Fundraising glossary

Participating preferred stock

Participating preferred stock lets an investor take their liquidation preference back first and then also share in the remaining proceeds alongside common shareholders, rather than choosing between the two.

Liquidation preference

A liquidation preference is the amount an investor is paid out of exit proceeds before common shareholders receive anything, normally expressed as a multiple of the money they invested.

Drag-along rights

A drag-along right lets a defined majority of shareholders force the remaining shareholders to join a sale of the company on the same terms, preventing a small holder from blocking an exit.

Tag-along rights

A tag-along right lets a minority shareholder join a sale being made by a majority shareholder, selling the same proportion of their holding on the same terms rather than being left behind.

Pro-rata rights

A pro-rata right lets an existing investor buy enough of a future round to maintain their current ownership percentage, protecting them from dilution if they choose to keep funding the company.

Anti-dilution provision

An anti-dilution provision adjusts an earlier investor's conversion price downward if the company later sells shares at a lower price, compensating them for the drop by giving them more shares on conversion.

Redemption rights

A redemption right lets an investor require the company to buy back their shares after a defined period, usually at the original price plus accrued dividends, giving them an exit if no sale or IPO happens.

Advisory shares

Advisory shares are equity granted to an adviser in exchange for guidance rather than cash investment or full-time work, almost always as stock options or restricted stock that vest over one to two years.

Stock appreciation rights

Stock appreciation rights pay an employee the increase in a company's share price between grant and exercise, in cash or shares, without the employee ever buying the underlying stock.

Phantom shares

Phantom shares are a contractual promise to pay an employee the value of a number of shares at a future event, without issuing any actual stock or giving the holder shareholder rights.

Vesting cliff

A vesting cliff is an initial period during which no equity vests at all, after which a large block vests at once and the remainder vests gradually, most commonly one year into a four-year schedule.

Reverse vesting

Reverse vesting means a founder already owns their shares outright, but the company holds a right to buy them back at cost if the founder leaves, with that repurchase right lapsing over a vesting schedule.

ESOP pool

An ESOP pool is a block of shares set aside for employee equity grants, normally 10% to 20% of a company's fully diluted capital, and where it sits in a term sheet determines who pays for it in dilution.

ISO vs NSO

ISOs are tax-advantaged stock options available only to employees, potentially taxed at capital gains rates if holding requirements are met; NSOs can be granted to anyone and are taxed as ordinary income on the spread at exercise.

Early exercise

Early exercise lets an option holder buy their shares before they have vested, starting the capital-gains clock immediately and minimising tax while the spread between strike price and fair market value is still near zero.

Cashless exercise

A cashless exercise lets an option holder acquire shares without paying the strike price in cash, by surrendering part of the grant or selling some of the shares to cover the cost.

Acceleration (single and double trigger)

Acceleration vests equity early when defined events occur: single trigger vests on a change of control alone, while double trigger requires both a change of control and the holder losing their job.

Pre-money valuation

Pre-money valuation is what a company is agreed to be worth immediately before new investment goes in, and it is the number that determines how much of the company the new money buys.

Post-money valuation

Post-money valuation is a company's value immediately after new investment closes, equal to the pre-money valuation plus the amount raised, and it is the denominator for every ownership calculation in the round.

409A valuation

A 409A valuation is an independent appraisal of a private company's common stock, used to set the strike price on employee options so the company and its employees are not penalised by US tax authorities.

Valuation cap

A valuation cap is the maximum valuation at which a convertible note or SAFE will convert into equity, protecting the early investor from being diluted by a much higher priced round later.

Down round

A down round is a financing priced below the company's previous round valuation, which dilutes existing shareholders more heavily and usually triggers anti-dilution adjustments in favour of earlier investors.

Bridge round

A bridge round is short-term financing raised between priced rounds to extend runway until the company can reach the milestones needed for its next full round, usually structured as a convertible note or SAFE.

Capital call

A capital call is a venture fund's request that its limited partners transfer a portion of the money they have committed, made when the fund needs cash to make an investment or pay expenses.

Fund of funds

A fund of funds invests in other venture funds rather than directly in companies, giving its own investors exposure to a spread of managers in exchange for a second layer of fees.

Follow-on investment

A follow-on investment is additional money a fund puts into a company it has already backed, funded from reserves the fund sets aside specifically for supporting existing portfolio companies.

Qualified financing

A qualified financing is an equity round large enough to trigger the automatic conversion of outstanding convertible notes or SAFEs, with the threshold defined in the instrument itself.

Secondary sale

A secondary sale is the sale of existing shares from one shareholder to another, so the money goes to the seller rather than into the company, unlike a primary round which issues new shares.