second stage of venture capital funding, following Series A. It is used to further scale a business, expand market reach, and optimize operations, typically involving larger investments to fuel growth and attract new customers.
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Service Level Agreement (SLA)
: means A contract between a service provider and a client that defines the level of service expected.
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Shareholder Agreement
: means a document outlining the rights and responsibilities of shareholders, often addressing voting, transfer of shares, and management.
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Shareholder Meeting
: means is a formal gathering of a company's shareholders.
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Shares / Stock / Equity / Securities
: means Financial instruments that represent ownership (stocks), creditor relationship (bonds), or rights to ownership (options).
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Statutory Compliance
: means adhering to the laws and regulations applicable to a business or industry.
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Stock Option Plan
: means A program granting employees the right to purchase company stock at a fixed price within a specific timeframe.
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Sweat Equity
: means Ownership or shares in a company provided to founders or employees in exchange for their work rather than monetary investment.
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Tag-Along Rights
: means a contractual obligation ensuring minority shareholders can join the sale of shares by majority shareholders under the same terms.
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Term Sheet
: means a non-binding agreement that outlines the basic terms and conditions under which an investment will be made.
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Trade Sale
: means the sale of a company or its assets to another business, typically within the same industry, as a strategic move for growth, consolidation, or exit.
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Trade Secrets
: means Information, practices, or processes that give a company a competitive edge and are protected by confidentiality agreements.
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Trademark
: means A recognizable sign, design, or expression identifying products or services of a particular source, legally registered or established by use.
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Transfer Restrictions
: means Limitations on the ability of shareholders to transfer shares, often found in shareholder agreements.
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Unsecured Debt
: means debt that does not have specific assets pledged as collateral
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Up-Round
: means A funding round in which the company’s valuation increases compared to the previous round.
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Usury Laws
: means regulations governing the maximum interest rates that can be charged on loans.
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Valuation
: means the process of determining the current worth of a company, asset, or investment based on factors like financial performance, market conditions, and future prospects.
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Valuation Cap
: means a term in convertible notes that sets a maximum company valuation at which an investor's loan will convert to equity.
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Vesting
: means the process by which an individual earns ownership rights over time, commonly used for stock options or equity.
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Vesting Schedule
: means a timeline that outlines when an employee or shareholder gains full ownership of benefits, such as stock options or retirement funds, based on a specified period of service or performance milestones.
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Voting Rights
: means Rights granted to shareholders to vote on corporate matters, such as electing the board of directors or approving major transactions.
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Waiver
: means a voluntary relinquishment of a legal right, often requiring formal documentation.
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Warrant
: means a security giving the holder the right to buy shares at a specified price before a certain date.
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Warranty
: means A guarantee in a contract that certain facts or conditions are true or will happen.
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XML (Extensible Markup Language) Agreements
: means Legal agreements specific to industries or contexts that use XML for data structuring, though rare in common legal settings.
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Yield Maintenance
: means a prepayment penalty on loans to ensure lenders receive the same yield as if the borrower had paid over the full term.
