'No shop' clause
the clause in a term sheet that states to the founder they are not to share the term sheet with other investors in order to receive a competing offer. This is a standard clause. The etiquette in venture is to give founders about a week or less for a decision on a term sheet to limit the time founders have to unofficially ‘shop around’ the deal.
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Accelerated vesting
a speeding up of the vesting schedule, for example in case of an exit.
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Accredited Investor (US)
an individual or institution that meets certain wealth criteria (as defined regulators), and is therefore deemed to be sophisticated enough to participate in private, non-public investments. There are many ways to qualify, including if you are:- An individual that has had income in excess of $200,000 per year in each of the prior two years, and reasonably expects the same for the current year- A spousal couple that has had income in excess of $300,000 per year in each of the prior two years, and reasonably expects the same for the current year- An individual or spousal couple with over $1,000,000 in net worth (excluding the value of their primary residence)- A charitable organisation, corporation, partnership or trust with assets in excess of $5,000,000. For most up to date definitions see www.irs.gov.
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Allocation
the size of the round that is set aside for a specific investor (can be a fund or group of investors), usually communicated in a dollar amount.
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Anchor investor
also called Lead Investor - First investor in a fund; can be also referred to as the lead investor.
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Anti-dilution protection or rights
a clause that protects an investor from a reduction in the value of his shares due to the issuance by the company of additional shares to other entities at a per share price that is lower than the per share price paid by the investor. The protection consists of an adjustment mechanism called a Ratchet.
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Blended Preferences
when all classes of preferred stock have equal payment rights in the event of a liquidation.
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Bootstrapping or Bootstrapped
business strategy by which a startup self-finances, eliminating the need for seed or angel investment. Typically achieved through lean operation and a product that generates revenue early in the companies life cycle.
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Bridge loan
a short-term loan that will eventually be replaced by permanent capital from equity investors or debt lenders. In venture capital, a bridge loan is usually a short-term note (six to twelve months) that converts to preferred stock.
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Broad-based weighted average
a system used in connection with anti-dilution protection. A broad-based weighted average protection adjusts downward the price per share of the preferred stock of investor A due to the issuance of new preferred shares to a new investor B at a price lower than the price investor A originally paid. Investor A’s preferred stock is re-priced to a weighted average of investor A’s price and investor B’s price. If a broad-based weighted average system is used, the denominator of the formula for determining the new weighted average price contains the total number of outstanding common shares (on an as-if converted basis) on a fully diluted basis (including all convertible securities, warrants and options).
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Cap table
Capitalisation table, a table providing an overview of the company’s equity securities and, if any such securities have been issued, non-equity securities that can be converted into equity securities. The capitalisation (or cap) table usually also provides an overview of the owners of the aforementioned securities.
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Capital Call
when a fund makes an investment and messages the LPs to put capital into the fund account to invest in the portfolio companies.
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Capital gains
investment earnings resulting from the purchase and sale of shares or other assets.
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Capped notes
refers to a "cap" placed on investor notes in a round of financing. Entrepreneurs and investors agree to place a cap on the valuation of the company where notes turn to equity. This means investors will own a certain percentage of a company relative to that cap when the company raises another round of funding. Uncapped rounds are generally more favourable to an entrepreneur/startup.
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Carry
Carried interest, the share of generated profits that an investment manager is entitled to keep as compensation. Typical venture capital fund incentive fees range from 20% to 30%, depending on the fund. This can also be referred to as an "Incentive Fee" or a "Performance Fee."
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Clawback
a clawback or clawback provision is a special contractual clause typically included in employment contracts by financial firms, by which money already paid must be paid back under certain conditions.
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Cliff
employee stock vesting agreements generally have a cliff, usually one year, before which no employee stock options vest.
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Co-sale right
a right that enables an investor to include his shares in any sale by another shareholder at the same price and under the same terms and conditions that apply to the other shareholder. Also referred to as a Tag-along right.
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Come Along Rights
also called Tag Along Rights. The right of an investor to sell shares, if a founder or other key employee sells shares. This right is designed to protect the investors against being trapped in an investment after the founders have cashed out.
