Arabella Dictionary

The words the Encyclopedia's answers use, defined once and in plain English. Each entry says what the thing is and, where it helps, the one fact people get wrong about it. The articles under each term go deeper.

0-9
83(b) election: A letter to the IRS, filed within 30 days of receiving restricted stock, choosing to be taxed on the shares' value now, while it is near zero, rather than as they vest. Miss the 30 days and there is no fix.; Read moreWhat is an 83(b) election, and why should I file one?How do I file an 83(b) election, by mail or online?
409A valuation: An independent appraisal of the fair market value of the company's common stock, used to set the exercise price of options so they comply with Section 409A of the tax code. It is refreshed at least every 12 months and after any financing, and it is nearly always far below the price investors pay for preferred.; Read moreWhy is my 409A valuation so much lower than my investors' valuation?
A
Acceleration (single trigger and double trigger): A clause that vests unvested shares early. Single trigger vests them on one event, a sale of the company. Double trigger needs the sale plus the holder being let go without cause afterward. Double trigger is the customary founder term; investors resist single trigger.; Read moreWhat is the difference between single trigger and double trigger acceleration?
Accredited investor: An investor the securities rules treat as able to look after themselves: for an individual, income over $200,000 (or $300,000 with a spouse) in each of the last two years, net worth over $1 million excluding the home, or certain professional licenses. Selling securities to anyone else brings extra rules and disclosure.
Angel investor: An individual who invests their own money in early companies, usually by SAFE or note and usually in amounts from a few thousand dollars to a few hundred thousand. Angels are the typical first investors after friends and family.
Anti-dilution protection: A right that gives preferred stock more common shares on conversion if the company later sells stock at a lower price, a down round. The customary form is broad-based weighted average, which adjusts by how much was sold at the low price. Full ratchet resets the price to the low price regardless of amount, and is rare.; Read moreWhich terms in a term sheet actually matter?
Authorized shares: The maximum number of shares the certificate of incorporation lets the company issue. Startups commonly authorize 10,000,000 and issue fewer, so that later grants need only a board vote and not a charter amendment. Authorizing more shares does not give anyone more of the company.; Read moreHow many shares should my company authorize?
B
Board consent: A written resolution signed by every director in place of a meeting. Startups approve almost everything this way: officers, stock issuances, option grants, the SAFE round. If a decision needs the board, there should be a consent or minutes recording it.; Read moreWhich decisions need board approval?
Board of directors: The body legally responsible for managing the corporation. A one-founder company can have a one-person board. Directors appoint officers, approve major decisions, and owe the company duties of care and loyalty.; Read moreWhat are my duties as a director of my own startup?
Bridge financing: A short round, usually SAFEs or notes, that carries the company from where it is to a priced round or a sale it expects to close on better terms. Investors want to see what the bridge reaches; a bridge to nowhere is the phrase for one that does not.
Business judgment rule: The presumption courts apply that directors acted on an informed basis, in good faith and in the company's best interests, so that an honest decision that turned out badly is not a breach of duty. Delaware applies it through case law; Nevada and Texas have written it into their statutes.; Read moreHow do Delaware, Nevada and Texas corporate laws differ?
Bylaws: The corporation's internal rulebook, adopted by the board and never filed with the state: how directors are elected and removed, how meetings are called, who the officers are, and often a restriction on transferring shares. They sit under the charter and cannot contradict it.; Read moreHow does a corporation actually work?
C
C corporation: A corporation taxed under Subchapter C: the company pays tax on its own profit, and stockholders pay again on dividends. It is the entity venture investors expect, the only one whose stock can be QSBS, and the one most startups form.; Read moreWhich type of entity should my startup be?
Cap table: The capitalization table: who owns what. Every share, option, warrant, SAFE and note, by holder, with the percentage each represents. Investors ask for it on day one of every round, and a company should be able to produce an accurate one at any time.; Read moreHow do I build a pro forma cap table for a round?
