Understanding Key Legal and Financial Terms: A Glossary for Founders and Investors

This glossary serves as a comprehensive resource for founders, investors, and anyone involved in business and legal transactions. Each term is defined with detailed explanations, clarifying its role in corporate governance, venture financing, intellectual property management, and regulatory compliance. While some of these terms may be familiar, others are specific to niche areas like securities law, anti-dilution mechanisms, and fiduciary duties, each carrying significant implications for business strategy and legal obligations.

Whether you're an entrepreneur preparing for a funding round, an investor conducting due diligence, or a professional enhancing your corporate governance knowledge, this glossary is designed to demystify the terminology that shapes the financial and legal landscape. With clarity and insight, you can approach transactions, negotiations, and strategic decisions with confidence, knowing the language that powers your business.

Explore the glossary below to strengthen your understanding of these critical terms and equip yourself for success in the complex, regulated world of business and finance.

Antitrust Laws

Antitrust laws, also known as competition laws, are statutes developed to promote fair competition and protect consumers from monopolistic practices. These laws prohibit activities that restrain trade, such as price fixing, market allocation, and bid rigging. Violations can lead to government investigations, penalties, and, in some cases, company restructuring to ensure open market competition.

Appraisal Rights

Appraisal rights allow minority shareholders to receive a fair valuation of their shares if they disagree with a proposed corporate action, such as a merger or acquisition. When shareholders believe they aren’t receiving a fair price, they can invoke these rights under state law, often involving an independent valuation or court determination.

Assignment of Intellectual Property (IP)

An IP assignment is the legal transfer of ownership rights in intellectual property from one party to another. Typically used in employer-employee or contractor agreements, this ensures that all work created for the company is owned by the company, safeguarding proprietary information, patents, trademarks, and trade secrets.

Audit

An audit is an independent evaluation of a company's financial records and internal controls. Required by many investors, audits provide an accurate assessment of a company’s financial position. In the U.S., audits must adhere to standards set by the Public Company Accounting Oversight Board (PCAOB) and the American Institute of Certified Public Accountants (AICPA).

Audit Committee

The audit committee, often part of a company’s board of directors, oversees financial reporting, accounting, and regulatory compliance. The committee engages with external auditors and ensures transparency, acting as an internal check against fraud and financial misstatements, and protecting shareholders' interests.

Authorized Share Method

Delaware's default method for calculating franchise tax, the authorized share method bases the annual tax on the total authorized shares in a company’s charter. Young companies may find this method costly if they have a high number of authorized shares but limited revenue, prompting them to explore alternative tax structures.

Authorized Shares

Authorized shares are the maximum number of shares a corporation is legally allowed to issue, as outlined in its certificate of incorporation. Not all authorized shares are issued to investors immediately, leaving flexibility for future financing rounds, stock options, and strategic transactions.

Basis Points (BPS)

A basis point is a financial measurement equal to 0.01% (1/100th of a percent). Basis points help in accurately describing small changes in interest rates, bond yields, or other financial instruments. For example, an increase from 5.00% to 5.25% is a rise of 25 basis points.

Benefit Corporation (B Corp)

A benefit corporation is a for-profit entity with a commitment to social and environmental goals, alongside profit. B Corps legally bind directors to consider public impact in decision-making, and many undergo third-party assessments to verify their societal impact. Benefit corporations must maintain transparency and report on their social and environmental performance.

Bill of Materials (BOM)

A bill of materials (BOM) is a comprehensive list of raw materials, parts, and components required to manufacture a product. Common in manufacturing and supply chain management, BOMs are essential in production agreements, ensuring the accuracy of sourcing, costs, and timelines.

Board Minutes

Board minutes are official records of discussions, resolutions, and actions taken during board meetings. These minutes provide legal documentation of the board's decision-making process, ensuring accountability and compliance with corporate governance standards.

Board of Directors

A board of directors is the governing body responsible for overseeing a corporation’s operations, strategy, and management. Board members, elected by shareholders, have fiduciary duties to act in the company's best interest, ensuring ethical conduct, compliance, and alignment with shareholder objectives.

Bridge Financing

Bridge financing is interim funding provided to a company to cover short-term expenses or prepare for a subsequent round of financing. Often structured as convertible debt, bridge financing provides companies with liquidity until they can secure larger investments or achieve operational milestones.

Broad-Based Weighted-Average Anti-Dilution Protection

This form of anti-dilution protection adjusts the conversion rate of preferred shares in the event of a down round, preserving the ownership percentage of early investors. Broad-based weighted-average calculations are considered more favorable to common shareholders compared to other anti-dilution protections.

