Section 83(b) elections can be filed with respect to any stock or other property which bears a risk of forfeiture (e.g. vesting). The Section 83(b) election notice tells the IRS that the stockholder wishes to be taxed on the value of the stock or property at the time of issuance, rather than over time as the forfeiture restrictions (vesting) lapse.

This is important because presumably the value of stock increases over time, and if a stockholder fails to file an 83(b) election, they will have to pay taxes based on the value of the stock at the time of each vesting event. That is both a hassle and potentially a huge financial burden, so we strongly recommend that stockholders file 83(b) elections as soon as they receive stock subject to vesting.

In connection with the issuance of founders’ shares, each founder will need to sign the 83(b) Election Notice corresponding to each founder and attached to each Founder Restricted Stock Purchase Agreement (RSPA). Please note that the IRS temporarily allows the 83(b) Election Notice to be electronically signed until 10/31/2023 and it must be received by the IRS no later than 30 days after the issuance date. There are no extensions, so it is extremely important to file the 83(b) election as soon as possible following issuance of the Founders’ Stock.

Accelerated vesting allows a founder or employee to speed up their vesting schedule upon the occurrence of certain events, such as a sale of the company. There are two types of accelerated vesting: (1) single-trigger acceleration; and (2) double-trigger acceleration.

The Action of Incorporator is executed by the Incorporator of a Corporation. It is typically executed and effective immediately following the filing of the corporation’s Certificate/Articles of Incorporation with the applicable Secretary of State. In the Action of Incorporator, the Incorporator appoints the initial Board of Directors and resigns from any further responsibilities in their role as the Incorporator.

An Advisor Offer Letter is used for experienced, noteworthy advisors who will be given some equity to be listed in the Company’s deck and provide occasional, very high-level advice.

Note: Do not use this form for any person that will be generating any meaningful work product – use the Consulting Agreement (or hire the person as an employee) instead.

The Charter, or Certificate of Incorporation, is a document that is filed with the Secretary of State to create the Company as a legal entity in that State (usually Delaware). It includes information about the rights, preferences, and privileges of the various classes and series of stock, and it must be amended any time a new class or series is issued or those rights, preferences or privileges are modified.

The Charter is usually amended and restated in connection with a VC Financing to update it for the terms of the new series of preferred stock being issued to investors.

The total investment amount that can be sold under the Purchase Agreement. If the parties want to be able to sell more stock than is initially authorized under the Purchase Agreement, the agreement will need to be amended. This is referred to as an “extension.”

If there are SAFEs or convertible notes converting into equity in an equity financing, the Purchase Agreement will need to provide for that and indicate the amounts of stock issues in connection with such conversion. If the parties are issuing Shadow Preferred for the conversion, that stock will be issued under the Purchase Agreement as well.

A Benefit Corporation (or Public Benefit Corporation) is specific type of corporation that commits the company to spending some of the profits or resources (or both) in support of a specific public benefit.

In its Certificate of Incorporation, the Benefit Corporation must clearly state that the entity is a public benefit corporation and must list the company’s benevolent objectives (“public benefit purpose”).

The Board of Directors is responsible for overseeing and deciding on major changes in the governance or operations of the Company. The Voting Agreement establishes the size of the Board and the Board members chosen by the stockholders. The Board typically consists of an odd number of Directors to avoid deadlock. It is typical for the lead Investors in a Preferred Stock financing to have the right to designate one or more members of the Board of Directors. The holders of Common Stock often have the right to designate one or more director as well. There are also typically provisions for independent directors and a Board seat for the CEO. The Voting Agreement requires all stockholders to vote those designees into office.

Term Sheet Language: At the Closing, the Board of Directors shall consist of [______] members comprised of (i) [name] as [the representative designated by [____], as the lead Investor, (ii) [name] as the representative designated by the remaining Investors, (iii) [name] as the representative designated by the Common Stockholders, (iv) the person then serving as the Chief Executive Officer of the Company, and (v) [___] person(s) who are not employed by the Company and who are mutually acceptable [to the other directors].

An agreement on certain board matter terms. The board matter terms often included in the Investors’ Rights Agreement are:

Board Composition: How many of the Company’s Board committees must have a Preferred Director.

• Expenses: The Company will reimburse directors’ reasonable expenses incurred when attending Board meetings.
• Insurance: The Company will buy director and officer liability insurance (“D&O Insurance”) covering a negotiated amount. This insurance protects directors’ and officers’ personal liability if they are sued in a matter relating to their position in the Company.
• Indemnification: The Company will protect directors and officers against legal liability in certain circumstances by compensating them for harm or losses.
• Post-Sale Indemnification: The Company promises to maintain the directors’ and officers’ indemnification agreement if they sell or merge the Company with another.

These terms are not typically negotiated extensively and are part of standard protections for those Investors who designate the Preferred Directors.

Term Sheet Language: [Each Board Committee/the Nominating and Audit Committee shall include at least one Preferred Director.] Company to reimburse [nonemployee] directors for reasonable out-of-pocket expenses incurred in connection with attending Board meeting. The Company will bind D&O insurance with a carrier and in an amount satisfactory to the Board of Directors. Company to enter into Indemnification Agreement with each Preferred Director with provisions benefitting their affiliated funds in form acceptable to such director. In the event the Company merges with another entity and is not the surviving entity, or transfers all of its assets, proper provisions shall be made so that successors of the Company assume the Company’s obligations with respect to indemnification of Directors.

A C Corporation is a legal structure in which the stockholders are taxed separately from the entity. The profit of the corporation is taxed to the corporation when earned and then is taxed to the stockholders when distributed as dividends, which creates a double tax.

A Company’s capitalization table (“Cap Table”) is complete list of all of a Company’s securities and who owns them.

The Cap Table is a historical record of who owns how many shares of the Company’s stock, stock options, warrants, convertibles and other ownership stakes in the Company. As the Company grows and raises capital from investors and issues equity incentives to employees and contractors, the Cap Table gets more complicated. It is important to keep track of all of this information and ensure it is accurate and up-to-date.

The Cap Table platforms in the marketplace (Carta, etc.) have developed solutions to help companies, investors and their counsel keep track of this data at reasonable cost to ensure its accuracy, completeness and that it is current and readily accessible. It is very difficult and expensive to achieve this without one of these platforms, which is why so many companies use them at the outset.

A type of security that represents a share of ownership in a corporation, which includes Common Stock and Preferred Stock.

Upon a liquidation event, the Investor gets its liquidation preference and then shares in the liquidation proceeds on an as-converted basis until a certain multiple of the original purchase price is reached. Once the return is greater than the cap, the participation stops.