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Common Stock
a type of equity security, contrasted with preferred shares. Common stock is most frequently issued to founders, management, and employees. In a liquidation event, preferred shares generally take priority over common shares.
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Control Rights
rights of an investor or shareholder relating to control over the company’s affairs. Control rights typically relate to voting or designation of board seats, voting (e.g., does a class of securities give the holder 10 votes per share?), and certain actions (e.g., incurring indebtedness) which require the consent of a majority of a certain class or series of security.
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Conversion
the converting of an investor's preferred shares into common shares at a pre-set conversion ratio; or the conversion of convertible notes into preferred shares at a conversion ratio based on the issue price of a future financing round.
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Conversion Rate or Ratio
means the number of shares of Common Stock into which each share of Preferred Stock is convertible.
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Convertible note
are most often used in early financing rounds. They are not based on a standardised template like a SAFE and therefore provide more flexibility for a founder and/or investor, depending on the circumstances.
The key difference between a convertible note and a SAFE, is that a convertible note (is generally a debt instrument for accounting purposes. Interest is generally payable on a convertible note and there is a maturity date by which a trigger event must have occurred so that the notes can convert to equity, or otherwise the company must repay the debt to investors.
As with a SAFE, the funds contributed will convert to equity upon a qualifying financing at a discount to the price set during the priced equity round, based either on a fixed discount and/or valuation cap.
Unlike a SAFE, which is recorded on a company’s balance sheet as equity, the amount owing to investors under a convertible note will generally sit on a company’s balance sheet as a liability. Therefore, founders need to be cognisant of the company’s obligations to repay note-holders and, where they are directors of the company, their duty to prevent insolvent trading.
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Convertible preferred shares
a type of shares that give the owner the right to convert such preferred shares to common shares. Convertible preferred shares are the most common type of equity used by venture capital investors to invest in companies.
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Covenant
a legal promise to do or not do a certain thing.
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Crowdfunding
the practice of funding a company by raising many small amounts of money from a large number of individuals, usually via the internet, based on a donation, rewards, lending or equity model.
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Default
a company's failure to comply with the terms and conditions of a financing arrangement.
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Dilution
generally speaking, as subsequent financing rounds occur, existing investors will own proportionally less of the company than they did previously since additional equity is generally issued as part of a new financing round. Dilution is not necessarily a bad thing - since new stock can be issued at a higher price, you may own a smaller piece of a larger company, which means the value of your investment is actually higher than it was previously.
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Dilution of ownership
the reduction in the ownership percentage of current investors, founders and employees caused by the issuance of new shares to new investors.
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Discount
a discount in a note (usually SAFE or convertible notes) sets a percentage reduction at which the convertible note will convert relative to the next qualified priced round. Effectively this permits an investor to convert their investment into shares of stock at a discount to the purchase price paid by investors in that round. Discounts range from 0% to as high as 35% with 20% being common.
For example, if the share price at the next funding round is $100, an investor that invested $10,000 on a SAFE note with a 20% discount would convert their investment to stock at a price of $80 (instead of $100), meaning they'd get ~125 shares in the company.
Beneficially, SAFEs & convertibles notes can have both a valuation cap & a discount, allowing them to compound each other. This can be very good for an investor who is an early believer in a company.
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Dividends
a share of profits paid by a company to its shareholders. Dividends can be paid in cash or in shares.
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Down round
a financing round in which the valuation of the company is lower than the value determined by investors in an earlier round.
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Drag-along rights
a right that enables a shareholder to force the other shareholders to sell their shares of the company.
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Due diligence
also known as 'DD' or 'due dilly' in startup land. An investigation of a company aimed at assessing the viability of a potential investment and the accuracy of the information provided by the company. This investigation usually focuses on the legal, financial, tax and commercial position of the company.
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Dynamic equity split
the concept that everyone involved in the early-stage phase of a start-up receives rewards (that can be converted into equity) for their contribution, based on an agreed calculation method.
