GLOSSARY
The startup equity glossary,
in plain English.
79 equity terms every founder ends up needing, from 409A and SAFEs to waterfalls and bad-leaver clauses. One or two sentences each, cross-linked, with free academy lessons where a definition isn't enough.
0–9
409A valuation
An independent appraisal of a US private company's fair market value, named after Section 409A of the tax code. It sets the minimum strike price for option grants and typically must be refreshed every 12 months or after a material event like a funding round. See the lesson on valuations and 409A.
83(b) election
A filing with the US IRS, due within 30 days of receiving restricted stock, that elects to be taxed on the stock's value at grant instead of as it vests. Founders on reverse vesting almost always file one, because the grant-date value is usually near zero.
A
Acceleration
A provision that speeds up vesting when a defined event occurs, most often an acquisition. Comes in single-trigger and double-trigger flavors.
Anti-dilution protection
A term protecting preferred investors if the company later raises at a lower price (a down round) by adjusting their conversion price so they receive more common shares. The two main formulas are the harsh full ratchet and the milder broad-based weighted average.
ASA (Advance Subscription Agreement)
The UK's rough equivalent of a SAFE: the investor pays now and receives shares at the next funding round, usually at a discount. ASAs carry no interest and typically include a longstop date by which shares must be issued, kept to six months or less to stay SEIS/EIS-compatible. Covered in regional equity differences.
B
Board consent
Formal written approval by the board of directors, required for actions like granting options, issuing shares, or approving a financing. Option grants are not legally effective until the board approves them, a common cap table hygiene failure.
Bridge round
An interim financing (usually convertible notes or SAFEs) that funds the company between priced rounds, "bridging" it to the next milestone or raise.
Broad-based weighted average
The most common anti-dilution formula. It adjusts the preferred conversion price using a weighted average of the old and new prices, counting all fully diluted shares, which softens the adjustment compared with a full ratchet.
C
Cap table (capitalization table)
The record of who owns what in a company: shares, options, warrants, and convertibles, by holder and share class, with each holder's ownership percentage. Start with cap table basics if this is new.
Capitalization
A company's complete ownership structure: all issued equity plus everything convertible into equity. "Fully diluted capitalization" counts options, warrants, pools, and convertibles as if converted; see fully diluted.
Carve-out (management carve-out)
A slice of exit proceeds set aside for management and key employees before the waterfall is applied. Used when liquidation preferences would otherwise leave common holders with too little to stay motivated through a sale.
CCD (Compulsorily Convertible Debenture)
An Indian instrument that must convert into equity by a set date or event. Conversion is mandatory, not optional. CCDs are a standard structure for foreign investment into Indian startups because optionally convertible instruments are treated as debt under FDI rules. See regional equity differences.
Cliff
An initial period of a vesting schedule during which nothing vests; at the cliff date, the accrued portion vests all at once. The standard employee schedule is 4 years with a 1-year cliff: leave in month 11 and you keep nothing. Explained in vesting explained.
CLN (Convertible Loan Note)
The UK term for a convertible note: a loan that accrues interest and converts into shares at a future round, usually with a discount and sometimes a cap, or repays at maturity.
Common stock
The basic ownership class held by founders and employees. Common ranks behind preference shares in a waterfall and typically carries no special rights. Called ordinary shares in the UK and much of the world. See share classes: common vs preferred.
Conversion
The moment a convertible instrument (SAFE, note, CCD) turns into shares, or preferred stock converts into common. The conversion price, set by the cap, discount, or round price, determines how many shares the holder receives.
Convertible note
A loan that converts into equity at a future priced round instead of being repaid in cash. Notes carry an interest rate and a maturity date, plus usually a discount and/or valuation cap. Compare with the simpler SAFE in SAFEs and convertibles.
D
Data room
An organized, access-controlled repository of company documents (charter, board consents, financing agreements, IP assignments) prepared for due diligence. The lesson on due diligence and data rooms covers what belongs in one.
Dilution
The reduction in an existing holder's ownership percentage when new shares are issued, whether in a round, from a pool top-up, or on conversion of SAFEs and notes. Work through the numbers in dilution math or with the dilution calculator.
Discount
A convertible term letting the holder convert at a reduced price versus the next round. 20% is typical, so a 20% discount on a 1.00 round price converts at 0.80. When paired with a cap, the investor usually gets whichever gives more shares.
Double trigger
Acceleration that requires two events: an acquisition and the holder's involuntary termination within a set window after it. It is the market standard for employees because it protects them without making the team costlier to acquire; compare single trigger.
Down round
A financing at a lower price per share than the previous round. Down rounds can trigger anti-dilution adjustments and pay-to-play provisions, compounding dilution for founders and employees.
Drag-along rights
A provision letting a majority (often board plus preferred majority) force all shareholders to join an approved sale of the company, so a small minority cannot block an exit. The mirror image of tag-along rights.
Due diligence
The investigation an investor or acquirer runs before closing: corporate records, cap table, contracts, IP, financials. A clean, current data room is what makes it fast; see the diligence lesson.
