Business and Corporate Glossary

Why these definitions

Most deal disputes start with a word both sides thought they understood.

Deal documents are written in terms of art, words with a specific legal meaning that lawyers, investors and lenders share and founders and business owners often do not. “One times, non-participating,” “double-trigger,” “a one percent tipping basket and a ten percent cap”: each phrase stands for a paragraph of negotiated terms, and confusion over any of them can be expensive.

The terms below are the ones we see most often in company formation, private placements, venture and angel financings, loans, and the purchase and sale of businesses. Many are defined by statute or SEC rule; where one is, the entry says which. A few have longer treatment elsewhere on this site, and the entry links to it. For oil and gas vocabulary, see our Oil and Gas Glossary.

A B C D E F G H I L M N O P Q R S T U V W By topic

A

• Accelerated vesting

  Stock or options that vest earlier than their schedule because of an event, usually a sale of the company. Single-trigger acceleration vests on the sale alone. Double-trigger acceleration needs two events: the sale and the holder’s termination without cause (or resignation for good reason) within a set period afterwards. Buyers prefer double-trigger because it keeps the team in place after closing. See also Vesting.

• Acceleration (of a loan)

  A lender’s right, after an event of default, to declare the whole unpaid balance due at once rather than on the payment schedule. See also Default.

• Accredited investor

  A person or entity that meets one of the tests in SEC Rule 501(a) — for individuals, chiefly income, net worth, certain securities licenses, or being a director or senior officer of the company raising the money. Most private placements are sold only to accredited investors because the disclosure burden for anyone else is heavy. We explain the tests in Investor Status and the Accredited Investor Definition.

• Affiliate

  A person that controls, is controlled by, or is under common control with another. Securities rules (Rules 144 and 405) treat an affiliate much like the company itself: its resales are restricted even if it bought its shares on the open market. Contracts often define the word their own way, so check the document.

• Angel investor

  An individual who invests personal money in an early-stage company, usually before any institutional investor. Most angels are accredited investors.

• Anti-dilution protection

  A term in preferred stock that lowers the price at which it converts into common stock if the company later sells shares at a lower price (a down round). Full ratchet resets the conversion price to the new, lower price. Weighted average adjusts it part of the way, depending on how many new shares are sold; the broad-based version, which counts all outstanding shares and options, is the market norm and the least punishing for founders.

• Appraisal rights

  A shareholder’s right, in some mergers, to refuse the deal price and have a court decide what the shares were actually worth. Delaware’s version is §262 of its corporation law. California calls them dissenters’ rights (Corporations Code §1300 and following). Both states generally deny them for shares traded on a stock exchange, but California also allows them in some deals Delaware does not, such as a sale of assets paid for in the buyer’s shares.

• Articles of incorporation

  The document filed with the state to create a corporation. California calls it the articles; Delaware calls it the certificate of incorporation. It sets the company’s name, the number and classes of shares it may issue, and either the rights of preferred stock or the board’s power to set them later. Changing it usually needs a shareholder vote. See also Bylaws.

• Asset purchase

  An acquisition in which the buyer buys selected assets, and takes on only the liabilities it agrees to, rather than buying the company’s shares. The seller keeps the company and whatever was left behind in it. Contracts, licenses and permits often need consents to transfer. Compare Stock purchase; Merger.

• Authorized shares

  The maximum number of shares a corporation may issue under its articles. Issued shares are the ones actually sold or granted. Outstanding shares are the ones currently held by shareholders; shares the company buys back are no longer outstanding.

B

• Bad actor disqualification

  A rule that bars a company from relying on Rule 506 if the company or certain people connected with it — its directors, executive officers, officers involved in the offering, anyone owning 20 percent or more of its voting power, anyone who organized it, or anyone paid to find investors — has certain securities-related convictions, court orders or regulatory sanctions (Rule 506(d)). Events before 23 September 2013 do not disqualify but must be described in writing to investors a reasonable time before they buy. A similar concept applies to brokers: see Statutory Disqualification.

• Basket

  In an acquisition agreement, the amount of losses the buyer must absorb before it can claim against the seller for breaches of representations. A deductible basket lets the buyer recover only the excess. A tipping (or first-dollar) basket, once crossed, lets the buyer recover from the first dollar. See also Cap; Indemnification.

• Beneficial owner

  A person who has the power to vote or sell shares, or the economic benefit of them, even though they are held in someone else’s name — for example, in a trust or a brokerage account. For reporting large holdings in a public company, the SEC looks only at the power to vote or sell (Exchange Act Rule 13d-3). The federal requirement that companies report their owners to the Treasury Department no longer applies to companies formed in the United States (FinCEN rule, August 2026).

• Blue sky laws

  State securities laws. Most private placements under Rule 506 are exempt from state review but still require a short notice and a fee in almost every state where investors live; in California that is a copy of the federal Form D filed within 15 days of the first California sale (Corporations Code §25102.1(d)). Other offerings may need a state exemption of their own, such as California’s §25102(f). See Exempt Offerings Compared.