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Employee Stock Option Plan (ESOP)
a plan established by a company to let certain employees benefit strongly from the increase in value of the company. Under an ESOP, certain employees have a right to buy shares in the company at a predetermined price (exercise price) within a specified period of time (exercise period). Under a (Restricted) Stock Ownership Plan, employees are not granted options, but buy shares at once. ESOPs and (Restricted) Stock Ownership Plans offer companies a way to employ (and retain) high-quality people at relatively low salaries.
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Equity
equity represents ownership in a company and is usually represented by common shares and preferred shares.
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Exercise Price (also known as Strike Price)
the amount that must be paid to execute your options. Generally, the exercise price is pegged to the “Fair Market Value” on the date of issuance, rather than the vesting date.
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Exit Event or Liquidity Event
when an issuer engages in a transaction that allows investors to sell their shares, which generally happens through a tender offer (sale) or an IPO.
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Fair Market Value
the value of a company based on what investors are willing to pay for it. For private companies or illiquid assets, "fair market value" is generally derived from comparable companies or assets that have recently had a transaction associated with them.
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Fiduciary
someone who owes special duties to another person and who has liability for not performing that duty.
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First Refusal Rights
also called Preemptive Rights. The right to purchase stock in future offerings by the company on the same terms as other investors. Usually the right is designed to enable investors to maintain their percentage ownership of the company by purchasing a pro rata share of all new stock sold by the company. Investors also often require company founders to grant first refusal rights on shares the founders own.
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Full ratchet protection
a type of anti-dilution protection. If new preferred shares are issued to investor B at a (per share) price that is lower than the price investor A paid in an earlier round, the effect of the full ratchet is that the per share price of investor A is adjusted downward to the price paid by investor B. Usually, as a result of the implementation of a full ratchet, the company management and employees who own common shares suffer significant dilution.
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Fully diluted basis
a methodology for calculating per share ratios. Under this methodology, the denominator is equal to the total number of shares issued by the company, whereby it is assumed that all common share equivalents (such as convertible notes, convertible preferred shares, options, warrants, etc.) have been converted into common shares.
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GP
general Partner of a fund.
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Grandfather Rights
a grandfather clause (or grandfather policy) is a provision in which an old rule continues to apply to some existing situations while a new rule will apply to all future cases. Those exempt from the new rule are said to have grandfather rights or acquired rights, or to have been grandfathered in.
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Growth Equity
Growth Equity refers to private investments in late-stage companies which aim to finance revenue growth through market expansion. Such investments typically target minority positions in proven market segment leaders.
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Information Rights
the right of investors to have the company provide financial information annually, quarterly or monthly and other information as requested by investors. Under Delaware (and most state) law, a stockholder has the right to inspect and make copies of the corporation’s information, including their stock ledger, a list of stockholders, and its books and records. However, such a demand must be for a "proper purpose", which means a purpose reasonably related to the person’s interest as a stockholder.
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Initial public offering (IPO)
a company's first sale of shares to the public also referred to as going public. An IPO is one of the ways in which a company can raise additional capital for further growth.
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Inside Round
a round of financing entirely composed of existing investors.
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Internal rate of return (IRR)
the interest rate at which a certain amount of capital today would have to be invested in order to grow to a specific value at a specific time in the future.
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Lead investor
the firm or individual that organises a round of financing and usually contributes the largest amount of capital to the deal.
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Letter of Intent (LOI)
a letter of intent (LOI) is similar to a memorandum of understanding (MOU) in that is is a common agreement between businesses (including startups) and potential customers to define commitment, interest, terms, and pricing in writing prior to delivering the good or service. This document is used to clarify understanding of both the customer and founder and often used to show investors. LOI and MOU agreements are used interchangeably and usually non-binding. At times, in working with customers on large projects with multiple phases where the customer and business work together before payment and services are exchanged a MOU may be used before a LOI is used to define pricing and terms. Also see Memorandum of Understanding (MOU).
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Limited Partner (LP)
limited Partner, typically funds 99–100% of a fund, major investors.
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Liquidation
the selling of all the assets of a company and the use of the cash proceeds of the sale to pay off creditors prior to the complete cessation of operations.