Certificate of incorporation: The document filed with the state that creates a corporation, called articles of incorporation in some states and the charter in conversation. It names the company, its registered agent, the shares it may issue and their rights, and the protections for directors. Preferred stock rights are written into it at each round.; Read moreHow do I form a Delaware corporation?
Cliff: The first stretch of a vesting schedule in which nothing vests at all, usually one year. A founder or employee who leaves before the cliff leaves with nothing; on the anniversary a quarter of the shares vest at once.; Read moreWhat vesting schedule do startup founders usually get?
Common stock: The basic ownership share of a corporation, held by founders and employees. It votes to elect the board and gets whatever is left after debt and preferred stock are paid in a sale. There is no separate legal category called founder stock; founders hold common.; Read moreIs founder stock a different kind of stock?
Conversion discount: A percentage off the priced round's share price at which a SAFE or note converts, commonly 10 to 25 percent. When an instrument has both a discount and a cap, the investor gets whichever gives them the lower price, never both.; Read moreWhat are the terms of a convertible note?
Convertible note: A loan to the company that converts into preferred stock at the next priced round instead of being repaid, usually at a discount to the round price or at a valuation cap. Because it is debt, it carries an interest rate and a maturity date.; Read moreWhat are the terms of a convertible note?
D
Delaware franchise tax: The annual tax Delaware charges every corporation for the privilege of existing, due March 1 with the annual report. It is calculated by one of two methods, and the state's first notice uses the one that produces the alarming number.; Read moreHow is the Delaware franchise tax calculated?
Dilution: The fall in an existing holder's percentage when the company issues new shares. Every round, every option grant and every conversion dilutes the people who already own stock. It is not the same as losing value; a smaller share of a bigger company can be worth more.; Read moreHow do I build a pro forma cap table for a round?
Down round: A priced round at a lower price per share than the last one. It dilutes everyone, triggers anti-dilution protection for earlier investors, which dilutes the common further, and can reprice outstanding SAFEs and notes.
Duly incorporated: Properly formed and properly kept: the charter filed, the organizational consents signed, stock validly issued and paid for, the records maintained. It is what an investor's lawyer confirms before closing, and what a founder who skipped the paperwork cannot say.; Read moreWe split the company on a handshake and never issued stock. What now?
E
EIN: The Employer Identification Number, the nine-digit number the IRS assigns a business. Every corporation needs one, so does any LLC or partnership with more than one owner, so does any business with employees, and every bank asks for it. It is free.; Read moreWhat is an EIN, and does my company need one?
F
Fiduciary duties: What a director owes the company and its stockholders: a duty of care, meaning informed decisions made in good faith, and a duty of loyalty, meaning the company's interests ahead of their own. A director who honors both is protected by the business judgment rule.; Read moreWhat are my duties as a director of my own startup?
Foreign qualification: Registering a company formed in one state to do business in another. A Delaware corporation with its office in California is a foreign corporation there and must qualify, pay California's fees and taxes, and keep a registered agent in both states.; Read moreDo I have to register my company in every state where it does business?
Founder stock: The common stock issued to founders at formation, bought at par value or for assigned intellectual property, and usually subject to vesting. The phrase describes when it was issued and what it cost, not a different class of stock.; Read moreIs founder stock a different kind of stock?
Full ratchet: The harsh form of anti-dilution protection: after a down round, earlier preferred stock converts as if it had been bought at the new, lower price, however few shares were sold at that price. Unusual in US venture deals, and worth a conversation if it appears in a term sheet.
Fully diluted: A share count that includes everything that could become common stock: issued shares, preferred as if converted, outstanding options and warrants, and usually the unissued option pool. Investors quote percentages on this basis because it is the honest denominator.; Read moreWhat does fully diluted mean, and why do investors count that way?
I
Issued and outstanding shares: The shares people actually own today, not counting options or the pool. Your percentage of issued and outstanding shares is always higher than your fully diluted percentage, which is why some offers are quoted that way.; Read moreWhat does fully diluted mean, and why do investors count that way?
