The Book of Jargon®

Acronym for Emerging Growth Company.

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.

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.

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.

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).

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.

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.

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.

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).

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.

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.

A Security that represents an ownership interest in an entity.

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.

See Employee Stock Option Plan (ESOP).

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.

See Securities Exchange Act.

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.

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).

Strategy that company management employs to get Liquidity for its Investors through an Exit. Investors will rarely enter without an Exit Strategy.

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.