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Liquidation preference
the right of an investor to priority in receiving the proceeds from the sale or liquidation of a company. This right is usually attached to the preferred shares and gives the holders of such shares a position that is senior or ahead of the holders of common shares or junior preferred shares if the company is sold or liquidated.
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Liquidity event
an event that allows an investor to realise a gain or loss on his investment. Examples of liquidity events include Initial Public Offerings (IPOs), trade sales, buy-outs and take-overs.
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Lock-up agreement
an agreement not to sell or transfer shares in a company for a specific period. Underwriters, for example, require lock-up agreements in most IPOs. In such cases, they will usually require the largest shareholders and directors of the company to agree to a lock-up period of six months following the IPO.
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Management Fee
The fees that a fund will charge its limited partners each year. Venture capital fund management fees typically range from 1–3% annually (usually 2%) and are generally charged based on committed capital during the investment period, and then invested capital after the investment period has finished.
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Narrow-based weighted average anti-dilution
a system used in connection with anti-dilution protection. A narrow-based weighted average protection adjusts downward the price per share of the preferred stock of investor A due to the issuance of new preferred shares to a new investor B at a price lower than the price investor A originally paid. Investor A’s preferred shares are re-priced to a weighted average of investor A's price and investor B's price. If a narrow-based weighted average system is used, the denominator of the formula for determining the new weighted average price contains only a total number of outstanding shares (as opposed to the number shares on a fully diluted basis). This number can vary from all pre-money outstanding shares (on a non-converted and non-diluted basis) to only the preferred shares issued in the previous round. The narrower the base, the larger the effect of the new price and the more favourable the clause is to the protected investors.
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Non binding
refers to the depth of the legal commitment of the document. Term sheets, Memorandums of Understanding (MOUs), Letters of Intent (LOIs) are non-binding documents of which the investor or startup can back out of the intended agreement. The etiquette in venture is to provide a term sheet and once the founder agrees to the term sheet move to execute the investment. It is not common for investors to back out of agreements once a term sheet is issued.
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Non-compete
an agreement often signed by key employees and other persons (such as management) who are key to the success of a company pursuant to which such persons agree not to work for competitor companies or form a new competitor company within a certain time period after termination of their employment with the company.
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Non-cumulative dividends
dividends that do not cumulate. In other words, if the cash flow of the company is insufficient to make payment of dividend possible at a certain point in time, the owners of the shares entitled to non-cumulative dividends will not receive the dividend owed for the time period in question (also not at a later stage) and will have to wait until another set of dividends is declared.
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Non-disclosure agreement (NDA)
an agreement often signed by key employees and management that is aimed at protecting the company against improper disclosure or use of the company-sensitive information and materials that are not known to the general public. Also used as an agreement issued by entrepreneurs to protect the privacy of their ideas when disclosing those ideas to third parties such as investors, often during the course of due diligence.
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Non-solicitation
an agreement often signed by employees and management that prohibits such persons, once they have left the company, from soliciting the customers and employees of the company.
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Option Pool
a number of shares of Common Stock specified in the corporate charter that can be sold to employees, officers and directors at low prices without triggering the Price Anti Dilution Protection of the Preferred Stock. 15% of the fully diluted shares is fairly typical, although the size of the Option Pool usually depends on the number of shares estimated to be necessary to grant to employees to attract a team capable of achieving the goals of the company's business plan. This varies from one company to another. Option Pool shares are usually considered to be outstanding shares when calculating the company's valuation.
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Over-allotment Option
the right of investors to exercise the First Refusal Rights and Come Along Rights of other investors who don’t exercise their own rights.
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Pari passu
a legal term that means in equal proportion. It usually refers to the equal treatment of two or more parties in an agreement.
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Participating dividends
the right of holders of certain preferred shares to receive their preferred dividends and share (with the common shareholders) in the dividends available for distribution after the preferred dividend has been paid.
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Participating preferred share/stock
a preferred share that is entitled to participating dividends. A participating preferred share can in effect be split into two parts: a preferred share part and common share part. The preferred share part entitles the owner to receive a predetermined cash dividend. The common share part represents additional continued ownership in the company.