• Board of directors

  The group elected by shareholders to manage a corporation’s business and appoint its officers. Directors act as a body — by vote at a meeting, or by a written consent signed by every director — not individually. An LLC’s equivalent is its managers, or its members if it is member-managed.

• Bridge loan

  Short-term financing meant to carry a company to a larger event, such as its next equity round or a sale. In startups it is often a convertible note.

• Bring-down

  Restating, at closing, the representations made when the acquisition agreement was signed, to confirm they are still true. A bring-down certificate from an officer is a usual closing condition. See also Conditions to closing.

• Business judgment rule

  The presumption that directors acted on an informed basis, in good faith and in the honest belief that the decision served the company. While it applies, courts do not second-guess the business merits of a board decision. It falls away where directors had a conflict or did not inform themselves. California’s statutory standard is Corporations Code §309.

• Buy-sell agreement

  An agreement among the owners of a closely held company that says what happens to an owner’s shares on death, disability, departure, divorce or deadlock — who may or must buy them, and at what price. It is often part of a shareholders’ or operating agreement.

• Bylaws

  A corporation’s internal rulebook: how directors are elected, how meetings are called, what officers the company has, and similar procedures. Bylaws are not filed with the state. The LLC counterpart is the operating agreement.

C

• Cap (indemnification cap)

  The most a seller can be required to pay the buyer for breaches of representations after closing, often stated as a percentage of the price. Claims for fraud, and for certain core representations such as title to the shares, are usually carved out. See also Basket.

• Capital call

  A fund manager’s demand that investors pay in part of the money they committed. Private equity and venture funds call capital as they find investments rather than taking it all on day one. See also Commitment.

• Capitalization table

  A table of who owns what in a company: every class of shares, options, warrants, convertible notes and SAFEs, and the percentage each represents. Investors rely on it, and errors in it are a common source of disputes. Usually shortened to cap table.

• Carried interest

  The general partner’s or manager’s share of a private fund’s profits, commonly 20 percent, paid only after investors have received back their capital and, often, a preferred return. See also Hurdle rate; Waterfall.

• Change of control

  An event, defined in a contract, by which ownership or control of a party passes to someone else — typically a sale of a majority of voting shares, a merger, or a sale of substantially all assets. Loan agreements, leases, licenses and employment agreements often give the other side rights when one occurs.

• Clawback

  A provision that requires money already paid to be returned. In a fund, the general partner returns carried interest it received in excess of its final share. In executive pay, incentive compensation is recovered after a restatement of the financial results it was based on; listed companies must have such a policy under exchange rules adopted under SEC Rule 10D-1.

• Closing

  The moment a transaction is completed: the money moves, the shares or assets transfer, and the signed documents are released. Signing and closing may be the same day or weeks apart. See also Conditions to closing.

• Commitment

  The total amount an investor has agreed to put into a private fund over its life, drawn down through capital calls.

• Common stock

  The basic ownership class of a corporation, carrying the right to vote and to whatever value is left after creditors and preferred stock are paid. Founders and employees usually hold common; investors usually buy preferred.

• Conditions to closing

  Events that must happen, or statements that must be true, before a party is obliged to close — for example, regulatory clearance, third-party consents, the bring-down of representations, and no material adverse effect. If a condition is not met, the protected party may walk away.

• Confidentiality agreement

  An agreement not to disclose or misuse information received from the other side, signed before due diligence begins. Also called a non-disclosure agreement or NDA. In acquisitions it may include a standstill or a promise not to hire the target’s employees.

• Control person

  A person who has the power to direct the management and policies of a company. Section 15 of the Securities Act and Section 20(a) of the Exchange Act can make a control person liable alongside the company for its securities violations.

• Convertible note

  A loan to a company that converts into shares, usually at the next priced round, instead of being repaid in cash. It typically carries interest, a maturity date, a discount to the next round’s price, and often a valuation cap. Compare SAFE.

• Covenant

  A promise in a contract to do something (an affirmative covenant, such as delivering financial statements) or not to do something (a negative covenant, such as taking on more debt). Loan agreements add financial covenants — tests the borrower’s numbers must meet each quarter.

• Cross-default

  A loan term that makes a default under another debt agreement of the borrower a default under this one. It lets every lender act as soon as any lender can.

• Crowdfunding

  Raising up to $5 million in any 12 months from the general public, including investors who are not accredited, through a single SEC-registered website (a registered broker-dealer or a “funding portal”), under the SEC’s Regulation Crowdfunding. The company files a disclosure document with the SEC (Form C) and an annual report afterwards. See Exempt Offerings Compared.

• Cumulative voting

  A method of electing directors in which each shareholder may cast all of its votes (shares times seats) for one candidate, or split them among several, which can let a minority elect a director. In California any shareholder may insist on it by announcing at the meeting, before the vote, that it intends to cumulate; once one does, all may (Corporations Code §708). A company listed on a stock exchange may opt out. In Delaware it applies only if the certificate of incorporation provides for it.

D

• Data room

  The online folder in which a seller or issuer posts documents for due diligence. What was, or was not, in the data room often matters later in a dispute over what the buyer knew.

• Default

  A failure to do what a contract requires. In a loan agreement, an event of default is the defined list of failures that lets the lender accelerate the loan and seize or sell the collateral (see Security interest).

