The Book of Jargon®

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).

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.

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.

The most common form of Anti-Dilution Protection seen in VC Financing. 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.

A signed writing by either the Board or Stockholders of a company that approves certain actions in lieu of voting at a meeting.

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.

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.