E
Escrow
A portion of acquisition proceeds (commonly 10–15%) held back by a neutral agent for a period after closing to cover indemnity claims if the seller's representations turn out to be wrong. Escrow reduces what shareholders receive at close in the waterfall.
ESOP (Employee Stock Option Plan)
The formal plan under which a company grants options to employees, drawing from a reserved option pool. "ESOP" is the common term in the UK, Europe, India, and the GCC; US documents usually say "equity incentive plan". Model one with the ESOP calculator.
Exercise
Buying the shares underlying an option by paying the strike price. Only exercised shares are actually owned; unexercised options are just a right to buy.
Exercise window
The time a leaver has to exercise vested options before they expire, classically 90 days after termination. Some companies extend it, though an ISO exercised more than 90 days after leaving loses ISO tax treatment and becomes an NSO.
Exit
A liquidity event that turns paper equity into money, usually an acquisition or IPO. Who receives what in an acquisition is determined by the waterfall.
F
Fair market value (FMV)
The price a share would fetch between a willing buyer and seller. For private companies it is established by a valuation (a 409A in the US, an FMV assessment or valuation report elsewhere), and it anchors option strike prices and tax outcomes.
Fully diluted
A share count that includes everything outstanding plus everything that could become shares: options, warrants, the unallocated pool, and convertibles. Ownership percentages are honest only on a fully diluted basis; see reading a cap table.
G
Good leaver / bad leaver
UK/European provisions that set what happens to a departing holder's equity based on how they leave. A good leaver (redundancy, illness, death) typically keeps vested shares or is bought out at fair value; a bad leaver (cause, breach) may forfeit shares or be bought out at nominal value via repurchase.
Grant date
The date the board approves an equity award. It is the legal start of the grant, the date the strike price is fixed against FMV, and usually the reference point for vesting unless a separate vesting start date is set.
I
Information rights
An investor's contractual right to receive regular company information, typically annual and quarterly financials, budgets, and cap table updates. Usually granted to "major investors" above a set check size, often via the investor rights agreement or a side letter.
ISO (Incentive Stock Option)
A US tax-advantaged option type for employees only: no ordinary income tax at exercise (though AMT may apply), and gains can qualify for capital-gains treatment if holding periods are met. ISOs have statutory limits and a strict post-termination exercise window; compare NSO. See granting options right.
Issued and outstanding shares
Shares that have actually been issued to holders and remain outstanding, the basic denominator before options and convertibles are counted. Always a subset of authorized shares, and smaller than the fully diluted count.
K
L
Lakh / crore numbering
The Indian numbering system used on Indian cap tables and term sheets: 1 lakh = 100,000 and 1 crore = 10,000,000, with digits grouped as ₹1,50,00,000 (1.5 crore). Worth internalizing before reading Indian documents; see regional equity differences.
Lead investor
The investor who negotiates the term sheet, sets the price, writes the largest check, and usually takes a board seat. Other investors in the round follow the lead's terms.
Liquidation preference
The right of preferred shareholders to be paid a set amount, usually 1× their investment, before common holders receive anything in an exit. Preferences, their seniority, and any participation drive the waterfall; see liquidation waterfalls.
M
MFN (Most Favored Nation)
A clause, common in uncapped SAFEs, letting the holder adopt the terms of any better convertible the company later issues, such as a lower cap. Also appears in investor side letters.
Mudaraba
A Shariah-compliant partnership structure used in GCC markets: one party provides capital, the other provides work and expertise, profits are shared at an agreed ratio, and financial losses fall on the capital provider. One of several instruments that replace interest-bearing convertibles in Islamic-finance contexts; see regional equity differences.
N
NSO (Non-qualified Stock Option)
A US option type without ISO tax advantages: the spread between FMV and strike price is taxed as ordinary income at exercise. NSOs can go to anyone (advisors, contractors, directors), not just employees.
O
Option (stock option)
The right, not the obligation, to buy a set number of shares at a fixed strike price for a set period, normally subject to vesting. The standard instrument for employee equity; see equity for employees.
Option pool
Shares reserved for future employee and advisor grants under the ESOP, typically 10–15% of the fully diluted cap table. Investors often require the pool to be topped up before their money lands (the "option pool shuffle"), pushing that dilution onto existing holders. See the option pools lesson and the pool shuffle explained.
P
Par value
The nominal per-share value stated in the charter, often 0.0001 or 0.00001 of a dollar. It is a legal formality unrelated to what shares are worth, but shares generally cannot be issued below it.
Participating preferred
Preferred stock that takes its liquidation preference first and then also shares pro-rata in the remaining proceeds with common, the "double dip". Often limited by a cap (for example, 3× total return); non-participating preferred must choose preference or conversion, not both.
Pay-to-play
A provision requiring investors to invest their pro-rata share in future rounds, especially down rounds, to keep their preferential rights. Investors who do not participate can lose anti-dilution protection or be converted to common.
Phantom equity
A cash bonus plan that mimics equity: holders receive a payout tied to share value or exit proceeds without ever owning shares. Used where real options are legally or tax-wise awkward, including several GCC and SEA jurisdictions.