• Derivative suit

  A lawsuit a shareholder brings on the company’s behalf, usually against its directors or officers, to recover for harm done to the company. Any recovery goes to the company. The shareholder normally must first ask the board to act or show why asking would be futile. Compare a direct claim, which a shareholder brings for its own injury.

• Dilution

  The fall in an owner’s percentage (and sometimes in the value per share) when a company issues new shares. See also Anti-dilution protection; Fully diluted.

• Disclosure schedules

  The attachments to an acquisition agreement in which the seller lists exceptions to its representations — the contracts, lawsuits, liens and other facts that would otherwise make a representation untrue. A fact properly scheduled is generally not a breach.

• Dissenters’ rights

  California’s name for appraisal rights. See Appraisal rights.

• Distribution waterfall

  See Waterfall.

• Down round

  A financing at a price per share lower than the previous round’s. It can trigger anti-dilution adjustments for earlier investors and often signals trouble to employees and investors.

• Drag-along right

  A right that lets holders of a set majority force the remaining owners to join a sale of the company on the same terms. It prevents a small holder from blocking a deal a buyer will do only if it gets 100 percent. Compare Tag-along right.

• Due diligence

  The investigation a buyer, investor, lender or underwriter conducts before committing — reviewing contracts, finances, litigation, licenses, employees, and intellectual property. In securities offerings, a reasonable investigation is also a defense to certain liability.

• Duty of care

  A director’s or officer’s duty to act on an informed basis, with the care an ordinarily prudent person would use in a like position. See also Business judgment rule; Exculpation.

• Duty of loyalty

  A director’s or officer’s duty to put the company’s interests ahead of personal ones — no self-dealing, no taking corporate opportunities, no acting in bad faith. A company’s documents cannot excuse directors from paying damages for breaking it. See also Interested director transaction.

E

• Earn-out

  Part of a purchase price that is paid only if the business hits targets after closing, such as revenue or earnings over one to three years. It bridges a gap between what the seller thinks the business is worth and what the buyer will pay today. Earn-outs are a frequent source of litigation over how the buyer ran the business.

• EBITDA

  Earnings before interest, taxes, depreciation and amortization — a rough stand-in for operating cash flow, used to value businesses and to set loan covenants. Deal documents usually define an adjusted EBITDA; the adjustments are where the negotiation happens.

• Enterprise value

  The value of a business as a whole, before deducting its debt and adding its cash. Equity value is what is left for the owners after those adjustments.

• Entire fairness

  Delaware’s strictest test for reviewing a board decision. It applies when a controlling shareholder or conflicted directors are on both sides of a deal, and the defendants must prove both a fair process and a fair price. Since 2025, a deal with a controlling shareholder avoids that test if it is approved by a committee of at least two directors with no personal stake, empowered to negotiate and to say no, or by a vote of the uninvolved shareholders that the deal was conditioned on from the start. A deal that buys out the minority needs both (§144).

• Escrow

  Money or documents held by a neutral third party until conditions are met. In an acquisition, part of the price is often held in escrow for a period after closing to cover indemnification claims. Compare Holdback.

• Event of default

  See Default.

• Exclusivity

  An agreement, usually in a letter of intent, that the seller will not negotiate with anyone else for a set period. The matching clause in a signed merger agreement is called a no-shop. Compare Go-shop.

• Exculpation

  A clause in a company’s articles (in Delaware, its certificate of incorporation) that shields directors from paying money damages for careless decisions. It never covers disloyalty, bad faith or deliberate wrongdoing. In Delaware (§102(b)(7)) it covers directors and, since 2022, can also cover officers, but only against claims shareholders bring for their own losses. California’s version (Corporations Code §204(a)(10)) is narrower: directors only, never officers, and only against suits brought on the company’s behalf.

• Exempt offering

  A sale of securities that is exempt from registration with the SEC, such as a Rule 506 private placement, Regulation A, Regulation Crowdfunding, or Rule 147. Exempt does not mean exempt from the anti-fraud rules. See Exempt Offerings Compared.

F

• Fairness opinion

  A financial adviser’s letter to a board stating that the price in a transaction is fair, from a financial point of view, to the company or its shareholders. Boards obtain one to show they informed themselves.

• Fiduciary duty

  The duty owed by someone who holds power over another’s property or interests — here, directors, officers, managers, general partners and controlling owners. The core duties are care and loyalty. See Duty of care; Duty of loyalty.

• Fiduciary out

  A clause in a merger agreement that lets the target’s board change its recommendation or accept a better offer where its fiduciary duties require it, usually on paying a termination fee.

• Finder

  A person who introduces investors or buyers for a fee. A finder paid a commission on securities sales is usually acting as an unregistered broker, which exposes the deal to claims by investors to undo their purchase. California has a narrow exemption for finders who only introduce accredited investors, in offerings of $15 million or less, after making a filing with the state (Corporations Code §25206.1). It does not protect the finder under federal law.

• Form D

  The notice a company files with the SEC within 15 days after the first sale in a Regulation D offering. States use it, or a copy of it, for their own notice filings.