Burn Rate

Burn rate is the speed at which a company uses its available cash, typically measured monthly. Startups and growth-stage companies monitor burn rate closely to assess how long they can operate before requiring additional capital. High burn rates increase reliance on external funding, while lower rates indicate financial resilience.

Business Plan

A business plan is a strategic document outlining a company’s mission, goals, market analysis, operational structure, and financial projections. Essential for attracting investors, business plans provide a roadmap for growth and highlight the company's competitive advantages, revenue models, and target markets.

Buy-Out Clause

A buy-out clause is a contractual provision allowing one party to buy another party’s ownership stake under specific conditions, such as termination, death, or disability. The clause often details a predetermined formula or valuation method, minimizing conflicts during shareholder exits.

Bylaws

Corporate bylaws are a set of internal rules governing the operations and decision-making of a corporation. While the certificate of incorporation establishes the company, the bylaws provide detailed governance guidelines, including rules for board meetings, shareholder voting rights, and officer duties.

C Corporation (C-Corp)

A C Corporation is a legal entity where profits are taxed at the corporate level and dividends are taxed again at the shareholder level (double taxation). C-Corps provide limited liability, unlimited shareholder capacity, and multiple stock classes, making them attractive for high-growth companies seeking venture capital.

Cap Table (Capitalization Table)

A cap table is a detailed ledger showing a company’s ownership structure, including equity stakes, options, and convertible securities. Cap tables are essential tools for tracking ownership percentages, dilution effects, and shareholder rights, facilitating transparency for investors and company executives.

Capital Gains

Capital gains are profits realized from the sale of assets, such as stocks or real estate, at a price higher than the acquisition cost. Short-term gains (assets held for less than a year) are usually taxed as ordinary income, while long-term gains benefit from lower tax rates, making strategic tax planning critical for investors.

Carve-Outs

Carve-outs are exceptions or exclusions in contracts that modify the application of broad clauses. For example, intellectual property agreements might allow employees to exclude prior inventions. Carve-outs help clarify contractual boundaries and preserve specific rights for involved parties.

Certificate of Incorporation

The certificate of incorporation, sometimes called the "charter," is the foundational document that legally establishes a corporation. Filed with the state, it outlines the corporation’s name, purpose, stock structure, and other essential elements. It serves as the company’s primary legal identity document.

Chief Financial Officer (CFO)

A Chief Financial Officer (CFO) is a senior executive responsible for overseeing the financial health of a company. Duties include managing cash flow, financial planning, record-keeping, and financial reporting, as well as analyzing data to guide strategic decisions.

Common Law Rights

Common law rights are legal principles established by judicial decisions rather than statutory laws. These rights evolve over time through case law and are binding on future cases, providing flexibility and adaptability within the legal system, particularly in English-speaking jurisdictions.

Common Stock

Common stock represents an ownership interest in a corporation and typically comes with voting rights, allowing shareholders to participate in corporate governance. Unlike preferred stock, common stockholders have residual claim on assets in liquidation but are subordinate to debt and preferred equity claims.

Confidential Information and Inventions Assignment Agreements (CIIAA)

A CIIAA, also known as a Proprietary Information and Inventions Assignment Agreement (PIIAA), ensures that employees assign any work-related inventions or proprietary information to their employer. This agreement protects the company’s intellectual property and restricts employees from disclosing confidential information.

Conflict of Interest

A conflict of interest occurs when a person’s responsibilities or duties are compromised by personal interests. In corporate governance, directors and officers must avoid situations where their personal interests conflict with those of the corporation, as this can breach their fiduciary duty of loyalty.

Convertible Note

A convertible note is a type of short-term debt that converts into equity upon a future financing event, often the next funding round. Popular in early-stage investments, convertible notes allow companies to raise capital without immediately setting a valuation, deferring equity decisions until a later date.

Corporate Veil

The corporate veil is the legal separation between a corporation and its shareholders, protecting personal assets from corporate liabilities. Courts may "pierce" the corporate veil if there is evidence of fraud or improper conduct, holding shareholders personally liable.

Covenant

A covenant is a formal agreement in a contract where one party commits to undertake or refrain from specific actions. Affirmative covenants require certain actions (e.g., maintaining insurance), while negative covenants restrict actions (e.g., incurring new debt). They are commonly found in loan and investment agreements.

Data Room

A data room is a secure location where confidential documents, such as contracts, financial statements, and intellectual property records, are stored for due diligence in M&A transactions. Virtual data rooms are widely used to provide controlled access to these documents, facilitating the transaction process.