Post-money valuation
The company's valuation immediately after a round: pre-money plus the new money. If you raise 2M on 8M pre-money, post-money is 10M and the investors own 20%. Post-money is also the denominator convention in the modern YC SAFE; see priced rounds and term sheets.
Pre-emption rights
The right of existing shareholders to buy new shares before they are offered to outsiders, preserving their ownership. The UK/Commonwealth term for what US documents implement as pro-rata rights; often statutory by default in the UK.
Pre-money valuation
The company's agreed value before new investment is added. Pre-money plus the round size equals post-money; the split determines how much of the company the new investors buy.
Pro-rata rights
An investor's right to invest in future rounds in proportion to their current ownership, so they can maintain their percentage and avoid dilution. Usually reserved for major investors; the UK analogue is pre-emption rights.
Protective provisions
Veto rights held by preferred shareholders over major actions: selling the company, issuing senior stock, changing the charter, taking on significant debt. They operate alongside board consent as a second approval layer.
Q
Qualified financing
A priced equity round above an agreed minimum size (say 1M) that automatically triggers conversion of outstanding notes and SAFEs. Rounds below the threshold leave conversion to the holder's choice.
R
Ratchet (full ratchet)
The harshest anti-dilution formula: in a down round, earlier investors' conversion price resets all the way to the new, lower price, as if they had invested at it. Rare in healthy markets; compare broad-based weighted average.
Repurchase right
The company's right to buy back shares from a departing holder, whether unvested founder shares at cost under reverse vesting, or a leaver's shares under good/bad leaver provisions.
Reverse vesting
Founder shares that are owned outright but subject to a repurchase right that lapses over time, economically the same as vesting. Standard in venture deals so a departing founder cannot walk away with a full stake; usually paired with an 83(b) election in the US.
ROFR (Right of First Refusal)
The company's (and sometimes investors') right to match any third-party offer before a shareholder can sell their shares in a secondary sale. A core transfer restriction alongside tag-along rights.
Rule 701
A US securities-law exemption that can cover compensatory equity grants by private companies to eligible employees, directors, and consultants. Its rolling 12-month sales limit is the greatest of USD 1 million, 15% of total assets, or 15% of the outstanding class. If aggregate sales exceed USD 10 million in that period, enhanced disclosures may be required before sale. Eligibility, valuation, timing, and disclosure details should be confirmed with securities counsel.
S
SAFE (Simple Agreement for Future Equity)
Y Combinator's standard early-stage instrument: money now for shares at the next priced round, priced by a valuation cap and/or discount. Unlike a note, a SAFE is not debt: no interest, no maturity date. Learn the mechanics in SAFEs and convertibles or model one with the SAFE calculator.
Secondary sale
An existing shareholder selling their shares to another buyer, with proceeds going to the seller, as opposed to a primary issuance, where the company sells new shares and keeps the money. Usually subject to ROFR and board approval.
Seniority
The payout order of liquidation preferences in an exit. "Stacked" seniority pays the latest round first; "pari passu" pays all preferred proportionally at the same tier. Seniority is the skeleton of the waterfall.
Side letter
A separate agreement giving one investor rights beyond the main round documents: information rights, MFN, board observer seats. Side letters are easy to lose track of and a frequent diligence surprise.
Single trigger
Acceleration that fires on one event, usually the acquisition itself, vesting some or all unvested equity at close. Less common than double trigger because acquirers dislike buying a fully vested team.
Snapshot
A saved point-in-time copy of the cap table, taken before and after significant events like a round closing, so past states can be compared and audited. Vquity automates these with field-level diffs and an auto pre-close snapshot.
Stock split
Dividing each share into several (or, in a reverse split, combining several into one), changing share count and per-share price proportionally while leaving every holder's percentage unchanged. Startups often split pre-fundraise so option strike prices look sensible.
Strike price (exercise price)
The fixed price per share an option holder pays to exercise. To avoid tax penalties it must be at least fair market value on the grant date, which in the US is what the 409A valuation establishes.
T
Tag-along rights (co-sale)
The right of minority shareholders to join a sale on the same terms when a major holder sells, so founders cannot take liquidity and leave everyone else behind. The counterpart to drag-along rights.
Term sheet
The short, mostly non-binding document that sets the headline terms of a round (valuation, preference, board, pool) before lawyers draft the definitive agreements. Read one line by line in priced rounds and term sheets.
V
Valuation cap
The maximum valuation at which a SAFE or note converts. If the next round prices above the cap, the holder converts as if the company were worth only the cap, so more shares for the same money. Try scenarios in the SAFE calculator.
Vesting
Earning equity over time or against milestones instead of all at once, typically 4 years monthly with a 1-year cliff. Unvested equity is forfeited (or repurchased) on departure. The full picture is in vesting explained.
W
Warrant
A right to buy shares at a fixed price for a set period, mechanically like an option, but issued to investors, lenders, or partners rather than under an employee plan. Common as a "kicker" attached to venture debt.
Waterfall
The step-by-step calculation of who receives what when a company exits: escrow and carve-outs first, then preferences in seniority order, then the remainder to common and any participating preferred. Worked examples in liquidation waterfalls.
Now put the vocabulary to work.
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