Startup legal jargon. Demystified.

Helping you with the knowledge to navigate the legal landscape confidently.

A

Assets Under Management

Assets under management (or “AUM”) is equal to the market value of investments that either an institution or individual manages on behalf of its clients.

Asset Deal

During mergers and acquisitions (M&As), buyers may choose to purchase a company’s underlying assets instead of its stock (shares). These transactions are called asset deals.

Articles of Association

A document that sets out the rules and regulations governing the management of a company, including its internal affairs and shareholder rights.

Arm’s Length Transaction

An arm’s length transaction is a business deal where the buyers and sellers act independently. Neither party influences the other. Normally, the parties will have no pre-existing relationship, and both parties will have equal access to information relating to the deal.

Anti-dilution

A protective provision for investors that adjusts their equity ownership percentage in the event of a future funding round at a lower valuation, ensuring their stake is not reduced unfairly. Anti-dilution provisions can come in various forms, such as full ratchet or weighted average adjustments.

Angel Investor

An angel investor is a type of individual investor who provides funding to up-and-coming startups in return for equity in the company.

Advance Subscription Agreement (ASA)

An agreement for future equity, allowing investors to invest in a company now and receive shares in a future funding round.

Accredited Investor

An accredited investor is a legal entity or natural person allowed to trade unregistered and unregulated securities. Generally, only investors registered with a governing financial organisation can sell or publicly exchange securities such as stocks and bonds.

Accelerator

An accelerator is an organisation that provides capital (usually a seed investment), mentorship, and networking connections to startups. Y Combinator, the first seed accelerator, is a well-known example.

Articles of Association

A document that sets out the rules and regulations governing the management of a company, including its internal affairs and shareholder rights.

Anti-dilution

A protective provision for investors that adjusts their equity ownership percentage in the event of a future funding round at a lower valuation, ensuring their stake is not reduced unfairly.

Advance Subscription Agreement (ASA)

An agreement for future equity, allowing investors to invest in a company now and receive shares in a future funding round.

Acceleration Clause

A provision that allows for the acceleration of vesting (of shares) or other benefits in the event of specific circumstances, such as a change of control or termination.

B

Business Model Canvas

A business model canvas is a planning tool typically consisting of a single page that outlines the essential building blocks necessary to bring a business (or a product or service) to market.

Burn Rate

Burn rate is the rate at which a business spends money. It’s typically used by new businesses to track how much they spend in venture capital funding before creating their own positive cash flows. It is a measurement of negative monthly cash flow.

Bridge Loan

Bridge loans, also known as swing loans or bridge financing, are a short-term financing options for companies that need funds temporarily until long-term financing becomes available. Essentially, they “bridge” the gap between a company’s immediate need for funds and access to funds from long-term financing. A type of bridge financing is an ASA or CLN.

Boot-strapped

Bootstrapped is a term used to describe a company that has been built from the ground up with little to no outside capital.

Board of Directors

A group of individuals appointed to oversee the management, day-to-day running and direction of a company.

Blind Pool

A blind pool describes when a limited partnership raises funds from investors without telling them where the money will be invested.

Bear Hug

A bear hug is an acquisition strategy where one company offers to purchase another at a much higher price than that company’s valuation. It’s sometimes viewed as a hostile takeover, but it’s more beneficial for shareholders than most hostile takeovers would be.

Board of Directors

A group of individuals appointed to oversee the management, day-to-day running and direction of a company.

C

Crossover Investors

Crossover investors are concerned more with short-term gains than long-term returns on their investments.

Convertible Loan Note (CLN)

A debt instrument that can be converted into equity shares at a future date, typically during a funding round or upon certain events.

Correlation Formula

In the financial realm, correlation is a measurement of the relationship between two securities. The correlation coefficient is expressed as a number between -1.0 and 1.0.

Convertible Shares

Convertible preferred shares, or convertible shares, is a form of hybrid investment that is most commonly offered to venture capitalists that invest in startup businesses. Also known as convertible stock in the US market.

Convertible Debt

Convertible debt, also known as a convertible bond, is a hybrid investment that starts as a bond but can be converted into shares of the company later.

Conglomerate

A conglomerate is a single corporation made up of smaller, merged companies. Companies acquired by or merged with a conglomerate become its subsidiaries. Holding companies that own controlling stock in a variety of businesses can also be considered conglomerates.

Confidential Information Memorandum

A confidential information memorandum (CIM) gives potential buyers the information they need in order to make an offer to buy a business.