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Pay-to-play
a clause that is aimed at punishing investors who do not participate on a pro rata basis in a financing round, by cancelling some or all of their preferential rights. The most onerous version of pay-to-play is automatic conversion to common shares, which in essence ends any preferential rights of an investor, such as the right to influence important management decisions.
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Piggyback right
the right of an investor to follow in the process to have shares registered. In the case of piggyback rights, this process is initiated and controlled by others. Consequently, the investor cannot force the company to go public.
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Post-money valuation
the valuation of a company immediately after an investment in the company. If, for example, an investor invests $2 million in a company valued at $1 million pre-money (before the investment was made), the post-money valuation will be $3 million.
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Pre-money valuation
the valuation of a company immediately before an investment in the company.
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Preference
a preferred position, or seniority. In venture capital transactions investors usually have preference with respect to dividends and proceeds from a liquidity event, for example.
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Preferred share
a type of share to which certain special rights are attached that are not attached to common shares. These special rights may include preferred dividends, anti-dilution protection, voting rights, drag-along rights, tag-along rights, liquidity preference, rights of first refusal, etc. A venture capital investor will normally only subscribe to preferred shares.
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Priced equity
Priced equity round: Under a priced equity round, the company issues new shares to investors based on an agreed valuation and therefore fixed price per share. Investors receive shares upfront and the company then owes no further obligations (e.g. interest payments, trigger rights etc.) in addition to the usual obligations owed to shareholders under the law and any shareholders agreement in place.
A priced equity round is the simplest in terms of giving founders and investors a clear view on valuation and dilution. However, negotiations around valuation can be time consuming and there are additional complications which can arise where investors seek to negotiate additional rights under a shareholders agreement or side letter, such as pro-rata rights in future capital raises, rights to appoint directors and drag-along and tag-along rights. This usually means that a priced equity round is slower to execute and is often the reason why start-ups opt for a SAFE or convertible note when the speed of execution and funding is a priority during the early stages of a start-up's journey.
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Private placement
the sale of securities directly to a limited number of investors.
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Pro-Rata Rights
Also known as pre-emptive rights, similar to rights of first refusal. The term preemptive rights refers to the right to purchase a company’s new shares before they are offered to anyone else. In term sheets the preemptive rights provision may be titled "Right to Participate Pro Rata in Future Rounds". This is standard in term sheets.
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Prospectus
a formal written offer to sell securities that sets forth a plan for a (proposed) business opportunity and that gives sufficient detail about such opportunity for a prospective investor to make a decision.
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Qualified IPO (or Qualified Offering)
a public offering of securities that meets certain predetermined criteria, such as a minimum per share price and minimum proceeds to the company.
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Ratchet
a provision that provides an investor with down-round protection (i.e., where the company raises a subsequent round of financing, which can include IPO, at a lower price) by providing for the issuance of additional shares in the subsequent round. In the IPO context, a ratchet provision provides that if the IPO price does not meet a certain level, say at least the price paid by the investor in the private round or some baked in rate of return above that price, the IPO conversion of those shares to common shares is adjusted such that an additional number of shares are issued to investors which would meet the predetermined level.
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Recapitalisation
the reorganisation of a company's capital structure.
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Redemption rights
the right of an investor to force the company to repurchase the investors' preferred shares.
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Registration
the process whereby shares of a company are registered with the relevant authorities in preparation for a sale of the shares to the public.
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Registration rights
the rights of an investor in a company regarding the registration of the company's shares for sale to the public. Examples of registration rights are piggyback rights and demand rights.
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Right of first refusal (ROFR)
a right to match any offer made for shares held by a shareholder, under the same terms and conditions, and thus to pre-empt any other buyers.
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Roll up
a Rollup (also "Roll-up" or "Roll up") is a process used by investors (commonly private equity firms) where multiple small companies in the same market are acquired and merged. The principal aim of a rollup is to reduce costs through economies of scale.
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Round
an event whereby financing is provided to a company by one or more investors.
