The Equity Glossary

The most common equity-related terms and terminologies, explained.

In its wider definition, equity refers to the financial ownership of an asset, subtracted by any debts or other liabilities attached to it. In the startup lexicon, it is usually mentioned as shareholder equity: an ownership interest in a company that comes in the form of common stock or other types of assurances.

The capitalization table, as its name indicates, is a table that sums all the equity funding and distribution in a company. Simply put, a cap table shows who has what piece of the pie and how many pieces. The cap table may be managed through a spreadsheet such as Excel or via an automated system like Altshare.

Every company will have to manage a cap table at a certain point. The job is usually given to a trustee (or a lawyer), a CFO, or a founder. The responsible person is usually picked as a verdict of the company's size and all-around capabilities.

Every company’s ownership is distributed into fractions called "stocks." The "common stock" is the basic one. Other stocks might enjoy benefits other than just part ownership of the company, but common stock does not. 

A founder’s stocks are usually considered common stock unless they are specifically defined otherwise. When a company is still in its private stages, it evaluates an estimated common stock value and calculates every other equity transaction at its rate.

Any stock that enjoys benefits surpassing those of common stock is considered preferred stock. The benefits frequently given are: premium price per share and priority payments in the case of an exit or liquidation.

When offered to employees, Often referred to as grant-based compensation, stock options are a contract that gives an employee an option to buy a predefined amount of the company's shares at a pre-defined time or event and price (the exercise price). When a founder creates his company and breaks it into shares, he will often allocate a certain number of shares to an "option pool" to be reserved for future employees’ exercising options in shares.

These are the stock option related keywords:

  • Exercise Price-the set price at which a stock option is converted into stock.
  • Unvested-Hasn't met the requirement for purchase yet.
  • Vested-available for purchase
  • Unallocated-Available to be offered out of the options pool
  • Allocated (outstanding)-Already offered, out of the option pool
  • Exercised-Converted into stocks

Paying the predetermined (in the grant letter) cost of converting vested options into company stocks, and signing an exercise notice.

A convertible note is a type of short-term financial debt that converts into equity, typically following a financial event.

A form of "convertible notes," SAFE or a CLA, defines a future ownership of a company's shares to be given to an investor for his funding at present. The time for the transaction is pre-defined by trigger events, such as a new funding round, M&A, etc.

The exercise price of stock options granted to US citizens must be equal to the underlying stock's fair market value ("FMV") at the grant date, or higher, in order to be exempt from section 409A of the US IRC. 409A Valuation is an independent evaluation of the company’s common stocks' fair market value (FMV). A 409a valuation is valid for the first 12 months or until any material event that might change the FMV occurs.

The shareholders reduction of ownership (in-%) after a new stock issuance. For example, a founder owned 100% of his company’s 10 million stocks. After a funding round in which 5 million new stocks were issued to investors, he was diluted and now owns 66% of the company.

The percentage of ownership each shareholder has after every equity distribution has been taken into consideration (including future liabilities and convertibles)

The process of looking for and obtaining funds for your company. A startup’s funding rounds are usually given a letter of indication by the order of the alphabet (A round, B round, etc.).

The first round of funding for a startup is commonly referred to as "Seed Round". The seed investors are commonly the founders themselves, as well as angel investors, and sometimes ventures specializing in seed round investments.

A trustee takes legal ownership of the assets and holds an agreed-upon responsibility for managing those assets and carrying out the purposes of the trust.

A thorough investigation is meant to make sure every aspect of a company checks out. Due diligence is often conducted before any major financial event (such as a merger, investment, etc.).

The plan in which a company specifies the guide-lines of how and under what conditions an employee will receive his stock options.

Unique dictation on the correct way to address any taxation regarding stock options given to Israeli employees in. It dictates specific attributes to be followed in order to enjoy a significant tax reduction with regard to the stock options.

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