This glossary provides definitions for common terms used in the context of startups. Many of these terms have different meanings in other contexts.
Anything with economic value. Assets can be intangible - for example, intellectual property. Assets can be thought of as the counterpart to liabilities.
Authorized Shares, Number of
The number of shares the corporation is authorized to issue. See Stock, Requirements to Issue.
Board of Directors
The bylaws of a Delaware corporation are a set of rules and procedures for how the corporation operates. These bylaws work with the certificate of incorporation to supplement Delaware law, which also specifies how corporations can operate. For startups, bylaws are highly standardized and customization is unusual. Changing the bylaws of a corporation requires approval of either the board or the stockholders.
See generally Yokum Taku, Startup Company Lawyer: What are bylaws?, http://www.startupcompanylawyer.com/2009/02/15/what-are-bylaws/.
The capital structure of a corporation - i.e. the structure of the equity and debt of a corporation. See Fully-Diluted Capitalization.
Certificate of Incorporation
The document filed with the Delaware Secretary of State in order to form a corporation. The certificate of incorporation specifies the types of stock the corporation can issue, and how many shares can be issued.
The certificate of incorporation can be changed by filing an amendment with the Delaware Secretary of State. Amending the certificate of incorporation typically requires the approval of the board of directors, and depending on the changes being made, may require stockholder consent. On occasion, startups may have separate contractual obligations that require the consent of additional parties for certain types of changes.
Synonym for Certificate of Incorporation.
A Confidential Information and Invention Assignment Agreement, also often abbreviated to CIIAA. Sometimes mistakenly referred to as a CIIAA Agreement. Effectively synonymous with with PIIA Agreement, which stands for Proprietary Information and Invention Assignment Agreement. See Employees & Consultants.
The default type of stock that corporations typically start off with. Common stock is typically issued to founders, employees, and consultants, and is typically not issued to investors. See Stock.
The default type of corporation. The C refers to subchapter C of the tax code. C-corporation status means that the corporation will be taxed as a separate entity (apart from its stockholders).
A C-corporation incorporated in Delaware.
Delaware Secretary of State
The agency in the Delaware state government responsible for registering corporations.
The reduction of value of shares of stock as the result of the corporation issuing more shares. See Fully-Diluted Capitalization.
A right to be paid dividends before other stockholders are. It is uncommon for startups to issue dividends.
For the purposes of this handbook, startups that have not yet raised a Series A financing. See Audience.
Synonym for stock.
A financing in which equity is issued, as opposed to other types of securities such as convertibles notes or safes.
Also known as strike price. In the context of a stock option, the price at which the underlying stock can be purchased by the holder upon exercising the stock option (i.e. choosing to use it).
Fair Market Value (FMV)
The value a given asset would fetch in an open market, assuming no information asymmetry.
See Registered Agents.
The process of registering (also referred to as qualifying) to do business in state other than the one in which the corporation was incorporated. Since most startups are Delaware corporations but are not located in Delaware, most startups must foreign qualify in at least their home state. See Process.
A term generally used to refer to people who play a main role in starting a company. This term does not have any legal meaning.
Initial Public Offering (IPO)
The first time a company offers securities to the public. Due to securities regulations, it is extremely expensive to do an IPO. Consequently, it is typically only done by mature companies.
Legal Due Diligence
The process a potential investor or acquirer goes through to determine if a startup has any legal issues that may affect its value. Typically, this involves the investor or acquirer having their attorneys review the startup's legal paperwork. Issues discovered in legal due diligence can affect the valuation of the company or the viability of the deal altogether.
A non-human legal person.
As used in a legal context, legal responsibility for something. As used in an accounting context, an obligation to pay something in the future.
A right to receive proceeds from an acquisition (or shutdown) of the corporation before other stockholders do. From a founder's perspective, a liquidation preference for investors creates a minimum price that must be reached before founders (and other common stockholders) will receive proceeds from an acquisition.
See CIIA Agreement.
In the context of a given financing, the valuation of a company prior to that financing. See Fully-Diluted Capitalization.
One of the two types of stock that startups typically issue. Preferred stock has additional rights and privileges that common stock does not have, and is typically only issued to investors. See Stock.
The minimum number of directors required to be present at a board meeting in order for the board to act. See Board of Directors.
As the term is used by startups, common stock that is subject to vesting. See Vesting.
Shares that have been issued by the corporation, subsequently repurchased by or forfeited to the corporation, and retired by the board of directors. Typically, once shares have been retired, they cannot be re-issued.
A corporation that has elected to be taxed under subchapter S of the tax code. S-corporation status means that the corporation can pass its income and losses onto its shareholders. All corporations start off as C-corporations, and must make an election with the IRS in order to become an S-corporation. S-corporations can revoke their S-corporation election in order to become a C-corporation again, but should consult attorneys and accountants before doing so.
S-corporations cannot have more than 100 stockholders, stockholders who are not individuals, stockholders who are nonresident aliens, or more than one class of stock. Consequently, startups are almost never S-corporations.
The space created by clear boundaries in laws and regulations, designed to provide people with certainty about how to comply with a given law or regulation. Typically, the actual boundaries of the law or regulation are more permissive than the safe harbor but also much harder to discern.
A common officer position in corporations. The secretary is generally responsible for maintaining the corporation's records. Some states have laws that require or give special status to the secretary's signature on certain documents.
Generally, this term includes anything a startup might issue to people in order to raise money or share profits. This includes stock, stock options, convertible notes, safes, etc.
Series [A, B, C, etc.] [Preferred Stock] Financing
The name typically given to the first, second, third, etc. equity financing of a startup. See Preferred Stock.
What stock is divided into.
Shares Available for Issuance
The number of shares the corporation can issue. This is the number of authorized shares, minus any shares that have been issued or otherwise reserved, plus any shares that have been repurchased and not retired. See Stock, Requirements to Issue.
For the purposes of this handbook, companies that plan to raise (or have raised) money from an accelerator or VC. See Audience.
The stock of a corporation can be organized into classes. See Stock, Structure, Classes.
A type of security that allows people to purchase common stock at a fixed price in the future. See Equity Compensation.
Stock classes can be further divided into series. See Stock, Structure, Series.
A type of security that allows people to purchase common stock at a fixed price in the future. They largely function like stock options, and differ primarily in that they are typically issued to investors and partners.