Competitive Positioning

Competitive positioning is what sets you, your business, product, or service, apart from the competition.

Common Stock

Common stock represents part ownership in an incorporated entity. A company’s common stock can be found under the “stockholders’ equity” section on the company’s balance sheet. Common stock is a US term, in the UK we would say “Share capital”.

Cliff Vesting

Cliff vesting is when an employee becomes fully vested on a specified date rather than becoming partially vested in increasing amounts over an extended period.

Cash Position

A company’s cash position is the cash amount it currently has on its books relative to expenses and liabilities.

Capital Asset Pricing Model (CAPM)

The capital asset pricing model (CAPM) is a mathematical formula that attempts to establish a relationship between the systematic risk and expected return of an asset, mostly equities. Let’s use the CAPM to compute the expected return for a US-based stock using the following information: 10-Year Treasury yield: 1.5% Average annual return for US equities: 10% Beta for our chosen stock: 1.5 (i.e., the stock is 150% more volatile or risky than the overall US equities market) Based on the CAPM, the expected rate of return is 14.25%.

Capital Efficiency

Capital efficiency is a measure that estimates how efficiently the capital is deployed.

CapEx

CapEx refers to funds used by a company to purchase, maintain, or upgrade physical assets such as equipment, technology, buildings, plants, and property.

Capitalisation Table (or cap table)

A table that shows the ownership structure of a company, including the percentage of ownership, equity value, and dilution of each shareholder.

Convertible Loan Note (CLN)

A debt instrument that can be converted into equity shares at a future date, typically during a funding round or upon certain events.

Capitalisation Table(Cap table)

A table that shows the ownership structure of a company, including the percentage of ownership, equity value, and dilution of each shareholder.

D

Due Diligence

The process a company / organisation carries out involves investigating and evaluating a potential investment or business opportunity, including reviewing financial statements, legal documents, and other relevant information.

Drag-Along Rights

Drag-along rights grant the ability of any majority shareholder in a given organization to force minority shareholders to sell their shares. They are generally triggered by sudden mergers or acquisitions by third parties.

Down Round

A down round happens when a startup sells its shares at a lower price than what it sold them for in previous rounds of financing. As the share price is lower than last time, it’s called a “down round”.

Divestiture

A divestiture occurs when a company disposes of some or all of its assets through a sale, bankruptcy, closure, or exchange. It’s the opposite of an investment.

Discounted Cash Flow

Discounted cash flow (DCF) is a valuation method that estimates the value of an investment based on its expected future cash flows.

Dilution

A reduction in the ownership percentage of a shareholder due to the issuance of new shares in the company. As new shares are issued, the proportion of the company each shareholder owns decreases, potentially affecting their control, influence, and value of their investment.

Depreciation Methods

A depreciation method is a means of calculating the overall amount of value goods will lose over their lifetime.

Debt To Equity Ratio

Debt to equity is a financial ratio used to assess the debt component and overall strength of a company’s balance sheet. Debt to equity ratio = (total liabilities / total equity)

Debt To Asset Ratio

Debt to asset ratio is a leverage ratio used to ascertain the portion of a company’s total assets that were acquired using leverage. Often referred to as the debt ratio, it’s the ratio of the company’s total debt to its total assets.

Debt Service Coverage Ratio

The debt service coverage ratio (DSCR) is a financial ratio that assesses a company’s ability to service its debt. If the company has sizable capital expenditures (CapEx), you can calculate DSCR after deducting capital expenses.

Debt Financing

Debt financing is a way for companies to raise money. They do this by selling debt instruments to investors. These are fixed-income products, such as bonds, bills, or notes (also includes convertible notes or convertible loan agreements).

Deal Flow

Deal flow describes the rate at which business proposals and investment pitches are being received by a firm.

Data Room

A data room is a secure area to store sensitive data, documents and agreements for external parties to view, most common in financial transactions such as mergers and acquisitions or venture capital transactions.

Due Diligence

The process of investigating and evaluating a potential investment or business opportunity, including reviewing financial statements, legal documents, and other relevant information.

Dilution

A reduction in the ownership percentage of a shareholder due to the issuance of new shares in the company. As new shares are issued, the proportion of the company each shareholder owns decreases, potentially affecting their control, influence, and value of their investment.

E

Exit

An ‘exit’ is when a founder leaves a startup. For many founders, this is something they’ve planned for from day one, perhaps even hoping to build a unicorn company. They created the startup with the plan of cashing out at some point by selling ownership of the company either to investors or to another company.