• Founder shares

  Common stock issued to a company’s founders at formation, usually at a nominal price and subject to vesting. See also Section 83(b) election.

• Fully diluted

  A share count that includes not only outstanding shares but every share that could be issued under options, warrants, convertible notes, SAFEs and, often, the unissued option pool. Price per share in a venture round is usually set on a fully diluted basis, and which items count is negotiated.

G

• Gate

  A limit in a private fund’s documents on how much investors may withdraw on a single redemption date, often a percentage of the fund. It protects remaining investors from a forced sale of assets.

• General partner

  The partner that manages a limited partnership and is liable for its debts; in a private fund, the manager’s affiliate. Compare Limited partner.

• General solicitation

  Offering securities to the public at large — through advertising, open websites, social media or public seminars. Offering only to people the company or its agent already knows well is the usual way to show it did not do this. It is prohibited in Rule 506(b) offerings and allowed in Rule 506(c) offerings if the company takes reasonable steps to confirm that every buyer is accredited. See Rule 506(b) vs. Rule 506(c).

• Go-shop

  A period after a merger agreement is signed during which the target may actively seek better offers, usually with a reduced termination fee if it succeeds. Compare Exclusivity.

• Golden parachute

  A large payment to an executive on a change of control. If the payments reach three times the executive’s average pay over the prior five years, the executive owes an extra 20 percent tax on the amount above one year’s average, and the company loses its tax deduction for it (Internal Revenue Code §§280G, 4999). A private company can usually avoid this by getting approval from more than 75 percent of its shareholders after full disclosure.

• Good standing

  A state’s confirmation that a company exists and is current on its filings and taxes. In California a company can be suspended by the Secretary of State or the Franchise Tax Board, and a suspended company cannot sue or defend itself in court until it is revived. Contracts it signs while suspended can be cancelled by the other side, even after revival, unless the Franchise Tax Board grants relief.

• Guaranty

  A promise by one person to pay another’s debt if the debtor does not. Owners of small companies are often asked for personal guaranties of the company’s loans and leases. A payment guaranty lets the lender go straight to the guarantor; a collection guaranty requires it to pursue the borrower first.

H

• Hart-Scott-Rodino (HSR) filing

  A pre-merger notification filed with the Federal Trade Commission and the Department of Justice for acquisitions above a size threshold that is adjusted every year. The parties must wait, normally 30 days, before closing.

• High-water mark

  A term in a private fund that prevents the manager from earning a performance fee on gains that only recover earlier losses. The fee is paid only on value above the highest previous level on which a fee was paid.

• Holdback

  Part of a purchase price that the buyer keeps, rather than paying to an escrow agent, for a period after closing to cover claims. Compare Escrow.

• Hostile takeover

  An acquisition pursued against the wishes of the target’s board, usually by a tender offer directly to shareholders or a proxy fight to replace the directors. See also Poison pill; White knight.

• Hurdle rate

  The minimum return a private fund must deliver to investors before the manager earns carried interest. Also called a preferred return.

I

• Indemnification

  A promise to cover another person’s losses. In an acquisition agreement, the seller indemnifies the buyer for breaches of representations and covenants and for specified liabilities, subject to baskets, caps and time limits. For directors and officers, a company’s promise to pay their defense costs and liabilities, which the statute requires when the director or officer wins; California’s statute is Corporations Code §317, Delaware’s §145.

• Information rights

  An investor’s contractual right to receive a company’s financial statements, budgets and other reports. They are usually granted only to holders above a minimum size.

• Initial public offering (IPO)

  A company’s first sale of shares to the public under a registration statement filed with the SEC, usually followed by listing on a stock exchange.

• Insider trading

  Buying or selling securities while aware of material nonpublic information, in breach of a duty to keep it confidential, or passing the information to someone who trades (tipping). The SEC brings civil cases, and prosecutors criminal ones, under Exchange Act §10(b) and Rule 10b-5.

• Interested director transaction

  A deal between a company and one of its directors, or a business in which the director has a significant financial stake. In California the deal holds up if the shareholders approve it after full disclosure, or if the other directors approve it after full disclosure and it is fair to the company; otherwise whoever defends it must prove it was fair (Corporations Code §310). Delaware’s §144, rewritten in 2025, also covers officers. It protects a deal with a director or officer that is fully disclosed and approved by a majority of the uninvolved directors or of the votes cast by uninvolved shareholders, or that is fair. Deals with a controlling shareholder need more; see Entire fairness.

• Investment contract

  Any deal in which people put in money expecting a profit that depends on someone else’s work. It is a security — the Supreme Court set the test in 1946 in the Howey case — which is why interests in limited partnerships, many LLCs, and some other arrangements are securities even though they are not called stock.

L

• Letter of intent (LOI)

  A short document, signed before the definitive agreement, that sets out the main terms of a deal. Most of it is usually non-binding; the confidentiality, exclusivity and expense provisions are usually binding. Also called a memorandum of understanding; similar to a term sheet.

• Leveraged buyout (LBO)

  An acquisition funded largely with debt secured by the target’s own assets and repaid from its cash flow. Private equity firms use the structure.

