This is a provision negotiated into equity awards which are subject to vesting (whether stock options or restricted stock) that allows a recipient of such award to speed up the vesting schedule upon the occurrence of certain events. Most commonly the speed up of vesting will occur as a result of a sale of the business or when a service provider is terminated without cause (or a combination of the two). The speeding up of the vesting is referred to as “Acceleration”. When the Acceleration is a result of the occurrence of a single event (i.e. sale of the business OR termination without cause), that is referred to as “Single Trigger Acceleration”. When the Acceleration is a result of the occurrence of two events (i.e. sale of the business AND termination without cause within 12 months of the sale of the Company), that is referred to as “Double Trigger Acceleration”. This term is often found in the equity grants to founders as well as negotiated into equity grants of service providers
The Board of Directors of a Company are a group (or sometimes a single person) elected to represent the shareholders of a Company, and have a legal obligation to ensure it serves the best interest of the shareholders. The Board of Directors is responsible for setting up Company policies, hiring, firing and overseeing a Company’s high-level executives, and otherwise making major decisions of the Company. The Board of Directors typically begins as the Founders (or a Founder), however the size and composition is typically negotiated in financing rounds.
This is a legal structure of an entity in which its shareholders are taxed separately from the entity. Similar to other entities, C Corporations provide its shareholders with a limitation of liability that makes them responsible only to the level of their investment in the business. For Company’s aspiring to raise venture capital, a Delaware corporation is the most accepted entity type.
Also known as a Cap Table, is typically a table or spreadsheet, with a list of a Company’s securities (i.e. stock, options, warrants, etc.) and who is the owner, and in what quantity, of such securities. The Cap Table is an important document for founders so they can monitor the ownership of their Company.
This is a security representing ownership in a corporation. Holders of Common Stock vote on important matters of the Company including the composition of Board of Directors, and other policies and provisions outlined in the Company’s charter documentation. Typically, holders of Common Stock have the lowest priority of distributions in the event of liquidation. At the formation of a Company it is typical that founders are granted Common Stock, however, it is becoming more and more common to see different types of founder specific Preferred Stock granted to Founders.
This is a form of convertible security which converts from debt into equity at later, predetermined times or events (often equity financing rounds), which such conversion typically coming at a discounted price to those paid in the equity financing rounds. The Convertible Note allows investing without having to establish a valuation of the Company at the time of the investment, but rather, parameters around discounts to valuations at conversion. This instrument is a useful device for Founders at early stages as there are less negotiated terms than an Equity Financing, which allows for a quicker transaction. It also allows them to wait on the negotiations of valuation of the Company.
This is the reduction of the ownership percentage of a share of stuck as a result of the issuance of additional securities of a Company. Due to the increase of outstanding shares of stock, the current existing stockholders own a smaller percentage of the Company.
Equity is the ownership interest in a Company. In other words, equity represents the amount of money that would be returned to shareholders following the liquidation of the assets and the repayment of any outstanding debt of a Company. The value of a shareholder’s equity in a Company grows as the value of the Company grows
An Equity Financing is where a company raises capital through the sale of stock of a company. The purchasers of the stock becoming stockholders of the Company.
Officers of a Company manage the day to day operations of a Company and report to the Board of Directors. Officers are appointed by the Board of Directors of the Company and typically include the Chief Executive Officer, the President, Chief Operating Officers, Secretary, Treasurer and other high-level positions within a Company.
An Option Pool is an amount of shares of stock set aside to be issued to service providers of the Company, whether in the form of Common Stock, Stock Options, or other forms of equity grants. The amount of shares issuable under the Option Pool is determined by the Board of Directors with the approval of the stockholders.
Preferred Stock is a security representing ownership (or equity) in a Company with rights, preference and privileges relating to liquidation, voting, and distributions that are typically senior than those of Common Stock. Preferred Stock is the type of stock sold in Equity Financings, typically, and such rights, preferences and privileges are negotiated provisions of the Equity Financing.
A SAFE (simple agreement for future equity) is a convertible security that converts into Preferred Stock upon the occurrence of certain events (i.e. Equity Financings) at an agreed upon discount, pre-negotiated discount. A SAFE is an open source document created by Y-Combinator that is becoming a commonplace investment facility for very early stage investments in companies.
A Stock Option is the right to acquire a certain amount of shares of stock of a Company at a predetermined price per share (which is usually no less than the fair market value of the shares as of the day of the grant). Stock Options are typically granted to service providers of the companies and can be exercised during the period during which such person is performing services to the Company. Stock Option grants are usually subject to a vesting schedule.