Term Sheet Language: After the payment of the Liquidation Preference to the holders of Series [_] Preferred, the remaining assets shall be distributed ratably to the holders of the Common Stock and the Series [_] Preferred on a common equivalent basis, provided that holders of Series [_] Preferred will stop participating once they have received a total liquidation amount per share equal to [X] times the Original Purchase Price, plus any declared but unpaid dividends. Thereafter, the remaining assets shall be distributed ratably to the holders of the Common Stock.

Transactions involving foreign Investors may require review by the Committee on Foreign Investment in the United States (“CFIUS”). CFIUS reviews the facts and issues a statement about the national security risks associated with the transaction.

There are two types of statements of formal review: notices and declarations. A “notice” is a full-form filing that results in a definitive opinion by the CFIUS but may take months to obtain. A “declaration” is a short-form filing that may not result in a definitive opinion by CFIUS but is intended to be obtained within 45 days.

U.S. Treasury: CFIUS Laws and Guidance

The Company and Investors can include a provision obligating both parties to use best efforts in submitting the transaction to CFIUS and obtaining clearance. The Company and Investors may also want to include additional obligations regarding risk allocation measures, waivers of responsibility for filing fees or penalties, indemnification, or other terms related to CFIUS filing.

Term Sheet Language: Investors and the Company shall use reasonable best efforts to submit the proposed transaction to the Committee on Foreign Investment in the United States (“CFIUS”) and obtain CFIUS clearance or a statement from CFIUS that no further review is necessary with respect to the parties’ [notice/declaration]].

A material change in the ownership of a Company; including, without limitation, a transaction in which a person or group becomes the majority owner of the outstanding voting securities, a reorganization, a merger, or a sale of all or of substantially all the Company’s assets.

The Certificate of Incorporation (also called the “Charter” and also known as Articles of Incorporation in certain States) establishes the existence of the Company as a legal entity when filed in the State of Incorporation (typically Delaware). The Charter also establishes the initial authorized shares of stock and some other matters regarding the rights of stockholders and corporate governance.

The Closing is the event at which the purchase and sale of the securities occurs, with the Investors paying for, and the Company issuing, the securities. The Closing Date is the date upon which all of the conditions to closing have been met and when the transaction closes. Multiple or “rolling” closings may be preferable where there is or may be more than one Investor involved (which is often the case).

Common Stock is the ordinary type of stock in a corporation that has basic rights and privileges of the owners of a corporation, such as the ability to vote for directors and other matters put before the stockholders.

A series of items that must be completed before the Investor is obligated to purchase, and the Company is obligated to issue, the Preferred Stock and the transaction can close. Conditions to closing typically include:

• Due diligence: An investigation into the Company’s legal and financial history
• Blue Sky qualification: Registration or qualification of the shares under the relevant state security laws, known as “Blue Sky” laws
• Amended Certificate of Incorporation: Amendment of the Certificate of Incorporation (also known as the Charter) to reflect the rights and preferences of this new class of stock

They may also include:

• CFIUS clearance: Notifying the Committee on Foreign Investment in the United States (“CFIUS”) of the transaction. CFIUS review prior to closing is only necessary for certain foreign investment transactions
• Opinion: Delivery of an opinion letter to the Investors by the Company’s lawyers, certifying the validity of legal matters such as the Company’s formation, power to conduct business, and issuance of stock

Investors’ right to demand the Company register shares of common stock with the Securities and Exchange Commission (“SEC”) in an IPO. That way, the Investors can sell all or part of their investment to the public. If a Company wasn’t public already, a demand registration would make it so.

There are often three main requirements for Investors before they can make a demand registration and gives a range of reasonable timing and minimum price:

• Timing: A demand can only be made if 3-5 years have passed after signing of the Investors’ Rights Agreement, or 6 months after the Company has an IPO. Whichever comes earlier.
• Approval threshold: A demand can only be made if requested by holders of a certain percentage of Registerable Securities (usually a majority).
• Minimum price: A demand can only be made if the total amount of stock sold in the IPO is $5-15 million.

Other terms could be agreed upon before demand registration is permitted. Some common terms, including how many shares an Investor can demand to be registered, a minimum value that the Common Stock must be before demanding registration, who pays the registration fees, and best-efforts clauses that the Company will fulfill a demand promptly.

Term Sheet Language: Upon earliest of (i) [three (3)-five (5)] years after the Closing; or (ii) [six (6)] months following an initial public offering (“IPO”), persons holding [__]% of the Registrable Securities may request [one][two] (consummated) registrations by the Company of their shares. The aggregate offering price for such registration may not be less than $[5-15] million. A registration will count for this purpose only if (i) all Registrable Securities requested to be registered are registered, and (ii) it is closed, or withdrawn at the request of the Investors (other than as a result of a material adverse change to the Company).
 

Dilution occurs when a company issues new shares that result in a decrease in existing stockholders’ ownership percentage of that company. It can also occur when holders of stock options (such as company employees) exercise their options. When the number of shares outstanding increases, each existing stockholder owns a smaller, or diluted, percentage of the company, making each share less valuable.

However, the value of the dilution taken by existing investors depends less on a percentage basis than on the relative values of the stock before and after the dilutive event. For example, if the holders of the 6 million shares each purchased stock when the value was $0.01 per share, but the 4 million shares were sold at a value of $1.00 per share, then the value of the existing holders’ shares just went on paper from $60,000 to $6 million, a 100x increase. So although the existing stockholders own less of the Company on a percentage basis, they are happy because the Company, and their shares, are worth much more on the whole on a valuation basis.

It would be different, however, if the pre-money valuation of the Company in the new financing is lower than when the existing stockholders purchased their shares. That is called a “down-round” and results in a worst-case scenario for existing stockholders: they are getting diluted on both a percentage basis and a valuation basis.

An SEC-registered listing of a Company’s existing Common Stock for resale to the public.

The board of directors (or simply the “Board”) is responsible for overseeing “big picture” operations and deciding on major changes in the governance or operation of a corporation. The Board appoints and oversees the officers. Each director will typically have only one vote on matters presented for Board approval; the number of shares that a director holds (if any) is irrelevant in the context of a board vote.

The termination of the Company’s business operations, including (i) a voluntary termination of operations, (ii) a general assignment for the benefit of the Company’s creditors, or (iii) any other liquidation, Dissolution or winding up of the Company (excluding a Liquidity Event), whether voluntary or involuntary.