Environmental Scan

An environmental scan is a type of structured research that business leaders conduct to find opportunities inside and outside of a business.

Environmental Assessment

An environmental assessment is conducted to assess company risks and to determine whether a company fits environmental, social, and governance (ESG) criteria.

Entrepreneur In Residence

An entrepreneur in residence (EIR) is traditionally a position that resides (works) at a venture capitalist firm.

Engagement Letter

An engagement letter outlines the terms of a client relationship. Businesses and clients who agree to work together under certain terms often use an engagement letter to put the details of the agreement in writing.

Economies Of Scale

Economies of scale is a term used to describe situations when the cost of producing a single unit of product decreases when the total number of units produced increases. There are two sets of costs associated with the production of goods: fixed costs and variable costs.

EBITDA

EBITDA (earnings before interest, taxes, depreciation, and amortization) is used as an indicator to assess the financial performance of a company. The figure includes interest expenses, taxes, depreciation, and amortization costs in addition to the net income. All the required information to calculate EBITDA will be available from the income statement and balance sheet.

Earnings Per Share Formula

Earnings per share (EPS) is a measure of a company’s profit per outstanding share of its common stock. It’s a direct indicator of company profitability. Investors are more likely to invest in a company with higher earnings per share.

Equity

Equity is the ownership interest a person or company holds in a company, typically represented by shares.

I, J, K

Key Man Clause

In an investment context, a key man clause is a contractual clause that prohibits an investment firm from making new investments in certain situations.

Joint Venture

A joint venture is an arrangement between two or more individuals or companies to work towards a mutual business goal or project. The parties may choose to remain as separate entities or form a new business entity.

Inventory Turnover Ratio

An inventory turnover ratio is a calculated measurement of sales of inventory over a given period. It is also known as inventory turns or stock turnover. A business’s inventory turnover ratio reveals the speed at which its entire inventory is sold and replenished.

Intrinsic Value

Intrinsic value is a measurement of an asset’s actual worth, regardless of its market value. To understand this concept, it is vital to understand the difference between intrinsic value and market value.

Internal Rate Of Return

Internal rate of return (IRR) estimates a potential investment’s profitability. It measures an investment’s expected yearly rate of growth.

Insurance Market

An insurance market simply means the buying and selling of insurance and includes the entities involved in the process as well as customers.

Infinite Banking

Infinite banking is a concept created in the 1980s by the late economist R. Nelson Nash that centers around individuals becoming their bankers. Infinite banking proposes that individuals can exert greater control of their finances by creating and managing their banking functions.

Indication Of Interest

An indication of interest (IOI) is a formal, yet non-binding letter or document expressing interest in purchasing either a company or a company's securities.

Incubator

An incubator is something akin to Startup 101. Joining one can be a huge help for budding entrepreneurs who have great business ideas but don't know where to start. Incubators can also provide support to startup founders who lack the resources to grow their ideas into a full-fledged business.

Identifiable Assets

Identifiable assets can be quickly and accurately valued at a given point in time. They should be able to be assigned a fair value or expected selling price.

Intellectual Property (IP)

Intangible assets, such as patents, trademarks, copyrights, and trade secrets, that are legally protected and provide a company with a competitive advantage.

L

Liquidation Preference

A term in preferred stock that specifies the order in which proceeds are distributed to shareholders in the event of a liquidation, dissolution, or sale of the company (i.e., when the company is sold or closed.)

Liquidity Event

A liquidity event is an exit strategy that private company ownership uses to cash out all or a portion of shares.

Limited Partner

A limited partner owns a stake in a business partnership with limited liability. They work with at least one General Partner who manages the day-to-day operations of the business. They expect returns from General Partners.

Leveraged Buyout

A leveraged buyout (LBO) is when one company purchases another using mainly debt rather than equity.

Leverage Ratio Formula

Leverage ratios show how much debt a company holds concerning other equity and assets. Leverage ratio formulas exist in several forms and are designed to help determine the stability and security of a company.

Liquidation Preference

A term in preferred stock that specifies the order in which proceeds are distributed to shareholders in the event of a liquidation, dissolution, or sale of the company.

O

Option Pool

A reserved number of shares set aside for future issuance to employees, advisors, and other service providers as part of an equity incentive plan.

Operating Profit Margin

Operating profit margin is a ratio that measures the profitability of a business. It measures how much a business makes in revenue after paying for operating and non-operating expenses.