Dilution

Dilution occurs when a company issues additional shares, reducing the ownership percentage of existing shareholders. Dilution is particularly relevant for startups raising multiple funding rounds, as founders and early investors experience a reduction in their equity stake over time.

Due Diligence

Due diligence is an investigative process that examines a company’s financial, legal, and operational aspects before a transaction, such as a merger or acquisition. Investors and acquirers conduct due diligence to assess risks, validate claims, and make informed decisions.

Equity

Equity represents ownership in a company, generally in the form of shares. Equity holders benefit from profits through dividends or appreciation in share value, though they are also exposed to losses if the company underperforms. Equity differs from debt, as it does not carry a repayment obligation.

Drag-Along Rights

Drag-along rights allow majority shareholders to compel minority shareholders to sell their shares if a third-party buyer makes an offer to purchase the company. Often negotiated in venture financing, these rights enable smoother exit strategies for investors by ensuring minority shareholders cannot block a sale.

Duty of Care

The duty of care is a fiduciary responsibility requiring corporate directors to make informed decisions on behalf of the company. Directors must act with the same care a reasonably prudent person would exercise in a similar position, ensuring that their decisions are based on adequate information and sound judgment.

Duty of Loyalty

The duty of loyalty requires directors and officers to prioritize the interests of the corporation over personal interests. Violations, such as self-dealing or taking corporate opportunities for personal gain, breach this duty, which can lead to legal consequences, including liability for damages.

Equity Financing

Equity financing involves raising capital by selling shares of the company. Unlike debt financing, it doesn’t involve repayment obligations, but it does dilute ownership. Equity financing is common for startups and high-growth companies seeking to expand without incurring debt.

Escrow

Escrow is a legal arrangement where a third party temporarily holds assets or funds on behalf of transacting parties. Escrow is commonly used in mergers and acquisitions, real estate transactions, and online marketplaces to ensure that conditions are met before assets or funds are released.

Exclusivity Clause

An exclusivity clause restricts one or both parties in a transaction from negotiating with other parties for a specified period. Common in mergers and acquisitions, exclusivity ensures commitment during negotiations, preventing either party from seeking alternative deals.

Fully Diluted Shares

Fully diluted shares represent the total number of shares outstanding, including those that could be issued through stock options, warrants, or convertible securities. This figure is used to calculate ownership percentages and potential dilution impacts, providing a complete view of equity distribution.

General Partner (GP)

In a partnership, the general partner is responsible for managing the business and assumes unlimited liability for the partnership’s debts and obligations. In private equity and venture capital, the GP is the managing entity that makes investment decisions and oversees the fund’s operations.

Golden Parachute

A golden parachute is a contractual agreement providing substantial benefits to executives if they are terminated following a change in control of the company. These benefits may include cash bonuses, stock options, or other compensation and are designed to retain key executives during mergers or acquisitions.

Goodwill

Goodwill is an intangible asset representing the excess value of a business beyond its identifiable assets. Arising in acquisitions, goodwill reflects factors such as brand reputation, customer relationships, and intellectual property that contribute to the company’s value but are not tangible.

Indemnification

Indemnification is a contractual obligation where one party agrees to protect another from specific liabilities, losses, or damages. Common in commercial contracts, indemnification clauses ensure that one party bears the financial risk associated with certain claims, often covering legal defense costs.

Independent Contractor

An independent contractor provides services to a business but is not classified as an employee. Contractors maintain control over how they perform their work and are responsible for their own taxes and insurance. This classification affects labor rights, tax obligations, and liability issues.

Initial Public Offering (IPO)

An IPO is the first sale of a company’s shares to the public, transforming a private company into a publicly traded one. IPOs provide companies with access to capital, increase their visibility, and create liquidity for shareholders, but they also impose rigorous regulatory and reporting requirements.

Intellectual Property (IP)

Intellectual property includes intangible creations such as inventions, literary works, symbols, and designs. IP rights are legally protected through patents, trademarks, copyrights, and trade secrets, allowing creators to prevent unauthorized use and monetize their creations.

Interest Rate

An interest rate is the cost of borrowing money, expressed as a percentage of the principal. Rates can be fixed or variable and are influenced by economic factors and monetary policies. Interest rates affect loan affordability, investment returns, and overall economic activity.

Joint Venture (JV)

A joint venture is a business arrangement where two or more entities collaborate on a specific project or business activity. JVs allow parties to pool resources, share risks, and combine expertise while remaining independent, commonly seen in industries requiring significant capital or technical expertise.