“Early exercise” stock options allow a service provider (employee, contractor, etc.) to exercise a stock option with respect to some or all of the unvested portion. The early exercised shares are shares of common stock held by the service provider and are subject to a repurchase option in favor of the Company, which lapses according to the original vesting schedule. By exercising early, the service provider may have more tax planning control over their shares. In addition, because the service provider’s own money is at risk, allowing early exercise may better align the interests of the service provider with other stockholders. However, if it is likely that the service provider will exercise within a short time after grant, it is probably easier to just grant Restricted Stock Awards at the outset. Further, if the options are Incentive Stock Options (which is often the case), the benefits to early exercising are eliminated by the tax disincentives to do so.

A Noncompetition Agreement (or Non-Compete Agreement) is a legal agreement or clause in a contract specifying that an employee or other party must not compete with the Company during some specified period (in the case of employees, after their employment has ended) and within some geographic area (often worldwide, but better if it is limited to a smaller region).

Note: Non-competition Agreements (“noncompetes”) are a hotly litigated area with laws varying from state to state. In California, noncompetes are virtually banned, and in Oregon and Washington, the laws regarding noncompetes are fraught with a variety of issues for employers.

An employee offer letter is a letter given by a company to a potential employee that provides key terms of the prospective employee’s employment. It is important that the offer letter not be written in a way that makes it deemed to be an employment contract.

An Employer Identification Number (EIN) refers to a unique identifier that is assigned to a business entity so that it can be easily identified by the IRS. Businesses can apply for EINs directly through the IRS.

A calculation of a company’s total value that includes not just the assets and liabilities of the Company, but also any accumulated goodwill and other factors that an Investor (or potential buyer) might consider important when deciding to invest in (or acquire) the Company. Other factors may include potential strategic or synergistic value of the Company’s products, services or personnel.

The main Entity Types are C-Corporations, S-Corporations, and Limited Liability Companies, with each type varying in terms of governance, tax treatment and complexity. Despite short-term benefits of the flow-through tax treatment of S-Corps and LLCs, C-Corps are much better suited for tech startups that expect to raise capital from institutional investors.

Entrepreneurs should form a business entity as soon as they embark on a new startup venture because doing so protects the owners’ personal assets from the debts and other liabilities of the business.

Fiduciary Duties are owed by each Director to the Company and its stockholders. Fiduciary duties are owed to all stockholders irrespective of equity interest, and the risks associated with breach of fiduciary duties increase as the Company grows and brings on new investors. All directors and officers have an obligation to act in the best interests of the business, sometimes to the exclusion of their own interests.

The fiduciary duties of Directors are encompassed by two broad categories: (1) duty of care and (2) duty of loyalty. Below is a brief summary of the standards that directors must observe in their capacities as corporate fiduciaries or risk liability for breach:

Duty of Care. Directors must be diligent and invest significant amounts of time and energy in monitoring management’s conduct of the business and compliance with the Company’s Charter, Bylaws, applicable laws and operating and administrative procedures. In doing so, directors are entitled to rely on reports, opinions, information, and statements of the Company’s officers, legal counsel, accountants and employees, subject to reasonable circumstances (i.e., directors are responsible for remaining informed and making further inquiry when alerted by the circumstances).

Duty of Loyalty. Directors are required to exercise their powers in the interests of the Company and must not use their corporate position to enjoy a personal benefit, gain, or other advantage at the expense of the Company. Directors must also act in good faith, disclose to stockholders all material facts relevant to a stockholder decision, deal with all matters involving the Company in confidence, and maintain the Company’s confidential information. If conflicts of interest arise, the “interested” director should (1) seek approval from disinterested directors or stockholders, (2) disclose such interest and all relevant material facts, (3) abstain from voting on the matter and (4) avoid being present while the disinterested directors or stockholders discuss and vote.

A Foreign Corporation is a corporation which is incorporated or registered under the laws of one state or foreign country and does business in another.

A Foreign Qualification refers to the notice or other documentation a foreign corporation must file in states where it conducts substantial business but is not incorporated. Foreign qualification may make the corporation subject to certain state tax and other legal requirements.

Form 1120 refers to the annual corporate tax form that C-Corporations must file.

Form 940 refers to the annual unemployment tax return form that every employer must file.

All Employers are required to obtain Immigration and Customs Enforcement Form I-9 from each employee and maintain completed forms with employee personnel files. There are substantial penalties for failing to comply with this requirement. Please consult with your Perkins team for assistance with I-9 compliance, as well as other questions regarding the employment of foreign workers (e.g., work visas).

A Form of Notice of Issuance for Founders’ Stock is the notice to each Founder that they have been issued shares of uncertificated stock. Unlike a stock certificate which is the actual evidence of ownership for certificated stock, the notice of issuance is just a notice that a stockholder has been issued shares and the Company’s stock ledger itself serves as the evidence of ownership of uncertificated stock.

Stock Options that have been granted to Company service providers that is not available for future Equity grants.

Investors holding a majority interest in the Notes under the Note Purchase Agreement constitute the group that can approve changes or modifications under all Notes without having to get every single Investor to agree. If you issue Convertible Notes without an NPA, it can lead to confusion in the future as to whether Convertible Notes are similar enough to be considered the same for purposes of allowing the majority in interest to approve changes or modifications without approval of all Investors.

Founders’ Stock are shares issued to the key team responsible for establishing the Company and coming up with the initial business plan and intellectual property. It is usually very important to make sure the Founders continue to be actively engaged in the Company after an investment round, so Investors require that the Founders’ Stock be subject to vesting for a sufficient period. The standard Founder vesting terms are 4-year vesting with 25% after one year and monthly thereafter. It is best to set up the Founders’ Stock with vesting from the beginning, but if it isn’t, then Investors will often require vesting to be imposed on those shares at the time of the first financing.

Term Sheet Language: Buyback right/vesting for [__]% for first [12 months] after Closing; thereafter, right lapses in equal [monthly] increments over following [__] months.]

The tax benefit of ISOs, as compared to NSOs, is that there is no tax withholding or FICA payroll tax on exercise, and the spread at sale is taxed as capital gain; however, the spread on the exercise date counts as AMT income and may subject the holder to AMT in the year of exercise. This benefit may be enjoyed by the holder if (i) they do not sell the shares before the expiration of two different holding periods and (ii) they are not subject to alternative minimum tax (AMT) in the year of exercise.

Questionnaire sent by Perkins Coie to the Client to gather required information to start the formation process.

An Incorporator is the person who signs the initial Certificate of Incorporation and then immediately hands control of the corporation to the initial Board of Directors.

Incremental Vesting refers to when equity granted to an employee or other service provider becomes partially vested in incremental amounts over a specified period, rather than in one lump sum on a specified date (as per a Vesting Cliff). Incremental Vesting is often coupled with a Vesting Cliff and forms the latter part of the standard 4-year vesting schedule.