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SAFE
SAFEs were introduced to the start-up venture capital community in 2013 by Y Combinator in Silicon Valley. A SAFE was designed to be a standardised document that reduces transaction costs for early-stage financing (i.e. lawyers fees!). Notwithstanding its standardised nature, there are some key parameters and variables that are important to understand when raising capital under this document.
A SAFE is, in simple terms, an agreement under which funds are provided to the company, which are not converted into equity (shares) in the company until a trigger event occurs at some point in the future, usually being the next priced equity round (i.e. where the company undertakes another capital raising where a valuation is set, a price per share determined and shares issued to investors).
Unlike a convertible note, a SAFE is not debt and there is no interest payable by the company and no maturity date or repayment obligation. In this sense, it is a riskier proposition for an investor because they have no surety that the amount they pay to the company will ever convert into equity. To compensate the investor for accepting this risk, they are entitled to convert their capital contribution into shares at the time of the next qualifying priced equity round at a lower price than new investors. This price is usually at a fixed discount to the issue price (e.g. 20%) or based on a valuation cap (or whichever of these options results in the lower issue price and therefore most shares to be issued to the investor). A valuation cap fixes the maximum price per share which the SAFE investor’s contribution can be converted into shares in the priced equity round.
For example, if there were 1,000,000 shares on issue in the company and the SAFE set the valuation cap at $5 million and also included the option of a fixed discount of 20%, then the maximum price per share based on the valuation cap would be $5 per share. If the priced equity round was based on a pre-money valuation of $8m, shares could be issued to the SAFE investor at $5 based on the valuation cap (being a 37.5% discount to the $8 issue price for new investors) or $6.40 per share based on the fixed 20% discount. The SAFE investor will choose the lower price based on the valuation cap so that they receive more shares and therefore a greater proportion of the equity in the company.
Another key consideration for founders and investors is that SAFEs are typically ‘eligible venture capital investments’ for the purposes of the Income Tax Assessment Act 1997 (Cth), meaning Venture Capital Limited Partnerships (VCLPs) and Early Stage Venture Capital Limited Partnerships (ESVCLPs) can provide capital to start-ups under a SAFE instrument. This is not necessarily the case for all convertible notes (as discussed below).
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Security
a document that indicates that the holder owns a portion of a company's equity or debt, or has the right to purchase or sell such a portion. Shares, notes, bonds and options are examples of securities.
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Seniority
higher priority.
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Series A preferred shares
preferred shares issued by a company in exchange for capital from investors in the Series A round of financing.
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Series A round
the first significant financing round in which one or more venture capitalist(s) become(s) involved in a fast-growing company that was previously financed by founders, seed venture capitalists and/or angels. Usually, a Series A round raises from two to ten million euros.
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Series B round
the financing round following the Series A round in which additional funds are provided to the company. Subsequent rounds are called C, D, and so on.
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Shareholder Agreement
a contract that sets out how the company will be operated and the shareholders’ obligations and rights. It often provides protection to minority shareholders.
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Side Letter
agreement between the fund and the individual investor.
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Sophisticated investor (AU)
the definition of "sophisticated investor" is outlined in section 708 of the Corporations Act 2001 (Cth). Australian corporations law defines a sophisticated investor as an investor that can be offered securities without the need to provide them with the same product disclosure requirements that must be provided to retail investors. In order to become qualified as a sophisticated investor, an investor must receive certification from a qualified accountant. This certification states that the investor possesses net assets of over $2.5 million or the gross income of the investor has reached at least $250,000 per year for the last two financial years.
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Stock
a share of ownership in a company.
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Stock Appreciation Rights (SARs)
rights, usually granted to employees, to receive a bonus equal to the appreciation in the company’s shares over a specified period.
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Stock option
a right to purchase or sell a share at a specific price within a specific period.
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Stock Option Plan or Employee Incentive Plan
The Stock Plan is an assimilation of all the rights and economic interests that are attached to company stock, including the company’s bylaws, grant documents, shareholder agreements, etc.
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Subordinated debt
a loan over which a senior loan takes priority. In the event of a liquidation of the company, subordinated debt-holders receive payment only after senior debt is paid in full. Also known as junior debt.
