Startup Legal Glossary
Plain-English definitions of the legal terms every founder needs to understand before signing anything.
Equity & Ownership
Equity
The ownership interest in a company, typically represented as shares or a percentage of the total outstanding shares. Founders, employees, and investors all hold equity in different forms and classes.
Vesting
The process by which a founder or employee earns their equity over time rather than owning it outright from day one. Vesting schedules protect the company and remaining founders if someone leaves early.
Vesting Cliff
The minimum period that must pass before any equity vests. The standard cliff is one year. If a founder or employee leaves before the cliff, they receive no equity. At the cliff, a lump sum typically vests all at once.
Accelerated Vesting
A clause that speeds up the vesting schedule upon a triggering event. Single trigger acceleration vests shares automatically upon acquisition. Double trigger acceleration requires both an acquisition and an involuntary termination or significant role change.
Dilution
The reduction in an existing shareholder’s ownership percentage caused by the issuance of new shares. Dilution occurs during funding rounds, when option pools are expanded, and when convertible instruments convert into equity.
Option Pool
A reserve of equity set aside for future employees, advisors, and other contributors. Institutional investors require an option pool before closing a funding round. The standard reserve is 10 to 20% of total equity.
Cap Table
Short for capitalization table. A document that tracks the full ownership structure of a company, listing all shareholders, the type and number of shares they hold, and their ownership percentage. Investors review the cap table during every due diligence process.
Common Stock
The basic form of equity ownership in a corporation, typically held by founders and employees. Common stockholders are paid last in a liquidation event, after debt holders and preferred stockholders.
Preferred Stock
A class of equity with rights and privileges that common stock does not have, typically held by investors. Preferred stock usually carries a liquidation preference, anti-dilution protection, and sometimes board representation rights.
Funding & Investment
SAFE
Simple Agreement for Future Equity. An investment instrument created by Y Combinator that allows investors to provide capital in exchange for the right to receive equity at a future priced round. SAFEs have no interest rate and no maturity date.
Convertible Note
A short-term debt instrument that converts into equity at a future funding round. Unlike a SAFE, a convertible note accrues interest and has a maturity date. It is commonly used for early-stage investment before a company has an established valuation.
Valuation Cap
A ceiling on the price at which a SAFE or convertible note converts into equity. If the company raises its next round at a valuation above the cap, the investor converts at the cap price, receiving more shares than new investors paying the higher price.
Discount Rate
A percentage reduction applied to the price per share that a SAFE or convertible note investor pays at conversion. A 20% discount means the investor pays 80 cents for every dollar paid by new investors in the same round.
Pro-Rata Rights
The right of an existing investor to participate in future funding rounds to maintain their ownership percentage. An investor exercising pro-rata rights invests enough in subsequent rounds to avoid being diluted by the new shares being issued.
Liquidation Preference
A provision that determines who gets paid first and how much in a liquidation event such as an acquisition or bankruptcy. A 1x liquidation preference means investors receive their original investment back before common shareholders receive anything.
Pre-Money Valuation
The valuation of a company before new investment is added. Used to calculate how much ownership investors receive in exchange for their capital. If a company has a $5 million pre-money valuation and raises $1 million, the post-money valuation is $6 million and the investor owns approximately 16.7%.
Post-Money Valuation
The valuation of a company after new investment is added. Equal to the pre-money valuation plus the amount raised in the round.
Legal Agreements & Documents
Co-Founder Agreement
A legal contract between the founders of a company that governs equity ownership, vesting, roles, decision-making authority, IP assignment, and what happens when a founder leaves. One of the most important documents a startup will ever sign.
IP Assignment
A clause or standalone agreement that transfers ownership of intellectual property from an individual to the company. Covers code, designs, inventions, and other work product created in connection with the company’s business.
NDA
Non-Disclosure Agreement. A confidentiality contract that prevents the signing party from disclosing information designated as confidential. Used to protect sensitive information shared with potential hires, partners, vendors, and investors.
Non-Compete
An agreement that prevents a founder or employee from working for a competitor or starting a competing business for a defined period after leaving the company. Enforceability varies significantly by state. California does not enforce non-competes against employees.
Non-Solicitation Agreement
An agreement that prevents a departing founder or employee from recruiting company employees or approaching company customers for a defined period after they leave. Generally more enforceable than a non-compete.
Operating Agreement
The governing document for a limited liability company that defines how the LLC operates internally, including member ownership percentages, decision-making authority, profit allocation, and what happens when a member leaves.
Articles of Incorporation
The document filed with the state to legally create a corporation. Includes the company name, registered agent, authorized shares, and classes of stock. Filing this document brings the corporation into legal existence.
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