The Indemnification Agreement gives strong protections to the directors and officers of the Company in the event they are sued in their capacity as representatives of the Company. Only directors and executive officers should receive an Indemnification Agreement. There is mandatory indemnification provided in the Charter and Bylaws (including advancement of expenses) that covers all other employees, consultants and agents of the company so there is no need to provide them with a separate agreement.

The Initial Capitalization is how much stock a Company can legally issue under its initial Certificate of Incorporation. In general, the Company should authorize enough stock to issue to the Founders and initial service providers under the Equity Incentive Plan such that when you go to raise capital from investors, the price per share for the new stock sold to investors is about $1.00 per share. For example, if you’re raising $5,000,000 in Series Seed Preferred on a $10,000,000 pre-money valuation and there are 10,000,000 shares outstanding on a fully-diluted basis, then the price per share is $1.00 per share, you will issue 5,000,000 shares to the Series Seed investors, who will own about 33% of the corporation on a post-money basis.

The initial officers (often President, CEO, Secretary and Treasurer) are appointed by the Board in the Organizational Board Consent. The Board must appoint at least a President/CEO and a Secretary as an initial matter.

The Initial Size of the Board of Directors is set by resolution of the Board. In the case of newly formed corporations, we recommend that just one Founder be the initial director to streamline decisionmaking.

The Company can impose certain limitations on the Investors ability to receive “material nonpublic technical information” that the Company has. Material nonpublic technical information is defined in the Defense Production Act (“DPA”).

Briefly from the DPA, material nonpublic technical information is defined as information that:

“(1) Provides knowledge, know-how, or understanding, in each case not available in the public domain, of the design, location, or operation of covered investment critical infrastructure, including vulnerability information such as that related to physical security or cybersecurity; or

(2) Is not available in the public domain and is necessary to design, fabricate, develop, test, produce, or manufacture a critical technology, including processes, techniques, or methods.”

Material nonpublic technical information is not financial information reports on how the business is performing. For information rights that are commonly negotiated by Investors, see the section above about Management and Information Rights.

Term Sheet Language: Notwithstanding anything to the contrary contained in the Stock Purchase Agreement, the Charter, the Investors’ Rights Agreement, the Right of First Refusal And Co-Sale Agreement, and the Voting Agreement (all of the agreements above together being the “Transaction Agreements”), Investors and the Company agree that as of and following [Closing/the initial Closing], Investors shall not obtain access to any material nonpublic technical information (as defined in Section 721 of the Defense Production Act, as amended, including all implementing regulations thereof (the “DPA”)) in the possession of the Company.]

The Committee on Foreign Investment in the United States (“CFIUS”) reviews certain foreign investment transactions before a deal is allowed to close for national security reasons. If a deal involves foreign entities, the domestic party may have to submit certain information about the deal to CFIUS. An application without issues will be approved within 30 days. If there are complications, up to 60 more days may be added.

Before CFIUS approval, the Company does not want Investors to make certain changes to the Company. Substantial changes will complicate an upcoming or pending CFIUS application. The term sheet lists actions that an Investor cannot do prior to CFIUS approval, including:

• Make any important matter or personnel decisions for the Company; and
• Access or affect the use/development/sale of certain private Company information and technology.

Any of these rights that an Investor will have in the future is put on pause pending CFIUS approval and may be resumed once approval has been received. If there is any chance that a Company may have foreign investment transactions in the future, this clause should be added so it does not cause complications later.

Term Sheet Language: Notwithstanding anything to the contrary contained in the Transaction Agreements, Investors and the Company agree that as of and following the initial Closing and until the CFIUS clearance is received, Investors shall not obtain (i) “control” (as defined in Section 721 of the Defense Production Act, as amended, including all implementing regulations thereof (the “DPA”)) of the Company, including the power to determine, direct or decide any important matters for the Company; (ii) access to any material nonpublic technical information (as defined in the DPA) in the possession of the Company; (iii) membership or observer rights on the Board of Directors of the Company or the right to nominate an individual to a position on the Board of Directors of the Company; or (iv) any involvement (other than through voting of shares) in substantive decision-making of the Company regarding (x) the use, development, acquisition, or release of any of the Company’s “critical technologies” (as defined in the DPA); (y) the use, development, acquisition, safekeeping, or release of “sensitive personal data” (as defined in the DPA) of U.S. citizens maintained or collected by the Company, or (z) the management, operation, manufacture, or supply of “covered investment critical infrastructure” (as defined in the DPA). To the extent that any term in the Transaction Agreements would grant any of these rights, (i)-(iv) to Investors, that term shall have no effect until such time as the CFIUS clearance is received.]

A Limited Liability Company is governed primarily by its LLC or operating agreement and combine the characteristics of a corporation with those of a partnership or sole proprietorship. In general, LLCs are not taxed separately from their owners.

Because of the difficulty of this tax structure from an investment standpoint, and due to certain rules governing institutional investors (VCs), very few institutional investors will invest in LLCs. For this reason, LLCs are rarely used as the entity of choice for a tech startup.

Certain rights under the Investors’ Rights Agreement can be limited to a smaller subset of Investors who have invested above a certain amount. These are referred to as the “Major Investors.”

Due to Department of Labor regulations, most institutional Investors will require a Side Letter Agreement granting the Investor the right to participate in the management of the Company; including, without limitation, the right to appoint directors, the right to appoint a representative to serve as a corporate officer, financial information rights, visitation and inspection rights, and consultation with the management of the Company.

While there are laws requiring companies to disclose certain basic corporate information to their Investors, Investors with a certain minimum amount of money invested in the Company may also negotiate disclosure of more information than what is legally required. This may be negotiated to assure major Investors that the Company is being run properly. Companies should be cautious in allowing excessive management and information rights, as Investors may become overly involved in the day-to-day business processes, which can be distracting and risky for various reasons.

The Investors’ Rights Agreement typically includes the following rights available to all Investors (or, more often, just the Major Investors):

• Access to the Company’s facilities with advance notice;
• Company financial statements delivered periodically (annual, quarterly, or monthly);
• Annual access to the budget, future revenue, expenses, and cash position report; and
• Quarterly access to an updated document detailing ownership of the Company, and securities and shares in the Company including stock, convertible notes, warrants, and equity grants (“capitalization table,” or “cap table”).

Also, certain Management and Information Rights for a specific Investor can be included in a management rights letter. Venture Capital investment firms typically ask for this letter, as it exempts them from certain federal regulation requirements under the Employee Retirement Income Security Act of 1974 (“ERISA”) when investing in a startup Company. If the Venture Capital Investor negotiates for a management rights letter, they can qualify as a Venture Capital Operating Company (“VCOC”), which exempts them certain ERISA regulations. If they do not, the Venture Capital Investor’s investment can be controlled by this Act, which can trigger unwanted fiduciary duties for their fund managers.

