83(b) Election
A tax filing that lets you pay taxes on stock at its current value rather than when it vests. Must be filed with the IRS within 30 days of receiving restricted stock. Missing this deadline can result in significant unexpected tax liability.
Acceleration
A clause that speeds up vesting under certain conditions, typically an acquisition or termination. Single-trigger acceleration vests on one event (like acquisition). Double-trigger requires two events (acquisition plus termination).
Anti-Dilution
A protection that adjusts an investor's ownership if the company raises money at a lower valuation (a "down round"). Weighted average anti-dilution is founder-friendly; full ratchet is investor-friendly.
Cap Table
Short for capitalization table. The record of who owns what in a company, including founders, investors, employees with options, and any other shareholders. Investors scrutinize this before investing.
Cliff
A vesting rule that requires someone to stay a minimum time before earning any equity. The standard cliff is one year. If someone leaves before the cliff, they get nothing.
Contribution Tracking
A system for recording what each person puts in, usually time, cash, revenue impact, or IP. Essential for dynamic equity models where ownership reflects actual contributions.
Dead Equity
Equity owned by someone who no longer contributes meaningful value—departed co-founders, inactive advisors, or former employees. It creates resentment, limits your ability to incentivize current contributors, and can scare off investors.
Dilution
The reduction of an owner's percentage when new shares are issued. Dilution happens during fundraising, when expanding an option pool, or when converting notes or SAFEs. A smaller percentage of a larger pie can still be worth more.
Dynamic Equity
A method for splitting ownership based on real contributions over time, not guesses upfront. Ownership adjusts as people add time, cash, revenue, or other measurable value. Must be converted to a fixed cap table before raising institutional funding.
Equal Split
A founder split where everyone gets the same percentage (typically 50/50 for two founders). Can be fair when contributions are truly equal, but often becomes unfair as effort and commitment diverge over time.
Exercise
The act of using stock options to buy shares at the strike price. After exercise, the option holder becomes an actual shareholder. Exercising usually requires paying cash and may trigger tax obligations.
Fair Market Value
The price something would sell for in a normal market between willing parties. Used to value services, assets, or shares. For private companies, typically established through a 409A valuation.
409A Valuation
An independent estimate of a private company's share value, required to set exercise prices for employee stock options. Helps companies comply with IRS tax rules. Typically updated annually or after significant events.
Founder Equity Split
The initial division of ownership among founders. A good split reflects roles, risk, commitment level, and expected contribution—not just friendship or convenience.
Liquidation Preference
An investor right to get paid before common shareholders in an exit. A 1x non-participating preference means investors get their money back first. A 2x participating preference means they get 2x their investment plus a share of what's left.
Liquidity Event
A moment when ownership can turn into cash, such as an acquisition or IPO. Secondary sales can also create limited liquidity for some shareholders.
Option Pool
A reserved slice of equity set aside for future employee grants, typically 10-20% of the company. Created before fundraising, the dilution usually comes from founders, not investors.
Pro-Rata Rights
An investor's right to participate in future funding rounds to maintain their ownership percentage. Helps investors avoid dilution, but can complicate later rounds if too many investors have these rights.
Restricted Stock
Shares issued now but subject to vesting or repurchase if someone leaves. Founders typically receive restricted stock at formation. Unlike options, you own the shares immediately but may forfeit them if you leave early.
Stock Options
A right to buy shares later at a fixed price (the strike price). Options typically vest over four years with a one-year cliff. Common for employees; you don't own shares until you exercise.
Strike Price
The price per share you pay when exercising stock options. Set at fair market value when options are granted, typically based on a 409A valuation. If the company's value grows, you profit from the difference.
Sweat Equity
Equity earned through work instead of cash investment. Common for founders and early contributors who can't take market salaries. The value is typically calculated based on hours worked at a fair market rate.
Term Sheet
A summary of key deal terms for an investment, usually non-binding except for exclusivity and confidentiality. Covers valuation, dilution, board seats, liquidation preferences, and investor rights.
Vesting
A schedule that earns equity over time instead of all at once. Standard is four years with a one-year cliff. Vesting protects the company and remaining founders if someone leaves early—they only keep what they've earned.
Voting Rights
The ability to vote on company decisions like board elections or major transactions. Common stock typically has voting rights. Some preferred stock has enhanced voting rights on specific matters.
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