The Book of Jargon®

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 Company (LLC) 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. 

Acronym for Chief Executive Officer.

Acronym for Chief Financial Officer (CFO).

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.

When a Venture Capitalist will ask its Limited Partners (LPs) to transmit previously committed funds for the purpose of making an investment in a Portfolio Company.

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.

A broad term that refers to the market for raising money through securities offerings.

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 Note, are often also tracked in the Cap Table.

A Financial Statement in which a company reports its incoming and outgoing cash flows during a specified time period (typically monthly, quarterly or annually).

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.

A Startup worth at least US$100 million.

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.).

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.

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.

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.

Another name for the Certificate of Incorporation.

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.

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.

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.

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.

The certificates that must be signed and delivered prior to Closing. These typically include an Officers Certificate and a Secretary's Certificate.

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.

The conditions that need to be satisfied on or prior to the Closing of the relevant transaction. In VC Financing, these conditions are typically found in the Stock Purchase Agreement.

The date on which the Closing occurs.

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 Agreement entered into at the time of a Preferred Stock Financing. Also sometimes called Tag Along Rights.

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.

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.

Holders of Common Stock.

Another term for Closing Conditions.

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 Agreement. 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.

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.

Contract under which a Consulting Agreement 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.

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.

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.

The ratio at which Preferred Stock converts into Common Stock. This Conversion Ratio is the Conversion Price divided by the Original Issue Price.

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.

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.

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.

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. Copyright protection attaches as soon as the work is created in fixed 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.

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.

Legalese for an agreement to do something (Affirmative Covenants), not to do something (Negative Covenants), or to maintain something (Maintenance Covenants).

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.

Another name for an Accruing Dividend.

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.