Operating Cash Flow Formula

Operating cash flow (OCF) is the measurement of cash generated by a business’s normal operating activities during a period. OCF is found by adding back non-cash items to net income and adjusting for changes in net working capital.

Option Pool

A reserved number of shares set aside for future issuance to employees, advisors, and other service providers as part of an equity incentive plan.

P, Q, R

ROI Formula

Return on investment (ROI) is a measure of the profitability of a particular investment.

ROE Equation

The return on equity (ROE) equation is used to calculate a company’s returns on capital raised through equity.

Retained Earnings Formula

Retained earnings refer to the amount of net profit a company retains without paying it out as dividends to its shareholders.

Retail Market

A retail market is one in which goods or services are sold to consumers for consumption. In the financial world, it means the selling of securities to individual investors rather than institutional investors.

Restrictive Covenant

Obligations within a contract or legal agreement that place restrictions on what any participating parties are allowed to do are called restrictive covenants. Restrictive covenants are used in a variety of legal agreements, especially in property deeds and employment contracts.

Rate Of Return Formula

The rate of return formula calculates the total net profit an investor makes from an asset. It is calculated and shown as a percentage of the total initial cost of the asset. Essentially, you are calculating the percentage change from the beginning to the end of an investment.

Quality Of Earnings Report

A quality of earnings report (QoE) reveals the true financial status of a company. It digs deeper than a standard income statement, breaking down income types, sources, and future viability.

Purchase Price Allocation

Purchase price allocation (PPA) categorises how much a buyer paid for a business into the assets and liabilities they purchased. The remainder of the purchase price is allocated to goodwill.

Profit Margin Formula

Profit margins are as vital to businesses as they are to financial investments and stocks. Similarly, profit margins form an essential element of accounting practices. Margins also mean different things in these three spheres: commerce, accounting, and investing.

Pre-emption Rights

Rights that give existing shareholders the opportunity to purchase new shares issued by a company before they are offered to new shareholders, allowing them to maintain their ownership percentage.

Present Value Formula

The present value formula is a tool investors and business owners use to estimate if an investment made today for a given rate of return will be worth the money they put into it.

Preferred Shares

Preferred shares or "preferred stock" are so called because they give their owners a priority claim whenever a company pays dividends or distributes assets to shareholders.

Post-Money Valuation

Post-money valuation refers to a company’s implied value after raising capital. The term is typically used in angel investing and venture capital parlance.

Pivot

To pivot is to change direction. It usually involves adopting a new strategy or testing out a new concept.

Pay-To-Play

Pay-to-play provisions are a form of safeguard for companies, helping to protect them from a downturn in market conditions.

Participating Preferred Stock

Preferred stock (or “preferred shares”) is the type of share that gives the holder a higher right to the dividends generated by the company. Those who hold participating preferred stock have an even higher claim to the dividends of a company.

Pari Passu

Pari-passu is a Latin term that means “on equal footing” or “moving together.” It’s a widely used legal term that has applications in corporate finance and personal finance that indicates fairness in the distribution of something. The term is used in equity shares, insolvency, and inheritance.

PaaS

PaaS, or Platform as a Service, gives developers and companies the ability to create, host, and deploy applications through the cloud. Both the hardware and the application software platform are provided as part of PaaS, hosted on the PaaS provider’s platform.

Pre-emption Rights

Rights that give existing shareholders the opportunity to purchase new shares issued by a company before they are offered to new shareholders, allowing them to maintain their ownership percentage.

S

Synergies

Financial synergies refer to the value created when two companies join together. If the two entities join up and create more value than when they operated separately, it’s considered synergy.

SWOT Analysis

SWOT (strengths, weaknesses, opportunities, and threats) analysis lets you see your business’s advantages and disadvantages. It can be used in several ways at different stages in the business life cycle.

Subsidiary

A subsidiary is a company that belongs partially or completely to a parent company or holding company. It’s a separate company from its parent or holding company, yet the parent or holding company exerts at least some influence over the subsidiary through at least 51% stock ownership, seats on the board of directors, and company decision-making.

Strategy Map

A strategy map is a visual representation of an organisation’s strategic objectives that illustrates cause-and-effect relationships between them.

Statement Of Cash Flows

A statement of cash flow, also known as a cash flow statement, is one of four types of business financial statements. It summarizes and details all cash inflows and outflows and is broken down into operating, investing, and financing cash flows.

Standard Deviation Formula

Standard deviation is a measurement of the variability of a data set against the mean.

Shares Outstanding

The number of shares outstanding is the number of shares that are issued, purchased, and held by investors and company executives.