• Limited partner

  An investor in a limited partnership whose liability is limited to what it invested and who does not manage the business. In a private fund, the investors are the limited partners. Compare General partner.

• Liquidation preference

  Preferred stockholders’ right to be paid a set amount — usually their original price, a 1x preference — before common stockholders receive anything on a sale or wind-down. Non-participating preferred takes the greater of its preference or what it would receive as common. Participating preferred takes its preference and then shares in the remainder as well.

• Lock-up

  Two different things. In an IPO, an agreement by existing holders not to sell for a period, typically 180 days, after the offering. In a private fund, a period after investing during which an investor may not withdraw.

M

• Management buyout (MBO)

  An acquisition of a company by its own managers, usually with a private equity firm or other outside investor and borrowed money. Because managers are on both sides, the selling owners need an independent process.

• Management fee

  The annual fee a private fund pays its manager to run it, usually a percentage of committed or invested capital (for a hedge fund, of the fund’s current value), regardless of performance. Compare Carried interest.

• Master-feeder structure

  A fund arrangement in which separate “feeder” funds, typically one for US taxable investors and one for non-US and US tax-exempt investors, each invest all their assets in a single “master” fund that makes the investments.

• Material

  Information is material if there is a substantial likelihood a reasonable investor would consider it important in deciding whether to buy or sell. Material information is what disclosure documents must include, and insiders may not trade on it before the public has it.

• Material adverse effect (MAE)

  A significant, lasting deterioration in a business, defined in an acquisition agreement. Its absence is usually a condition to closing, which gives the buyer a way out if one occurs between signing and closing. The definition carves out general economic and industry risks, and courts rarely find one. Also called a material adverse change (MAC).

• Merger

  A combination in which one company is absorbed into another automatically, without separate transfer documents: the surviving company takes all the assets and liabilities of the one that disappears. Most mergers need board and shareholder approval. See also Triangular merger.

• Mezzanine financing

  Debt that ranks behind senior loans but ahead of equity, often with warrants or conversion rights to compensate for the extra risk.

N

• Non-compete

  An agreement not to compete with a business. In California, a contract that keeps an employee from working in a lawful job or business is void, however narrowly it is written (Business and Professions Code §16600). Since 2024 an employer may not include one in an employee’s contract or try to enforce one, wherever the contract was signed, and the employee can sue and recover attorney’s fees (§16600.5). Restrictions between two businesses are judged case by case. The main exception is for an owner who sells a business, or sells their entire stake in it (§16601).

• Non-solicit

  An agreement not to solicit a business’s customers or employees. In California, an employee’s promise not to solicit customers is void, and courts increasingly treat promises not to recruit co-workers the same way; the exception again is the sale of a business. Protecting trade secrets remains lawful.

O

• Officer

  A person appointed by the board to run day-to-day operations — for example, chief executive, chief financial officer and secretary. California requires every corporation to have a chair of the board or president, a secretary, and a chief financial officer; one person may hold all of them (Corporations Code §312).

• Operating agreement

  The contract among an LLC’s members that governs management, voting, capital contributions, allocations of profit and loss, distributions, transfers and exit. See What an Operating Agreement Should Decide.

• Option pool

  Shares a company sets aside for future grants of stock options to employees and advisers. Investors usually require the pool to be created or enlarged before their investment, so the dilution falls on existing holders.

P

• Par value

  A nominal value per share, often a fraction of a cent, stated in a Delaware company’s certificate of incorporation. Delaware shares cannot be sold for less than par, and par value affects the annual Delaware franchise tax (the yearly fee for being a Delaware company) and how much the company may pay in dividends. California corporations have no par value.

• Pay-to-play

  A term in a venture financing that penalizes an existing investor that does not buy its share of a later round — usually by converting its preferred stock to common or stripping its anti-dilution protection.

• Personal guaranty

  See Guaranty.

• Piercing the corporate veil

  A court’s decision to hold owners personally liable for a company’s debts, overriding limited liability. California courts, applying the alter ego doctrine, require both a unity of interest between owner and company (mixing personal and company money, ignoring formalities, starting the company with too little money for its risks) and an unfair result if the company were treated as separate. For an LLC, skipping meetings does not count against the owners unless the operating agreement requires meetings.

• Placement agent

  A securities firm registered with the SEC and FINRA (a broker-dealer) engaged to sell a private placement to investors for a commission. Compare Finder.

• Poison pill

  A shareholder rights plan: if anyone buys more than a set percentage of shares without board approval, every other shareholder may buy more shares at a steep discount, diluting the buyer. It forces a bidder to negotiate with the board.

• Post-money valuation

  The value of a company immediately after an investment, equal to the pre-money valuation plus the new money. The investor’s percentage ownership is its investment divided by the post-money valuation.

• Pre-money valuation

  The value the parties agree a company has immediately before an investment. Whether it counts the option pool and outstanding convertibles changes the price per share.

• Preemptive right

  A shareholder’s right to buy its proportionate share of any new shares the company issues, so its percentage does not shrink. In California and Delaware it exists only if the articles (in Delaware, the certificate of incorporation) provide for it; investors often get the equivalent by contract as a pro rata right or participation right.