Term Sheet Language: A Management Rights letter from the Company, in a form reasonably acceptable to the Investors, will be delivered prior to Closing to each Investor that requires one.

Any [Major] Investor (who is not a competitor) will be granted access to Company facilities and personnel during normal business hours and with reasonable advance notification. The Company will deliver to such [Major] Investor (i) annual, quarterly, [and monthly] financial statements, and other information as determined by the Board of Directors; [and] (ii) thirty days prior to the end of each fiscal year, a comprehensive operating budget forecasting the Company’s revenues, expenses, and cash position on a month-to-month basis for the upcoming fiscal year[; and (iii) promptly following the end of each quarter an up-to-date capitalization table].

Preferred Stock automatically converts into common shares in the event of a qualified initial public offering (“QPO”), which is defined as an IPO of a pre-determined total value. So, if the Company goes public at or above a certain price or total proceeds, the Preferred Stock will automatically convert into Common Stock without any action by the Company or stockholders.

Term Sheet Language: Each share of Series A Preferred will automatically be converted into Common Stock at the then applicable conversion rate in the event of the closing of a firm commitment underwritten public offering [with a price of [___] times the Original Purchase Price] (subject to adjustments for stock dividends, splits, combinations and similar events) and [gross] proceeds to the Company of not less than $[_______] (a “QPO”), or (ii) upon the written consent of the Requisite Holders.

If a Company goes public in an IPO, a lock-up provision prevents stockholders from selling their shares for an agreed time period. This is designed to prevent an immediate drop in share value shortly after a Company goes public, during the time when the underwriters actively support the price of the stock.

The standard lock-up period is 180 days after the IPO.

Term Sheet Language: Investors shall agree in connection with the IPO, if requested by the managing underwriter, not to sell or transfer any shares of Common Stock of the Company held immediately before the effective date of the IPO for a period of up to 180 days following the IPO (provided all directors and officers of the Company [and [1 – 5]% stockholders] agree to the same lock-up). [Such lock-up agreement shall provide that any discretionary waiver or termination of the restrictions of such agreements by the Company or representatives of the underwriters shall apply to Investors, pro rata, based on the number of shares held.

A provision that restricts the sale or transfer of Common Stock or any Convertible Security within a certain amount of time (often 180 days) following an IPO, Direct Listing, or SPAC Transaction without approval by the Company or the managing underwriters in such transaction, as applicable. This is designed to prevent an immediate drop in share value shortly after a Company goes public, during the time when the underwriters actively support the price of the stock.

Material Transactions for purposes of a Section 409A valuation include:

• Signing a term sheet for or closing a material capital raise (equity, SAFE, debt, etc.);
• Receiving a term sheet for an acquisition (unsolicited or solicited);
• Launching a new product;
• Executing a material contract;
• Making material changes in a revenue forecast or other operational metrics (e.g., Daily Active Users);
• Obtaining a major customer;
• Completing secondary sale transactions, in some cases;
• Closing a strategic transaction (e.g., acquisition, joint venture); or
• Any other change to the assumptions on which the valuation firm relied in drafting the previous 409A report.

Note that even rejected offers or abandoned transactions can be material enough to move the needle to qualify as a material transaction.

The proposed name of the corporation/company is chosen by the founder(s). This may be the same or different from the “Doing Business As” (DBA) name. The name of the corporation must have Inc., Corp., Company, Corporation or some other configuration in the name.

No-Shop Provision: A binding term where the Company agrees to not negotiate a financing with other potential investor (or buyer) for a certain amount of time. The shorter the amount of time, the better for the Company. The Investor could also require disclosure if any third party approaches the Company and is interested in a similar deal. This term prevents Companies from leveraging an Investor’s offer to get a better offer from someone else.

Confidentiality Provision: A binding term where the seller/Company promises not to disclose term sheet provisions to anyone outside the Company’s officers, directors, accountants, attorneys, and certain other Investors without the Investor’s consent.

Both provisions are present in most term sheets. One point of negotiation the Company should pay attention to is how long the no-shop agreement lasts, as that will affect its ability to find other Investors if issues with its prospective buyer arise.

Term Sheet Language: The Company and the Investors agree to work in good faith expeditiously towards the Closing. The Company and the founders agree that they will not, for a period of [______] days from the date these terms are accepted, take any action to solicit, initiate, encourage or assist the submission of any proposal, negotiation or offer from any person or entity other than the Investors relating to the sale or issuance, of any of the capital stock of the Company [or the acquisition, sale, lease, license or other disposition of the Company or any material part of the stock or assets of the Company] and shall notify the Investors promptly of any inquiries by any third parties in regards to the foregoing. The Company will not disclose the terms of this Term Sheet to any person other than employees, stockholders, members of the Board of Directors and the Company’s accountants and attorneys and other potential Investors acceptable to [_________], as lead Investor, without the written consent of the Investors (which shall not be unreasonably withheld, conditioned or delayed).

A non-competition agreement prevents founders and key employees from competing with the Company during employment and temporarily after leaving the Company. The typical duration of a non-competition agreement is one to two years after leaving the Company. The agreement can also be limited to a specific geographic area.

While non-competition terms are present in many agreements, founders and key employees will likely push back against this term because it restricts their future career prospects. Also, many states (including California and Washington State) do not allow or severely restrict non-competition agreements in the employment context.

Term Sheet Language: Founders and key employee will enter into a [one] year non-competition agreement in a form reasonably acceptable to the Investors.

A Non-Disclosure Agreement (also referred to as a confidentiality agreement) is a binding contract that establishes a confidential relationship whereby signatories agree that sensitive information they may obtain will not be made available to any third party. They should be used prior to negotiations to allow parties to share sensitive information without fear that it will end of in the hands of competitors or others who will abuse it.

Note: NDAs are not a protective panacea. It is impossible to “un-ring the bell” once you disclose sensitive information, whether there is an NDA in place or not. You should only ever provide information to third parties that they need to know to carry out or evaluate the proposed transaction.

Officers run the day-to-day operations of the Company. All officers are appointed by and are subordinate to the Board. The CEO is the primary officer responsible for carrying out the business and affairs of the Company and signing contracts on behalf of the Company. Other officers (such as Vice President(s), CFO, Secretary and Treasurer) have the duties described in the Bylaws, or as prescribed by the board or the CEO from time to time.

A One-Way NDA (or Non-Mutual NDA) is an NDA whereby only one party (the “recipient”) agrees to keep the other party’s (the “disclosing party’s”) information confidential.