Series C Funding

Series C funding is the forth stage in raising capital for startups and the third stage in venture capitalism. It is sometimes referred to as Series C financing or a Series C round, and it takes place after Series B funding.

Series B Funding

Series B funding is the third stage in raising capital for startups and the second stage in venture capitalism. It is sometimes referred to as Series B financing or a Series B round, and it takes place after Series A funding.

Series A Funding

Series A funding is a type of equity-based financing that is considered the first major round of external funding startups can raise. Also known as Series A financing, it’s usually funded by private equity firms and venture capital firms.

Seed Money

Seed money refers to the funds a startup raises to launch its product or business. It usually comes from friends and family, co-founders, or angel investors in exchange for equity.

Secondary Sale

A secondary sale refers to the sale of existing securities or assets, such as shares of stock, from one investor to another within the secondary market. Unlike primary sales, where funds raised from issuing new securities go directly to the issuing company (such as in an IPO or initial public offering), in a secondary sale, the funds go to the selling shareholder, not to the company whose shares are being traded.

Secondary Offering

A secondary offering takes place in the secondary market in the years following an IPO. It may either involve the sale of existing shares or the issue of fresh shares, depending on the parties involved in the transaction.

Sandbagging

Sandbagging is a term used to describe when a company deliberately seeks to lower the expectations of its stakeholders to achieve greater-than-expected results.

Sale and Purchase Agreements

Sale and purchase agreements (SPAs) are legally binding contracts that detail conditions that must be met by the buyer and seller. They help to ensure a smooth purchase process and work to protect all parties.

SaaS

SaaS (software as a service) is sometimes called “cloud-based software.” Over the past decade or two, it’s become the default method of software provision.

Simple Agreement for Future Equity (SAFE)

A financing instrument that allows investors to provide capital to a company in exchange for the right to receive equity at a later date, typically during a future funding round.

Shareholders' Agreement

A contract between shareholders that establishes their rights and obligations and sets out the rules for managing the company.

T, U, V

Vulture Fund

A vulture fund is made up of investors who profit from distressed securities. The group may be formed as a hedge fund or private equity group.

Voting Rights

Shareholders of corporations have voting rights on matters of corporate policy. For instance, they can vote on decisions about directors, about actions like mergers or acquisitions, and to approve dividends.

Venture Capitalist

A venture capitalist (VC) is an investor who provides private financing to a company in exchange for an equity stake (typically 15% to 45% of the company). VCs normally invest in startups or small companies that are seeking to expand, though some venture capitalists invest in more mature companies.

Valuation Methods

Valuation methods are the methods for calculating how much a company is worth now or how much it will be worth in the future.

Valuation

In simple terms, business valuation is how much someone would pay to buy the company. While many business owners place sentimental value on their business ventures, there are many reasons to determine a more grounded, realistic value.

Use Of Proceeds

A use of proceeds statement is a short document summarising how a company plans to spend the funds secured through additional capital.

Unilateral Contract

A unilateral contract is a type of contract in which one party promises payment to another in exchange for a specific act.

Treasury Stock

Treasury stock is the portion of shares that a company itself owns. It’s separate from any shares being owned by investors, including individuals who are officers or employees of the company.

Times Interest Earned Ratio

Times interest earned (TIE) ratio is a financial ratio that signals the company’s ability to pay off its debt.

Terminal Value Formula

Terminal value refers to a business’s or asset’s value beyond the forecasting period in which it’s possible to estimate future cash flows.

Tender Offer

A tender offer is one type of public takeover bid. Normally, the tender is a public open offer by a prospective acquiring company to the shareholders of the target corporation.

TAM

Whether you dream of launching your startup or just want to become a more sophisticated investor, there’s a concept you need to understand: TAM (total addressable market).

Vesting

The process by which a founder, employee or service provider earns the right to own shares or options over time, typically based on continued employment or performance milestones. There are different types of vesting, with forward and reverse vesting being the key types.

Valuation Cap

A limit on the conversion price of a convertible security, such as a SAFE or ASA, used to protect investors from excessive dilution in future funding rounds.

Term Sheet

A non-binding document outlining the key terms and conditions of a proposed investment, used as a basis for negotiation between investors and a company.

W, X

Weighted Average

A weighted average assigns importance to values before calculating their average. This importance is represented mathematically by multiplying each value by its own predetermined "weight" number.

Warrant

A financial instrument that gives the holder the right to purchase a specified number of shares at a predetermined price within a defined time period.

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