• Preferred stock

  A class of shares with rights ahead of common stock — typically a liquidation preference, and in venture deals also conversion rights, anti-dilution protection and protective provisions. Venture investors buy preferred stock.

• Private placement

  A sale of securities that is exempt from SEC registration, usually under Section 4(a)(2) of the Securities Act or Rule 506 of Regulation D. See Exempt Offerings Compared.

• Private placement memorandum (PPM)

  The disclosure document given to investors in a private placement: the business, the risks, the terms, the use of proceeds, and the financial information. Required content depends on the exemption and whether non-accredited investors participate; accuracy is required either way under the anti-fraud rules.

• Pro rata right

  See Preemptive right.

• Promissory note

  A written promise to pay a sum of money, with interest, on stated terms.

• Protective provisions

  Matters on which preferred stockholders, voting as a separate group, have a veto — for example, selling the company, issuing senior stock, changing the preferred’s rights, or taking on debt above a limit.

• Proxy

  Authority given by a shareholder to someone else to vote its shares, or the document that grants it. A proxy statement is the disclosure a public company sends shareholders when soliciting proxies.

Q

• Qualified purchaser

  An individual or family company with at least $5 million in investments, or another entity with at least $25 million. It counts investments, not net worth; a home or an operating business does not count. A fund sold only to qualified purchasers, without a public offering, need not register under the Investment Company Act — the federal law regulating mutual funds — under Section 3(c)(7), and so avoids the 100-owner cap that applies to funds using Section 3(c)(1).

• Qualified small business stock (QSBS)

  Stock in a C corporation (an ordinary taxable corporation, not an S corporation) that qualifies for the partial or complete exclusion of gain under Internal Revenue Code §1202. The size limits, holding periods and exclusion percentages depend on when the stock was issued, and stock issued after 4 July 2025 is treated more generously than older stock. Certain businesses, including law, are excluded. See Business Entity Comparison Chart. California does not follow the federal exclusion.

• Quorum

  The minimum number of directors or shares that must be present for a meeting to act. The default is a majority. The governing documents can lower it, but not below one-third (for a California board, not below two directors either); for California shareholder meetings, only the articles can change it, not the bylaws (Corporations Code §602).

R

• Registration rights

  An investor’s contractual right to require the company to register the investor’s shares with the SEC so they can be sold publicly. Demand rights force a registration; piggyback rights let the investor join one the company is doing anyway.

• Registration statement

  The document filed with the SEC to register an offering of securities, containing the prospectus given to investors. The company, its directors, the officers who sign it, the underwriters (the banks that sell the offering) and experts such as the auditors can be liable for material misstatements in it; the company is liable even if it was not at fault.

• Representations and warranties

  Statements of fact in a contract about the present or past — for example, that a company owns its assets, has no undisclosed liabilities, and has paid its taxes. If a statement is untrue, the other side may have a claim. See also Disclosure schedules; Indemnification.

• Representations and warranties insurance

  A policy, usually bought by the buyer, that pays for losses from breaches of the seller’s representations. It lets the seller keep more of the price at closing and limits post-closing claims between the parties.

• Restricted securities

  Securities acquired in a private placement or other unregistered sale. They cannot be resold publicly without registration or an exemption, most often Rule 144, and the share certificate or ownership record carries a warning (a legend) saying so.

• Restricted stock

  Shares issued subject to vesting: the company may repurchase unvested shares, usually at cost, if the holder leaves. Compare Restricted stock unit.

• Restricted stock unit (RSU)

  A promise to deliver shares (or their cash value) in the future once vesting conditions are met. No shares are issued until then. Income tax is generally due when the shares are delivered; payroll taxes can be due earlier, at vesting.

• Right of first refusal (ROFR)

  A right to buy an asset or shares on the same terms as a third party that has offered to buy them, before the owner may sell to that third party. Compare the right of first offer, which requires the owner to offer to the right-holder first, before looking for a third-party buyer.

• Rollover equity

  Part of a seller’s ownership that is converted into equity of the buyer or its holding company, rather than paid in cash, so the seller keeps a stake in the business after the sale.

• Rule 10b-5

  The SEC’s general anti-fraud rule. It prohibits material misstatements and omissions, and fraudulent schemes, in connection with the purchase or sale of any security, public or private, registered or exempt.

• Rule 144

  The SEC rule that sets conditions for reselling restricted securities and securities held by affiliates without registration. The basic holding period for restricted securities is six months if the company has been filing reports with the SEC for at least 90 days, and one year if it has not.

S

• SAFE

  A simple agreement for future equity: an investor pays now for the right to receive shares in the company’s next priced round (a round in which shares are sold at a set price per share), usually at a discount to the round’s price or subject to a valuation cap. If the company is sold first, the holder generally gets its money back or a share of the sale proceeds. Unlike a convertible note it is not debt — no interest and no maturity date. The standard form was published by Y Combinator.

• Sandbagging

  A buyer’s claim for breach of a representation it knew was untrue before closing. Acquisition agreements often say whether that is allowed (a pro-sandbagging clause) or not (anti-sandbagging); where they are silent, the answer depends on the state’s law.