Letter of Intent (LOI)

An LOI is a preliminary, non-binding document outlining the basic terms and conditions of a prospective transaction, such as a merger, acquisition, or investment. The LOI serves as a foundation for further negotiations, detailing the scope, price, and timeline of the proposed deal.

Liquidation Preference

Liquidation preference specifies the order in which investors receive their payout in the event of a company’s liquidation or sale. Common in venture capital, it ensures preferred shareholders recover their investments before common shareholders, protecting investors from potential losses.

Lock-Up Period

A lock-up period is a contractual restriction preventing shareholders from selling their shares for a specified period, often following an IPO. Lock-ups stabilize the share price by limiting the immediate supply of shares in the market, giving the company time to establish market presence.

Non-Compete Agreement

A non-compete agreement restricts an employee or former employee from working with competitors or engaging in competitive activities within a specified geographic area and time frame. These agreements protect the company’s trade secrets and customer relationships, though enforceability varies by jurisdiction.

Non-Disclosure Agreement (NDA)

An NDA is a legally binding contract that prohibits parties from disclosing confidential information to third parties. Common in business transactions, NDAs protect trade secrets, proprietary information, and sensitive business data from being shared or used by competitors.

Option Pool

An option pool is a reserved set of shares designated for stock options, typically offered to employees, advisors, and contractors. Creating an option pool is standard in startups to attract and retain talent, aligning employee interests with company growth through equity incentives.

Outstanding Shares

Outstanding shares are the total number of shares currently held by all shareholders, including restricted shares and shares held by insiders. This figure is essential in calculating market capitalization, voting power, and earnings per share (EPS).

Pre-Money Valuation

Pre-money valuation is the estimated value of a company before it receives new investment or funding. This valuation determines the percentage of equity that investors will receive in exchange for their capital, commonly used in venture capital and private equity financing.

Post-Money Valuation

Post-money valuation is the estimated value of a company after a new investment is added. It is calculated by adding the investment amount to the pre-money valuation. Post-money valuation reflects the company’s implied market value with the new capital, influencing future funding rounds and ownership structure.

Preferred Stock

Preferred stock is a class of ownership that has a higher claim on assets and earnings than common stock. Preferred shareholders typically receive dividends before common shareholders and may have additional rights, such as liquidation preferences and anti-dilution protection.

Promissory Note

A promissory note is a written promise by a borrower to repay a specified amount of money to a lender at a predetermined interest rate and maturity date. It serves as a legally enforceable debt instrument, commonly used in loans and convertible debt arrangements.

Pro-Rata Rights

Pro-rata rights allow investors to maintain their ownership percentage in future funding rounds. By participating in subsequent rounds, investors prevent their equity from being diluted, a common provision in venture capital agreements that benefits early-stage investors.

Reverse Merger

A reverse merger is a method by which a private company becomes publicly traded by merging with an already public shell company. Reverse mergers provide a faster and more cost-effective route to public markets than traditional IPOs, though they may lack the same level of investor scrutiny.

Right of First Refusal (ROFR)

The right of first refusal allows existing shareholders or the company to purchase shares before they are offered to third parties. ROFR protects shareholders from dilution and ensures they retain control over ownership, common in shareholder agreements and investment terms.

SAFE (Simple Agreement for Future Equity)

A SAFE is a financing instrument that allows investors to convert their investment into equity at a future financing round, commonly used by startups. SAFEs are simpler and quicker to execute than traditional convertible notes, often lacking interest rates or maturity dates.

Series A, B, C Funding

Series A, B, C funding refers to rounds of equity investment that companies raise as they grow. Series A typically funds market expansion, Series B supports scaling operations, and Series C drives growth into new markets or products. Each round generally involves an increase in company valuation.

Shareholder Agreement

A shareholder agreement is a contract among a company's shareholders outlining rights, responsibilities, and restrictions. It covers matters like voting rights, share transfers, and dispute resolution, ensuring all parties understand their roles in corporate governance.

Stock Option

A stock option is a contractual right to purchase shares at a predetermined price, often offered as an incentive to employees. Stock options align employee interests with company performance, as they become valuable if the company’s stock price exceeds the exercise price.

Term Sheet

A term sheet is a non-binding document that outlines the key terms and conditions of a potential investment or transaction. It serves as a basis for further negotiation and drafting of definitive agreements, covering aspects like valuation, investment amount, and governance rights.

Vesting Schedule

A vesting schedule determines the timeline over which an employee or contractor gains ownership of granted equity. Vesting aligns incentives by rewarding long-term commitment, with typical schedules spanning four years with a one-year cliff, after which ownership accrues incrementally.

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