K
KISS: Keep It Simple Security, 500 Startups' 2014 answer to the SAFE, in a debt version with interest and maturity and an equity version without. Rare today; the post-money SAFE won.
L
Liquidation preference: The right of preferred stock to be paid a set amount, usually what the investor paid, before common stock gets anything in a sale or wind-down. A 1x non-participating preference is the customary term; participating preferred takes its money back and then shares in the rest too.; Read moreWhich terms in a term sheet actually matter?
LLC: A limited liability company: owners, called members, get the liability shield of a corporation with the pass-through taxation of a partnership by default, and an operating agreement in place of bylaws. The right form for many businesses, and the wrong one for a company that will sell preferred stock to venture funds.; Read moreWhat is an LLC, and when is it the right choice?
M
Maturity date: The date a convertible note comes due if it has not converted, usually 18 to 24 months out. In practice notes are extended or converted rather than repaid, but the date gives the holder a lever a SAFE holder does not have.; Read moreWhat happens to convertible notes at maturity?
Most favored nation (MFN): A clause in a SAFE or note with no cap and no discount that lets the holder adopt the terms of any later, better SAFE or note the company sells. It is a way of not setting terms yet.; Read moreWhat should I know before I sign a SAFE?
O
Option pool: Shares the company reserves under its stock plan for future grants to employees, advisors and contractors. Investors usually size it as a percentage of the post-money capitalization and put it in the pre-money, so the pool dilutes the founders and not the new investors.; Read moreHow does the option pool change my valuation?
P
Par value: The minimum price a share can be issued for, set in the charter. Startups use a tiny figure, usually $0.0001, so that founders can buy millions of shares for a few hundred dollars while the company is worth almost nothing.; Read moreHow do founders pay for their shares?
Post-money SAFE: The 2018 version of the SAFE, under which the investor's ownership after conversion is fixed by the cap: investment divided by the post-money valuation cap. Each SAFE is worked out independently, so a stack of them dilutes the founders rather than each other.; Read moreWhat should I know before I sign a SAFE?What is a valuation cap, and how does it work?Post-money SAFE versus pre-money SAFE: what changes for the founders?
Post-money valuation: What the company is worth immediately after the round closes: the pre-money plus the cash invested. A $2 million round at an $8 million pre-money is a $10 million post-money, and the investors own 20 percent.; Read moreWhat is the difference between pre-money and post-money valuation?
Pre-money SAFE: The original 2013 version of the SAFE, whose cap measures the company's value before the SAFE money goes in. An investor's percentage therefore depends on how many other SAFEs the company sells, so nobody knows their number until the round closes, and the SAFEs dilute each other rather than the founders. Y Combinator replaced it with the post-money form in 2018, but some investors still use it.; Read morePost-money SAFE versus pre-money SAFE: what changes for the founders?What is a SAFE, and how is it different from a convertible note?
Pre-money valuation: What the company is agreed to be worth immediately before new money goes in. Pre-money plus the money raised equals post-money, and the investor's share is the money raised divided by the post-money.; Read moreWhat is the difference between pre-money and post-money valuation?
Preferred stock: The class of stock investors buy in a priced round. It carries rights common stock does not: a liquidation preference, anti-dilution protection, often a board seat and vetoes over major decisions. It converts into common stock on an IPO or when the holder chooses.
Priced round: A financing in which the company sells preferred stock at a fixed price per share, so the valuation is settled rather than deferred. Series Seed, Series A and every later round are priced rounds; most seed money today is raised on SAFEs before one.; Read moreWhat is the difference between a friends and family round, a seed round and a Series A?
Pro forma cap table: A cap table as it will look after a proposed round, with the new shares, the converted SAFEs and notes, and the enlarged option pool included. It is how a founder sees what a term sheet actually costs in ownership before signing it.; Read moreHow do I build a pro forma cap table for a round?