An Option Exercise Agreement is used when optionees want to exercise their options.

The Option Grant Agreement is used to issue a stock option to a service provider under an Equity Incentive Plan.

Par Value is the base value of a single share of capital stock as set by a Corporation’s Charter and is typically lower than the actual value of the shares. Par values are often a tenth ($0.001) or a hundredth of a penny ($0.00001).

A latin term meaning “equally and without preference.” For example, a pari passu liquidation preference means that all series of Preferred Stock share together in the proceeds upon a liquidation event.

Pari Passu (also called Blended Preferences) is an approach to liquidation preference whereby series are equivalent in status (e.g., Series A and Series B share ratably until all of the liquidation preference amounts are returned).

A right for existing Investors to take part in future financings up to their pro rata percentage ownership in the Company. This allows an Investor to not lose their degree of control in the Company when fundraising happens in the future. Otherwise, a new Investor could come in and take significant portions of the Company, thus diluting the earlier Investor’s shares.

Example: Earl E. Investor invested $20 million in The New Company in 2018, receiving a 15% share of the business, along with the right to participate pro rata in future rounds. In 2020, The New Company decided to do a new round and sell more shares. Earl now has the first crack at maintaining his 15% share of the Company by buying enough of the new shares until he again owns 15% of the Company. Note that Earl must still pay the Company for those shares at the price offered to other investors in the new round (e.g. they are not available to him at any discount). If Earl doesn’t have the money or doesn’t want to exercise his rights, he misses out and the opportunity to purchase these new securities will be opened to other Investors.

Term Sheet Language: All [Major] Investors shall have a pro rata right, based on their percentage equity ownership in the Company (assuming the conversion of all outstanding Preferred Stock into Common Stock and the exercise of all options outstanding under the Company’s stock plans), to participate in subsequent issuances of equity securities of the Company (excluding those issuances listed at the end of the “Anti-dilution Provisions” section of this Term Sheet and shares issued in an IPO). In addition, should any [Major] Investor choose not to purchase its full pro rata share, the remaining [Major] Investors shall have the right to purchase the remaining pro rata shares.

A patent is a right granted by a country’s government to an inventor for a limited time to exclude others from making, using, offering for sale or selling the invention in, or importing the invention into, that country. In order to be enforceable in any country, the patent must be registered by that country’s government after the inventor files an application for patent protection. In general, patents are granted for new and nonobvious ideas that have utility or an ornamental design.

Pay-to-Play provisions require Investors to keep investing (on a proportional or “pro-rata” basis) in future financing in order to keep the preferential rights and privileges of Preferred Stock. If they choose not to participate in future rounds, their Preferred Stock is automatically converted to Common Stock.

These provisions are generally good for the Company and the other Investors who decide to continue to participate. They require Investors to agree to support the Company during its life cycle, they guarantee that all Investors agree to the same rules, and they ensure that only committed investors continue to hold Preferred Stock. For that reason, many Investors will push back against pay-to-play provisions.

Pay-to-play provisions may not be appropriate in early rounds of financing involving angel investors, family and friends, or other investors that do not participate in subsequent rounds as a matter of practice. A pay-to-play provision in that case would penalize them in the future for supporting the Company at the beginning. A contractual carve-out for these Investors can be negotiated and included in the term sheet.
The Company can choose to apply the pay-to-play requirement on all subsequent rounds or limit it only to down rounds. Down rounds are rounds of financing in which the Company’s valuation is lower than it was in the previous round. Pay-to-play provisions are most useful and most negotiated in these rounds, as Investors may not want to be a part of future financing. This provision therefore creates a strong incentive for investors to continue financially supporting the Company.

Term Sheet Language: Unless the Requisite Holders elect otherwise, on any subsequent [down] round all holders of Series A Preferred Stock are required to purchase their pro rata share of the securities set aside by the Board of Directors for purchase by such holders. [A proportionate amount/all] of the shares of Series A Preferred of any holder failing to do so will automatically convert to Common Stock and lose corresponding Preferred Stock rights, such as the right to a Board seat if applicable.

Piggyback Registration is a weaker form of registration than Demand Registration Rights for Investors. If a Company is carrying out an IPO or going through the registration process of common stock, an Investor with Piggyback Registration rights can “piggyback” off the Company and have their unregistered stock registered, too.

It is weaker than Demand Registration rights because here, Investors must wait for the Company to initiate registration. It is also up to the Company to bear the registration costs if an Investor chooses to invoke their Piggyback Registration rights.

Common negotiated terms when discussing Piggyback Registration include:

Whether underwriters can cut back Investors’ shares when registration occurs. Negotiated terms in registration rights are somewhat flexible, as companies rely on experts at the time of actual registration to adjust. However, full power for an underwriter to slash all Piggyback Registration rights would not be good for an Investor. So, many Investors typically negotiate a floor that underwriters cannot go below: here, 20-30% of the offering;

Whether founders and management can also have Piggyback Registration rights; and

Which Investors’ shares will be at the front of the line to be included in the offering. The ones at the end of the line will be the first cut.

Term Sheet Language: The holders of Registrable Securities will be entitled to “piggyback” registration rights on all registration statements of the Company, subject to the right, however, of the Company and its underwriters to reduce the number of shares proposed to be registered to a minimum of [20-30]% on a pro rata basis and to complete reduction on an IPO at the underwriter’s discretion. In all events, the shares to be registered by holders of Registrable Securities will be reduced only after all other stockholders’ shares are reduced.

The post-money valuation is the pre-money valuation plus the proposed aggregate investment amount.

Holders of stock options must exercise their vested options within a certain pre-defined time period after they cease providing services to the company. This time period is known as the “post-termination exercise period” (PTEP). The standard PTEP is three months. This means that after option holders leave the company, they have three months to exercise their vested options before the options automatically terminate.

Stockholders may potentially exclude from income all or a portion of any gain recognized on the sale of QSBS held for more than five years. This potentially means no federal tax on the sale of QSBS, within certain limits and if certain taxpayer and corporate requirements are met. See our post on QSBS for more information and important qualifications.

Redemption rights allow Investors to sell their shares back to the Company for the original purchase price (plus dividends, if applicable) after a specified period of time (usually five years). This provision provides Investors with an exit plan out of a “sideways situation”, a situation in which the Company is successful enough to conduct ongoing business but not successful enough to launch an IPO or attract an acquisition. This would seem to provide the Investors with substantial downside protection and be Investor-friendly; however, a Company that isn’t successful enough to grow likely doesn’t have the cash to buy back shares, and state law typically prohibits companies from redeeming shares if they do not have the available capital. Redemption rights therefore rarely come into play and most deals do not include them.