• Section 83(b) election

  A filing with the IRS, within 30 days after receiving restricted stock, electing to be taxed on the stock’s value when received rather than as it vests. For founders who pay full value at formation, there is usually little or no tax now, and later appreciation becomes capital gain. The 30-day deadline cannot be extended.

• Section 409A valuation

  An appraisal of a private company’s common stock used to set the exercise price of stock options. Options priced below fair market value can make the holder owe income tax as the options vest, even before exercising them, plus an extra 20 percent tax and interest (Internal Revenue Code §409A). An independent appraisal done within twelve months before the grant, absent material changes since, is presumed reasonable; the IRS can then challenge it only by showing it was grossly unreasonable.

• Security

  A broad statutory term covering stock, notes, bonds, LLC and partnership interests in many cases, options, warrants, and any investment contract. If an instrument is a security, its sale is subject to registration or an exemption and to the anti-fraud rules. See Investment contract.

• Security interest

  An interest in a borrower’s property other than real estate — equipment, inventory, receivables, intellectual property — that secures repayment, created by a security agreement. It is made effective against other creditors, or perfected, usually by filing a UCC-1 financing statement. See also UCC-1 financing statement.

• Seed round

  An early outside financing, often the first, usually from angels or seed funds, often through SAFEs or convertible notes.

• Series A

  A company’s first priced round of preferred stock, usually led by a venture capital fund. Later rounds are Series B, C and so on.

• Shareholders’ agreement

  An agreement among a corporation’s shareholders (Delaware says stockholders) that governs board seats, voting, transfers, rights of first refusal, drag-along and tag-along rights, and buy-sell terms. See also Buy-sell agreement.

• Side letter

  A separate agreement that gives one investor terms different from the main deal documents — in a private fund, lower fees, more information, or a right to be excused from certain investments; in a startup round, extra information or a management role. Fund investors often negotiate a “most-favored-nation” clause that lets them claim terms given to others.

• Side pocket

  A separate account within a hedge fund for hard-to-value or illiquid investments. Only investors in the fund when the asset is placed there share in it, and they cannot withdraw that part until it is sold.

• Signing

  The execution of a definitive agreement. Where regulatory approvals or consents are needed, closing follows later; otherwise the parties may sign and close at the same time.

• Special purpose vehicle (SPV)

  An entity formed for a single transaction or to hold a single asset — for example, to pool investors into one line on a company’s cap table, or to hold a project so lenders can look only to it.

• Squeeze-out

  A transaction, usually a merger, in which a controlling owner forces out minority owners for cash. Also called a freeze-out. In Delaware, a court will closely examine the fairness of the deal unless two things happened: a committee of at least two directors with no personal stake negotiated it and could say no, and a majority of the uninvolved shareholders who voted approved it (§144, as amended in 2025). California separately restricts cash-out mergers where the buyer owns more than half but less than 90 percent (Corporations Code §1101).

• Standstill agreement

  An agreement by a potential buyer or large shareholder not to buy more shares, launch a tender offer or proxy fight, or seek control for a period.

• Stock option

  The right to buy shares at a fixed price (the exercise price) for a period. Incentive stock options (ISOs) can go only to employees; there is no regular income tax when they are exercised, and the gain is taxed at capital-gain rates if the shares are held two years from grant and one year from exercise, subject to strict limits including a $100,000-a-year cap. Non-qualified options can also go to directors and consultants, and the holder pays ordinary income tax on the gain when exercising. See also Section 409A valuation.

• Stock purchase

  An acquisition in which the buyer buys the shares of the target from its owners. The company, with all its history and liabilities, changes hands. Compare Asset purchase.

• Subordination

  An agreement that one debt will be paid only after another is paid in full, or that one lien ranks behind another. Between two lenders it is usually set out in an intercreditor or subordination agreement.

• Subscription agreement

  The contract by which an investor buys securities directly from the issuer. In a private placement it includes the investor’s representations about accredited status and investment intent, on which the issuer relies for its exemption.

T

• Tag-along right

  A minority holder’s right to join a sale by a majority holder, on the same terms and in proportion. Also called a co-sale right. Compare Drag-along right.

• Tender offer

  A public offer to buy shares directly from a company’s shareholders, usually at a premium and for a limited time. The Williams Act and the SEC’s tender offer rules govern them. The detailed filing rules apply only to companies that report to the SEC, but some rules — including a minimum 20-business-day offer period and a ban on misleading statements — apply even to offers for a private company’s shares.

• Term sheet

  A short summary of the main terms of an investment or loan, usually non-binding except for confidentiality, exclusivity and expenses. In venture financing, the term sheet decides most of the economics. See also Letter of intent.

• Termination fee

  A fee one party pays the other if a signed deal fails for specified reasons — for example, the target accepting a better offer (a break-up fee) or the buyer failing to obtain financing or regulatory approval (a reverse termination fee).

• Triangular merger

  A merger using a subsidiary of the buyer. In a reverse triangular merger, the subsidiary merges into the target, which survives as the buyer’s subsidiary — usually avoiding the need to transfer the target’s contracts. Contracts that require consent on a change of ownership still apply, and some courts, including one in California, have treated these mergers as transferring certain licenses. In a forward triangular merger, the target merges into the subsidiary.

