Term Sheet Vocabulary

Question 1

Post-Money Valuation

Answer 1

The value immediately following the investment

= Investment / Percent Ownership

Question 2

Pre-Money Valuation

Answer 2

The value immediately before an investment

= Post-Money Valuation - Investment

Question 3

Fully Diluted

Answer 3

The number of outstanding shares includes shares that could be issued under a Warrant or an Equity Incentive Plan

= Shares Outstanding + Stock Option Program

Question 4

Equity Incentive Plan

Answer 4

Start-ups typically can’t pay full salaries.

For tax reasons, strike price is usually at or above the price at grant

Question 5

Vesting

Answer 5

The employee will only receive the grant if he or she continues to work at the company

Question 6

Warrant

Answer 6

Gives an investor an option to purchase an interest in the future

Question 7

Conversion Discount

Answer 7

Can be in the form of convertible debt or preferred stock. In either case, the investment converts into the investment that is issued in the future financing, usually at a discount of 10% - 20%

Price Paid = Share price * (1 - Discount)

Question 8

Liquidation Preference

Answer 8

The preference is normally the amount invested, but could be a multiple of this amount

Question 9

Participation

Answer 9

It is common for start-up investors to receive a preferred security (with a Liquidation Preference) that either converts to common equity or participates in the equity upside with common equity following receipt of the Liquidation Preference

Question 10

Pre-emptive Rights

Answer 10

the right to invest in future rounds to preserve their percentage ownership

Question 11

Anti-Dilution Protection

Answer 11

Issuing the existing investors additional shares if shares are being sold for less than they paid

Question 12

Pay to Play

Answer 12

Lead investor may require that all investors must continue to participate in future rounds or lose certain rights, such as their liquidation preference

Question 13

Protective Provisions

Answer 13

Certain major corporate events, such as a sale, must be agreed to by a majority or super-majority of each class of shares

Question 14

Information Rights

Answer 14

Periodic delivery of financial statements and timely tax information

Question 15

Drag-Along Rights

Answer 15

If one group of shareholders agrees to a sale, all of the other investors must agree as well.

Question 16

Tag-Along/Co-Sale Rights

Answer 16

One group of investors cannot sell shares unless all other investors have the opportunity to participate in the sale on a pro-rata basis

Question 17

Right of First Refusal

Answer 17

Investors may ask for the right to invest in the future at terms agreed to by the company with another investor

Can make it more difficult to raise money as it introduces a third party into the negotiations

Question 18

Assignment

Answer 18

Sale of shares is usually highly restricted except to certain affiliated parties

Question 19

Contingency

Answer 19

Investor may want to condition the investment on certain milestones being hit

Question 20

No Shop Provision or Exclusivity

Answer 20

Start-up will often be asked to refrain from trying to raise money from other potential investors for a fixed period of time

Question 21

Cap Table

Answer 21

Table of equity capitalization