The Book of Jargon®

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.

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.

Acronym for the US Securities and Exchange Commission.

The ability for a company to grow its market and product and service offerings exponentially faster than the need to grow supporting infrastructure of the company. For example, a software company that has already built software is very "scalable" because the company can easily add customers without very much additional cost to the company.

Another name for Disclosure Schedule.

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).

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.

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.

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 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.

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).

Negotiable financial instruments that represent some type of financial value to the Issuer, such as Debt or Equity.

The Securities Act of 1933, as amended, which governs the registration of Securities.

The Securities Exchange Act of 1934, as amended, which governs the continuing reporting obligations of companies with registered Securities.

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.

Financing in which Seed Capital is raised by a company.

Another name for a Target Company or party selling assets or Securities in a Business Combination.

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.

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.

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.

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.

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.

A US government agency that provides support to small businesses and entrepreneurs.

A program run by the Small Business Administration (SBA) to help certain small businesses conduct research and development through the use of contracts or grants.

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.

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.

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.

The division of a business into two or more separate legal entities.

A new business which can be on any scale — but most Startups start off small and hope to see significant growth over time.

Vote required by statute as opposed to Voting Rights established by contract.

Shares in a company/corporation.

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).

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.

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.

A person or entity who holds Stock in a company.

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.

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.

An Investor who is not an Institutional Investor, VC or Private Equity, 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.

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.

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.

A company that is owned by another company, which is the Subsidiary’s parent entity.

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.