Pro rata rights: An investor's right to buy enough of the next round to keep their percentage from falling. The post-money SAFE does not include them; they are granted by a separate side letter to the investors who ask.; Read moreWhat should I know before I sign a SAFE?
Public benefit corporation (PBC): A for-profit corporation whose charter names a public benefit it must promote alongside stockholder returns, and whose directors must balance the two. Delaware's version reports to stockholders every two years. It is a corporate form, not a certification; that is B Corp.; Read moreWhat is a public benefit corporation?
Q
QSBS: Qualified small business stock: stock in a US C corporation, bought from the company when its gross assets were under the limit, that can be sold with some or all of the gain free of federal tax after a holding period. For stock issued after July 4, 2025, the exclusion is 50 percent at three years, 75 at four and 100 at five, capped at the greater of $15 million or ten times what you paid.; Read moreWhat is qualified small business stock (QSBS)?
Qualified financing: The priced round that forces a note or SAFE to convert. A note usually requires the round to raise a minimum amount of new money, often one to two times the notes outstanding, so a token round cannot be used to force conversion on bad terms.; Read moreWhat are the terms of a convertible note?
R
Registered agent: The person or company named on the state filing to receive lawsuits and official notices for the company, at a street address in the state, during business hours. Every state requires one.; Read moreWhat is a registered agent?
Restricted stock: Shares issued now that the company can buy back at cost if the holder leaves before they vest. It is how founders hold their stock, and it is what the 83(b) election is for.; Read moreWhat is an 83(b) election, and why should I file one?
S
S corporation: A corporation that has elected pass-through tax treatment, so profit is taxed once on the owners' returns. The price is one class of stock and no more than 100 owners, all of them US individuals, which rules out investors and cheap common stock for employees. Not a startup entity.; Read moreWhat is an S corporation, and should my startup be one?
SAFE: A Simple Agreement for Future Equity: a short contract under which an investor pays the company now and receives preferred stock later, when the company closes a priced round. It is not a loan, so it has no interest and no maturity date. The form almost everyone uses today is Y Combinator's post-money SAFE.; Read moreWhat is a SAFE, and how is it different from a convertible note?What should I know before I sign a SAFE?Post-money SAFE versus pre-money SAFE: what changes for the founders?
Series financing (Series A, B, C): The lettered priced rounds a venture-backed company raises. Each sells a new series of preferred stock with its own price and rights, and each is larger and comes with more governance than the last.; Read moreWhat is the difference between a friends and family round, a seed round and a Series A?
Series Seed: The name for the preferred stock sold in a priced seed round, and for the short-form documents built for one. Series Seed terms are lighter than Series A terms: a plain liquidation preference, a small set of investor vetoes, and few of the Series A controls.; Read moreWhat is the difference between a friends and family round, a seed round and a Series A?
Stock option (ISO and NSO): The right to buy a set number of shares at a fixed exercise price for a set period, granted under the company's stock plan and vesting over time. Incentive stock options (ISOs) are for employees and get better tax treatment; non-qualified options (NSOs) go to everyone else.; Read moreHow do I grant stock options to employees?
T
Term sheet: The short, mostly non-binding summary of a proposed investment: valuation, amount, liquidation preference, board seats, vetoes, vesting. The binding parts are usually only the exclusivity period and confidentiality. The long documents are drafted from it.; Read moreWhich terms in a term sheet actually matter?
V
Valuation cap: The highest company valuation at which a SAFE or note will convert, whatever price the priced round sets. The lower the cap, the more shares the early investor gets. Most caps today are post-money caps, which fix the investor's percentage rather than a price.; Read moreWhat is a valuation cap, and how does it work?Post-money SAFE versus pre-money SAFE: what changes for the founders?
Vesting: Earning shares over time. Unvested founder shares can be bought back by the company at the price paid if the founder leaves; unvested options cannot be exercised. The customary schedule is four years with a one-year cliff.; Read moreWhat vesting schedule do startup founders usually get?

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