This glossary provides definitions for common terms used in the context of early-stage startups. Please note that 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 in Legal Concepts for Founders.
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?.
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 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 in Legal Concepts for Founders.
When you sell shares of stock you own, the difference between (1) what you bought the shares for and (2) what you sold the shares for will be treated as capital gains. Capital gains are typically subject to taxation, through taxes known as capital gains tax.
The capital structure of a corporation — i.e. the structure of the equity and debt of a corporation. See Fully-Diluted Capitalization in Legal Concepts for Founders.
Certificate of Incorporation
The document filed with a state in order to incorporate a corporation in that state. The certificate of incorporation specifies the number and types of shares the corporation can issue.
See Corporations in Legal Concepts for Founders.
See What’s a certificate of Incorporation? and What’s typically in a startup’s certificate of incorporation? in Startup Incorporation for Founders.
The default type of stock that startups typically start off with. Common stock is typically issued to founders, employees, and consultants, and is typically not issued to investors. See Stock in Legal Concepts for Founders.
Delaware C Corporation
A C corporation incorporated in Delaware.
Delaware Division of Corporations
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 in Legal Concepts for Founders.
A right to be paid dividends before other stockholders are. It is uncommon for startups to issue dividends.
Note that “double taxation” may also refer to an infrequently-used legal term that is generally not relevant for startups. (See “Double Taxation” in Black's Law Dictionary, 4th Ed. Rev.)
Dual-Class Common Stock
A less-commonly used stock structure with two classes of common stock. These two classes can differ in many ways, but dual-class common stock usually refers to a structure where one class has more voting power than the other. Dual-class common stock is also known as dual-class common or dual-class stock. The more powerful class of stock is often named Class F Common Stock or Class B Common Stock.
See Less Common: Dual-Class Common Stock in Startup Incorporation for Founders.
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).
FF Preferred Stock
A type of stock that makes it easier for startup founders to get liquidity in future venture capital financings. FF Preferred Stock can be converted into the type of preferred stock issued in a venture capital financing. Investors can then purchase those shares, which helps founders get liquidity without selling common stock.
FF Preferred is also referred to as:
- Founders Preferred Stock
- Founders’ Preferred Stock
- Founder Preferred Stock
- Class FF Preferred Stock
- Series FF Preferred Stock
Please note that even though FF Preferred Stock has the words preferred stock in its name, it’s typically a form of common stock, not preferred stock.
See Less Common: FF Preferred Stock in Startup Incorporation for Founders.
Fair Market Value (FMV)
The value a given asset would fetch in an open market, assuming no information asymmetry.
The process of registering (also referred to as qualifying) to do business in a 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 in Legal Concepts for Founders.
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.
Many states require corporations to pay an annual tax known as a franchise tax. A corporation usually becomes subject to franchise tax if it is either conducting business in that state or was incorporated in that state. For example, Delaware requires all Delaware corporations to pay an annual franchise tax, regardless of whether the corporation is doing business in Delaware. Note that not all states implement a franchise tax, and that the states that do each calculate the franchise tax in their own way.
Franchise tax is sometimes also called privilege tax. Just as a franchise like Subway collects fees from franchisees for the privilege of operating a Subway location, state governments collect franchise tax from companies for the privilege of existing and doing business in their jurisdiction.
See Taxes & Compliance in our help center.
Initial Public Offering
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.
A type of business entity popular with regular small businesses, as opposed to startups. LLC stands for limited liability company. LLCs are not corporations and do not have stock or stockholders. Instead, LLCs have membership interests that are owned by members.
See What about LLCs? in Startup Incorporation for Founders.
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.
Limited liability is an attribute of some legal entities that helps protect owners from being personally liable for actions taken by the legal entity. Limited liability is a significant benefit of incorporating a startup.
See Limited Liability in Startup Incorporation for Founders.
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.
The lowest amount that a share of a corporation can be sold for, set in the certificate of incorporation. For startups, the par value is almost always an extremely small number.
See Par Value in Startup Incorporation for Founders.
When two or more people start a business but don’t register a legal entity for it, they are often considered to have a partnership by default. Many startups with multiple founders are partnerships prior to incorporating without even knowing it.
Tax losses passed through a business to its owners. These losses can then be deducted by owners from their own taxable income. Typically, pass-through losses are more relevant for regular small businesses and aren’t relevant for startups.
See Pass-Through Losses in Startup Incorporation for Founders.
Pending B Corp
A temporary designation for a for-profit corporation on the path to becoming a certified B Corp. See B Corp Certification in Legal Concepts for Founders.
In the context of a given financing, the valuation of a company prior to that financing. See Fully-Diluted Capitalization in Legal Concepts for Founders.
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 in Legal Concepts for Founders.
Qualified Small Business Stock (QSBS)
Stock that is eligible for preferential tax treatment if the issuing corporation is considered a Qualified Small Business under U.S. tax laws. QSBS can provide significant tax benefits for founders and other stockholders of early-stage startups.
See QSBS in Startup Incorporation for Founders.
The minimum number of directors required to be present at a board meeting in order for the board to act. See Board of Directors in Legal Concepts for Founders.
As the term is used by startups, common stock that is subject to vesting. See Vesting in Legal Concepts for Founders.
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.
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 in Legal Concepts for Founders.
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 in Legal Concepts for Founders.
When one person starts a business alone and does not form a legal entity for it, they are often considered to have a sole proprietorship. Unlike corporations, you don’t need to file anything with the government for a sole proprietorship to exist. Many startups with solo founders begin as a sole proprietorship by default prior to incorporating.
The stock of a corporation can be organized into classes. See Stock, Structure, Classes in Legal Concepts for Founders.
A type of security that allows people to purchase common stock at a fixed price in the future. See Equity Compensation in Legal Concepts for Founders.
Stock classes can be further divided into series. See Stock, Structure, Series in Legal Concepts for Founders.
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.