If redemption rights are included in the Charter, the Company should be cautious of provisions that give Investors the right to a price greater than the original purchase price. The Company should also avoid language that gives Investors the right to redemption in the case of “a material adverse change” to its business. This language is vague and gives Investors unilateral control.

Term Sheet Language: Unless prohibited by applicable law governing distributions to stockholders, the Series A Preferred shall be redeemable at the option of the Requisite Holders commencing any time after the five (5) year anniversary of the Closing at a price equal to the Original Purchase Price [plus all accrued/declared but unpaid dividends]. Redemption shall occur in three equal annual portions. Upon a redemption request from the holders of the required percentage of the Series A Preferred, all Series A Preferred shares shall be redeemed [(except for any Series A holders who affirmatively opt-out)].

A Registered Agent (also called resident agent, statutory agent, or agent for service of process) is a business or individual designated to receive official documents on a company’s behalf. To incorporate in a state that is not the company’s principal place of business, a registered agent located in the state of incorporation is required.

Registrable securities are securities that are, or have the potential to be, registered with the SEC, including common stock and common stock issuable upon conversion of preferred stock.

Registering common stock costs a lot of money, which includes banker underwriting fees, counsel, auditors, and many more administrative costs. The parties can negotiate who will have to pay registration expenses, and how much, if an Investor chooses to use their registration rights. Expenses include:

• Registration and filing fees;
• Attorney’s fees;
• Blue sky fees and expenses;
• Printing expenses; and
• Special audits tied to registration.

The Investors’ Rights Agreement sets a dollar cap for the amount that a Company will spend on fees and expenses for one lawyer to represent all stockholders. The stockholders must pay any stock transfer taxes, underwriting discounts, and commissions.

Term Sheet Language: The registration expenses exclusive of (excluding) stock transfer taxes, underwriting discounts and commissions will be borne by the Company. The Company will also pay the reasonable fees and expenses, not to exceed $[______] per registration, of one special counsel to represent all the participating stockholders.

Form S-3 is a form created by the SEC for follow-on public offerings of stock by companies that are already publicly listed. As such, this form is less complicated and can be completed more quickly than Form S-1, which is used for an IPO.

– The SEC has several requirements for a Company to file an S-3 form:

• The Company must be based in and operated out of the U.S. or a U.S. territory;
• A minimum of $75 million worth of shares must be owned by public Investors;
• The Company must have traded a minimum of $1 billion in non-convertible (excluding common equity) shares for the past 3 years; and
• The Company hasn’t defaulted on any dividends or sinking fund installments (a store of money set aside and periodically added to pay off future debt).

The Investors’ Rights Agreement often describes the requirements for an Investor to demand that the Company register its shares in a follow-on public offering on Form S-3. This includes (1) the percentage of total registrable securities the Investor must own to make the demand (10-30%), (2) the offering price ($3-5 million), and (3) how many Form S-3 registrations are allowed (no more than two per year).

Notice that the requirements to register the Registerable Securities in a follow-on public offering on Form S-3 are a lower bar as compared to the Demand Registration rights requiring the Company to register the shares in an IPO.

Term Sheet Language: The holders of [[10-30]% of the] Registrable Securities will have the right to require the Company to register on Form S-3, if available for use by the Company, Registrable Securities for an aggregate offering price of at least $[3-5 million]. There will be no limit on the aggregate number of such Form S-3 registrations, provided that there are no more than [two (2)] per twelve (12) month period.

Registration rights give Investors who own Preferred Stock the right to require the Company to register its Common Stock with the Securities and Exchange Commission (“SEC”). Because Preferred Stock can only be freely sold on the public stock market once the Common Stock is registered, this is an especially important term for Investors.

Registration with the SEC is an expensive and time-consuming process for the Company. Initial registration takes a lot of time and effort, and the Company must continue to comply with periodic SEC reporting requirements.

Initial registration rights terms rarely dictate the registration process. That is a complicated process, and the Company’s investment banker and underwriter will decide those terms when and if the time comes. What should be negotiated is:

• Whether the registration rights are demand or piggyback (defined separately); and
• If a demand registration right is decided on, (1) how many times an Investor can demand registration, and (2) the size of registration Investors would be permitted to demand.

A few other terms are typical in registration rights provisions, defined separately:

• The rights of Investors to require the Company to use Form S-3 to register shares;
• Who pays for the registration expenses;
• Lock-up terms; and
• Termination of registration rights.

Representations and Warranties are important facts and assurances about the parties that they guarantee about one another. The Company makes statements regarding its capitalization, authority, key contracts, intellectual property and certain aspects of its business. Any exceptions to the Company’s statements can be modified by a Disclosure Schedule that is attached to the Stock Purchase Agreement. The Investors confirm they are “accredited” and otherwise able to take on the risk of their investment. Neither the Company nor the Investors should disregard them as boilerplate, and all parties should read them carefully.

S Corporations elect to pass corporate income, losses, deductions, and credits through to their stockholders for federal tax purposes. Stockholders report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates which allows them to avoid double taxation on the corporate income. However, the main limitations to S-Corps are that they must be owned by individuals (with a few exceptions for certain kinds of trusts), they cannot have more than 100 stockholders and they can only have one class of stock.

A SAFE is a type of Convertible Security that is a contract between a Company and an Investor used to raise capital during a financing round.

In exchange for a cash investment now, the contract gives the Investor a right to convert their SAFE into shares of Preferred Stock (typically in a separate Shadow Series) at a lower price per share than the new cash Investors in a subsequent Equity Financing.

To determine how much equity, the SAFE purchase amount is divided by a Conversion Price. The Conversion Price is determined based on the type of SAFE: (1) Valuation Cap, (2) Discount, (3) Valuation Cap + Discount, or (4) Most Favored Nation.

If the Company is sold or dissolves before an Equity Financing, then the SAFE converts into cash or equity.

The closing is the event in which the Investor sends funds to the Company and the Company issues the security. After you have firm commitments from Investors and the Board has approved the round and form of SAFE, these are the broad steps to closing the transaction:

• Get the SAFE signed by each Investor
• Investor sends funds
• Company confirms receipt and sends proof of payment to their legal representative
• Company countersigns the SAFE and sends a fully-signed copy to Investor

In an Equity Financing, the price per share is used to determine the total number of shares the Company will issue to SAFE holders. SAFEs often entitle holders to a share price that is lower than the price paid by Investors in the Equity Financing into which the SAFEs convert. This lower price, or Conversion Price, is calculated using a pre-negotiated Discount rate or Valuation Cap. The lower the Conversion Price, the more shares are issued to the SAFE holder and the more dilution the founders experience.