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Syndicate
a group of investors that agree to provide capital to a company under the same terms, as one entity on a cap table. The term syndicate can also refer to a group of (investment) banks that agree to participate in, for example, the sale of stock to the public as part of an IPO.
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Tag-along right
the right of an investor to include his shares in any sale by another shareholder at the same price and under the same terms and conditions which apply to such other shareholders. Also referred to as Co-sale right.
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Term Sheet
a document that includes the basic terms of a company's fundraising round (or any investment). Once signed, it indicates that the investor and the company intend to move forward to complete the transaction and stipulates the major economic or corporate governance terms related to the investment.
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Underwriter
an investment bank that commits to the successful distribution of a public issue, failing which the bank would take the securities being offered into its own books.
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Unicorn
team referring to a privately owned startup company valued at $1B or more.
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Valuation
the process of defining what your startup is worth. At the early stages of your startup’s growth, a valuation does not reflect your company’s true value. Instead, it shows how much of the company an investor (or investors) can obtain for their investment. If you exchange 10% equity in the company for $100,000, your start-up’s pre-money valuation will be $1 million. However, this does not mean your company could be sold for $1 million now. Rather, it is about growth potential.
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Valuation Cap
ensures that an investor's contribution to a company via a SAFE or convertible note is converted into equity at a set maximum price. This maximum price is set even in a scenario in which the value of a company during subsequent rounds is higher than the value specified in the valuation cap. It's important to note that a valuation cap is not the valuation of the company. Let's say, for example, a company enters into a SAFE note with an investor for $10,000 with a valuation cap of $10 million. Should the company's valuation at the next funding round reach $30 million, the investor's SAFE would convert into equity at the valuation cap price of $10 million. This means that if the share price is $100 for example, the valuation cap means the investor would get ~300 shares, instead of ~100 if there was no valuation cap on the SAFE.
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Value inflection point
an event or series of events that results in a significant change in the value of a company. An inflection point can be considered a turning point after which a dramatic change, with either positive or negative results, is expected to result.
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Vesting
generally, when something that is promised is delivered and ownership is officially granted to the recipient. For employees, shares generally vest according to a predetermined schedule. Vesting effectively means that employees only receive their equity compensation after a period of employment to ensure alignment of interest between the company and the employee. The current market standard for vesting schedules is 4 years with a one-year "cliff". Typically, this means that 25% of the grant will vest after one year, and the balance will vest in equal monthly instalments over the following 36 months.
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Visitation Rights
also called: Observer Rights - The right of investors to have a non-voting representative attend meetings of the Board of Directors of the company and committees of the Board.
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Voluntary conversion
the right of an investor to convert his preferred shares into common shares.
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Voting Right
the right of a shareholder to vote on certain matters affecting the company.
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Warrant
a right to buy a specified number of shares at a fixed exercise price by exercising such right prior to a specified expiration date. A warrant is a long-term option, usually valid for several years or indefinitely.
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Weighted average protection
also called: Weighted Coverage - a type of anti-dilution protection. If new preferred shares are issued to investor B at a (per share) price which is lower than the price investor A paid in an earlier round, the effect of the weighted average protection is that the per share price of investor A is adjusted downward to a weighted average of the price paid by investor A and the price paid by investor B. For the new price the weighting factor is the number of shares issued in the dilutive financing round. For the old price, the factor is either (i) the total number of common shares outstanding prior to the dilutive financing round on an as-if converted and fully diluted basis (broad based weighted average) or (ii) any number of shares outstanding prior to the dilutive financing round less than the number under (i) (narrow based weighted average).
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Wholesale Investor
used to describe investors that are more experienced and able to evaluate investment opportunities without needing a prospectus or other regulated disclosure documents. In Australia, the three categories of wholesale investors are sophisticated, professional, and experienced. The Corporation Act 2001(Cth) outlines the eligibility criteria for each category of investor.
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Zone of misalignment
the range of exit values where the interests of the holders of common shares and preferred shares are misaligned due to the effects of the liquidation preference.