U

• UCC-1 financing statement

  The public notice a secured lender files, usually with the secretary of state where the borrower is organized, to make its claim on the borrower’s property (other than real estate) good against other creditors and to set its place in line. The name comes from the form’s number under the Uniform Commercial Code; filing is governed by Article 9 of the Code, the part that deals with loans secured by property. Some assets, such as bank accounts and titled vehicles, need other steps — a filing alone does not protect the lender.

V

• Valuation cap

  The maximum company valuation at which a SAFE or convertible note converts. If the next round is priced above the cap, the holder converts as if it had been priced at the cap, and so receives more shares.

• Venture capital

  Equity investment by professionally managed funds in young, high-growth companies, in exchange for preferred stock and governance rights.

• Vesting

  Earning shares, options or other rights over time or on meeting conditions. A common schedule is four years with a one-year cliff: nothing vests in the first year, a quarter vests at the first anniversary, and the rest monthly. See also Accelerated vesting.

W

• Warrant

  A right, issued by the company, to buy its shares at a fixed price for a period. Warrants are often given to lenders or placement agents as part of their compensation.

• Waterfall

  The order in which money is paid out — in a fund, to investors’ capital first, then a preferred return, then extra profit to the manager until it has its agreed share (the “catch-up”), then a split of remaining profit; in a company sale, to creditors, then preferred stock, then common.

• White knight

  A friendly buyer the target’s board brings in to compete with a hostile bidder.

• Written consent

  Action taken by directors or shareholders by signing a document instead of holding a meeting. Directors must act unanimously. Shareholders in both California and Delaware may act by written consent of holders of the votes that would be needed at a meeting, unless the articles (in Delaware, the certificate) forbid it, and shareholders who did not sign must be told afterwards. In California, electing directors this way needs every shareholder’s signature, except that a majority of all outstanding shares may fill an open seat that did not open by removal (Corporations Code §603).

By topic

The same terms, grouped by subject. Each one links to its entry above; your browser’s Back button brings you back to this list.

• Forming and running a company

  Articles of incorporation · Bylaws · Operating agreement · Board of directors · Officer · Authorized shares · Common stock · Preferred stock · Par value · Quorum · Written consent · Cumulative voting · Proxy · Shareholders’ agreement · Buy-sell agreement · Right of first refusal (ROFR) · Preemptive right · Fiduciary duty · Duty of care · Duty of loyalty · Business judgment rule · Interested director transaction · Entire fairness · Exculpation · Indemnification · Derivative suit · Piercing the corporate veil · Good standing · Control person · Affiliate · Beneficial owner · Non-compete · Non-solicit · Special purpose vehicle (SPV)

• Raising money

  Angel investor · Seed round · Series A · Venture capital · Term sheet · SAFE · Convertible note · Valuation cap · Bridge loan · Pre-money valuation · Post-money valuation · Capitalization table · Fully diluted · Dilution · Down round · Anti-dilution protection · Liquidation preference · Pay-to-play · Protective provisions · Information rights · Registration rights · Drag-along right · Tag-along right · Founder shares · Vesting · Accelerated vesting · Restricted stock · Restricted stock unit (RSU) · Stock option · Option pool · Section 83(b) election · Section 409A valuation · Qualified small business stock (QSBS) · Warrant · Subscription agreement

• Securities rules

  Security · Investment contract · Exempt offering · Private placement · Private placement memorandum (PPM) · Accredited investor · General solicitation · Bad actor disqualification · Form D · Blue sky laws · Crowdfunding · Finder · Placement agent · Restricted securities · Rule 144 · Rule 10b-5 · Material · Insider trading · Registration statement · Initial public offering (IPO) · Lock-up · Tender offer · Clawback

• Loans and collateral

  Promissory note · Covenant · Default · Acceleration (of a loan) · Cross-default · Security interest · UCC-1 financing statement · Guaranty · Subordination · Mezzanine financing · Change of control

• Buying and selling a business

  Letter of intent (LOI) · Exclusivity · Confidentiality agreement · Due diligence · Data room · Asset purchase · Stock purchase · Merger · Triangular merger · Signing · Closing · Representations and warranties · Disclosure schedules · Bring-down · Conditions to closing · Material adverse effect (MAE) · Indemnification · Basket · Cap (indemnification cap) · Sandbagging · Representations and warranties insurance · Escrow · Holdback · Earn-out · Rollover equity · EBITDA · Enterprise value · Termination fee · Fiduciary out · Go-shop · Fairness opinion · Appraisal rights · Squeeze-out · Hart-Scott-Rodino (HSR) filing · Leveraged buyout (LBO) · Management buyout (MBO) · Golden parachute · Hostile takeover · Poison pill · White knight · Standstill agreement

• Investment funds

  General partner · Limited partner · Commitment · Capital call · Management fee · Carried interest · Hurdle rate · Waterfall · High-water mark · Gate · Side letter · Side pocket · Master-feeder structure · Qualified purchaser

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