Shares of Preferred Stock issued to SAFE holders = Investment Amount / Conversion Price

An event that triggers conversion of a SAFE into capital stock of the Company. Including an Equity Financing, Dissolution or Liquidity Event.

SAFE holders with Discount conversion terms are entitled to a Discount (often 20%) to the price per share at which the SAFE converts in the next Equity Financing.

Conversion Price for Discount = price per share in next Equity Financing * (100% – Discount)

If there is a Liquidity Event before conversion or termination of the SAFE, the Investor will automatically be entitled to receive a portion of the Proceeds equal to the greater of (i) the SAFE purchase amount or (ii) the amount payable on the number of shares of Common Stock equal to the SAFE purchase amount divided by the Liquidity Price. The Liquidity Price used for this calculation depends upon the type of SAFE: Discount, Valuation Cap, or MFN, and generally conforms to the calculation of the applicable Conversion Price for each type of SAFE.

SAFE holders with Valuation Cap conversion terms are entitled to a ceiling, or cap, on the pre-money valuation at which the SAFE converts in the next Equity Financing. If the pre-money valuation in the Equity Financing goes above the cap, then the SAFE converts at the Valuation Cap regardless of the Company’s valuation in the next Equity Financing. If the pre-money valuation does not go above the cap, then the SAFE converts at the lowest price per share at which Preferred Stock is issued to new Investors.

Conversion Price for Valuation Cap = the lower of (1) the Valuation Cap divided by the Company’s Fully Diluted shares immediately prior to the Equity Financing, or (2) the lowest price per share at which Preferred Stock is issued to new Investors.

A Valuation Cap can be “pre-money” or “post-money” which differs based on whether outstanding convertible securities are included in the Company Capitalization when calculating the Conversion Price. Pre-Money valuation caps are generally better for founders and other existing stockholders.

SAFE holders get the Conversion Price that is the better (lower) of the prices resulting from the Discount or Valuation Cap methods of calculating the Conversion Price.

Section 409A governs “deferred compensation” which is defined as the legally binding right to receive compensation in a future year, after it is no longer subject to a substantial risk of being forfeited by the recipient. The IRS has created a special exception from the application of Section 409A for stock options, but only if the options are (1) priced at not less than the fair market value on the date of grant and (2) do not contain “deferral” features (e.g., liquidation preferences or put/call rights above fair market value).

Section 409A Valuation refers to the process by which a qualified independent third-party valuation firm determines whether stock options are exempt from Section 409A. To avoid adverse penalties under Section 409A, the exercise price per share of stock options must be equal to or greater than the fair market value of the company’s common stock as of the date of grant, as determined by the company’s board of directors. For a company to use a 409A valuation, it must be less than 12 months old and reflect all material information known at the time.

A security is a broad term for a financial instrument that gives the holder certain rights with respect to a Company. Shares of stock are securities, but the term includes options, warrants, notes, SAFEs and other instruments as well.

A Convertible Note is typically treated as debt because it is a loan. If the parties prefer a financing strategy that is treated as equity for tax purposes, consider using a SAFE.

The Memorandum of Offering Terms (aka “Term Sheet”) outlines the fundamental aspects of the deal and the expectations of the Company and the Investors for discussion and negotiation purposes. The Term Sheet is non-binding in that it doesn’t create an enforceable contract between the parties. The Term Sheet establishes the security offered, the overall investment amount, the expectations of the parties and the rights, privileges and conditions of the shares to be purchased by Investors.

Usually the lead investor (the investor putting the most money into the deal) serves up the initial draft of the term sheet, but the Company can do the first draft too, especially if there might be competition among Investors.

Absent extraordinary circumstances or passage of time past the Expiration Date (see Expiration Date below), it is hard for the Company or Investors to re-negotiate the terms in the Term Sheet, and any attempt to do so will be heavily scrutinized. So although the Term Sheet is non-binding, it needs to be drafted and reviewed very carefully.

Termination is when a Deemed Liquidation Event happens, and Investors’ registration rights go away. Examples include:

• At the point after the IPO when all Investors can freely sell their shares on the public market under Rule 144;
• 3-5 years following the IPO; and
• Following the acquisition of the Company.

Term Sheet Language: [Upon a Deemed Liquidation Event [in which similar rights are granted or the consideration payable to Investors consists of cash or securities of a class listed on a national exchange]] [and/or after the IPO, when the Investor and its Rule 144 affiliates holds less than 1% of the Company’s stock and all shares of an Investor are eligible to be sold without restriction under Rule 144 and/or] [T][t]he [third-fifth] anniversary of the IPO.

No future registration rights may be granted without consent of the holders of of the Registrable Securities unless subordinate to the Investor’s rights.

Trade debt is money payable by the Company to a supplier of goods or services received by the Company. Bank debt is a loan borrowed from a bank (typically long-term). These types of debt are different than the kind of debt evidenced by Convertible Notes because they are typically not convertible into equity and the lenders for these loans typically want more downside protection since their only financial upside is the interest payable on the debt.

The number of shares of Common Stock that are reserved and available for future Equity grants under the Company’s equity incentive plans, but which have not actually been granted or promised yet.

The Valuation of a company is how much the company is worth. It determines the price per share at which stock is sold. There are two different ways to discuss valuation: (1) pre-money valuation; and (2) post-money valuation.

A Vested Share Repurchase Right enables the Company to repurchase vested shares held by former service providers on or following their termination of service to the Company. The price for such repurchased shares can be equal to the original purchase price for such shares (which is often very low) or the fair market value of such shares at the time of repurchase, or the lesser of the two. The right can be triggered by the occurrence of specified events, such as a termination for “cause,” a breach of restrictive covenants (e.g., non-competition or non-solicitation), and often in the case of private equity-backed companies, merely the end of continued employment.

The Vesting Cliff refers to when equity granted to an employee or other service provider becomes fully or partially vested in one lump sum on a specified date rather than becoming partially vested in incremental amounts over a specified period (as in Incremental Vesting). A Vesting Cliff is often coupled with Incremental Vesting and forms the initial part of the standard 4-year vesting schedule.

Founders’ Stock are shares issued to the key team responsible for establishing the Company and coming up with the initial business plan and intellectual property. It is usually very important to make sure the Founders continue to be actively engaged in the Company after an investment round, so Investors require that the Founders’ Stock be subject to vesting for a sufficient period. The standard Founder vesting terms are 4-year vesting with 25% after one year and monthly thereafter. It is best to set up the Founders’ Stock with vesting from the beginning, but if it isn’t, then Investors will often require vesting to be imposed on those shares at the time of the first financing.