The Capdesk Equity Glossary
From shares to options and pre-emption to preferences, understanding equity can sometimes feel like learning to speak a new language. And to make matters more complicated, startups, law firms and VCs often add their own definitions into the mix.
Our mission? To make the language of equity accessible to everyone, so you can have meaningful conversations about the topic instead of simply translating what the other person is saying.
We designed this glossary for employees, founders and investors alike. Whether you’re brand new to equity or an expert on the topic, you’ll find useful definitions for all the essential equity terms inside.
Let’s get started!
409A valuation |
An independent assessment of the fair market value of a company’s ordinary shares, named after section 409A of the IRS Internal Revenue Code (IRC). |
Acquisition |
When one company buys a stake of more than 50% in another company to take majority ownership and control over it. |
Actual market value (AMV) |
A company’s share price, determined by valuing share options in light of certain restrictions found in shares issued to minority shareholders like employees. Restrictions include veto on transfers, risk of forfeiture and pre-emption provisions, among others. |
Anti-dilution |
A clause built into the terms of shares, warrants and convertible loan notes that shields investors from dilution. Even when new shares are created and issued, the stakeholders’ position in the company remains the same. |
Angel investor |
A high net worth individual who provides financial backing to startups or entrepreneurs in exchange for equity ownership in the company. Angel investors are a common form of funding for startups at seed stage. |
Articles of association |
Documentation that lays out rules for running a company, agreed upon by its shareholders, directors and company secretary. May include information on how shares are issued, what rights are granted to shareholders and how the option pool is authorised. |
Board of directors |
A group of individuals elected by a company’s shareholders to oversee its development and influence important decisions such as hiring and terminating the CEO. May include investors, mentors and C-suite executives. |
Board resolution |
The formal record of an agreement or decision made by a company’s board of directors. Used to adopt an EMI share plan and authorise the creation of an incentive pool. |
Bootstrapped |
A term used to describe a company financed by its own revenue or the founder’s personal capital instead of investors, crowdfunding or bank loans. |
Bridge loan |
A short-term loan providing a startup with immediate capital to cover expenses until the next major round of funding. Also known as a swing loan, typically no longer than 12 months. |
Burn rate |
A measurement of how fast a company with a negative cash flow is spending its capital. |
Capital gains tax (CGT) |
A tax on the profit (‘gain’) made by disposing of an asset that has increased in value. Only applies to gains above the tax-free allowance. Each jurisdiction carries different tax rates and exclusions. |
Cap table |
A capitalization table (or cap table) is a list of all the securities a company has issued and who owns them (stakeholders). Common shares, preference shares, options, warrants and convertible notes are all types of security that may feature on the cap table. Stakeholders listed may include founders, investors, advisors and employees. |
Cashless exercise |
A transaction that allows an employee to exercise share options without having to pay cash upfront to cover the exercise price. Also known as a same-day sale, a cashless exercise must be pre-organised with a broker. |
Cash flow |
The net balance of cash moving in and out of a business at a specific point in time. Positive cash flow means a company has more money moving into it than out, while negative cash flow indicates the reverse. |
Cliff |
A point in time after which employee equity on a vesting schedule begins to vest. Typically fixed at one year after the grant date. |
Common share |
A security that represents company ownership and allows the grantholder certain rights, such as electing the board of directors and voting on corporate policies. Also known as an ordinary share. |
Company share option plan (CSOP) |
A government-approved share scheme in the UK, in which options are available for exercise three years after the grant date and capital gains tax applies at the point of sale. Income tax and national insurance contributions do not apply. |
Companies House |
A government body that stores information on all the limited companies registered in the UK. Reports filed to Companies House include statutory accounts and annual returns. |
Convertible loan note (CLN) |
A short-term debt that is converted into equity shares at a later date. Typically allows the investor to receive a discounted share price based on the company's future valuation. The debt may be repaid or cancelled instead of being converted. |
Crowdfunding |
Funding raised by a large number of investors, including retail investors, who each contribute a small amount of capital. Typically managed through crowdfunding platforms and social media. |
Dilution |
A decrease in existing shareholders' ownership percentage of a company, as a result of the company issuing new equity. |
Down round |
Funding raised at a lower company valuation than the previous financing round. |
Due diligence |
The process of examining a company’s operations and finances, carried out by a potential investor or buyer. Includes financial records, product, team, contracts and supply chains. |
Employee share option plan (ESOP) |
A government-approved share scheme for awarding share options to employees. Entitles the company and employees participating in the scheme various tax benefits. |
Enterprise Investment Scheme (EIS) |
A UK investment scheme which helps companies to fundraise by incentivising investors with tax relief. |
Enterprise Management Incentive (EMI) |
The UK’s most popular employee share scheme. It provides a tax-efficient means of rewarding, incentivising and retaining qualifying employees. Among other benefits, participants pay no tax upon exercising their options, and only 10% capital gains tax on selling their shares. |
EMI annual return |
A compulsory annual filing submitted to HMRC that lists out all the relevant changes to a company’s EMI scheme within the tax year. Due annually on the 6th of July. |
EMI notification |
A compulsory filing submitted to HMRC within 92 days of issuing new grants under an EMI scheme. Provides information about new grantholders, the number of options issued, vesting schedules and exercise prices. To be discontinued from April 2024. |
Equity |
Any type of security that represents ownership in a company, such as common shares, growth shares, share options and warrants. |
Equity crowdfunding |
Funding raised by a large number of investors, including retail investors, who each contribute a small amount of capital. Typically managed through crowdfunding platforms and social media. |
Equity management |
The process of managing company ownership. Includes tracking and reporting changes in ownership, maintaining and submitting compliant documentation to local authorities, communicating with stakeholders and consulting the board of directors. |
Exercise |
The process of converting an option agreement’s underlying security, such as an employee purchasing company shares at the predefined strike price. |
Exercise window |
The window of time a former employee has to exercise their options after leaving a company. Exercise windows are set by the company and typically range from 30 days and 10 years. |
Exit |
An event – such as an IPO, merger or acquisition – that marks the sale or change in control of a company, in which shareholders exit by liquidating their equity. |
Exit strategy |
An investor or business owner’s plan for exiting a company by liquidating their equity. |
Fair market value (FMV) |
The accepted current value of a private company’s common shares, as determined by a 409A valuation. |
Fully diluted equity |
The total number of shares that would be held by each stakeholder if all of the company’s legal obligations towards its stakeholders were fulfilled. Includes repaying convertible notes and converting options into shares. |
Fund |
A pool of capital set aside for a specific purpose. For example, a venture capital firm will raise money to create a fund for investing into private companies at a particular stage or in a certain industry. |
Grant |
An agreement allowing the grantholder to purchase shares at a fixed price in the future. Options, warrants, share grants, RSUs and phantom or virtual shares are all grants. |
Growth share |
A type of share that allows the shareholder to benefit from future growth in company value. The growth can be counted from the date of issue or from a specific valuation hurdle. Also known as a share grant. |
HMRC |
Her Majesty’s Revenue and Customs, commonly abbreviated to HMRC. The UK government department responsible for collecting taxes from individuals and businesses. EMI and ERS annual returns are filed with HMRC. |
HMRC valuation |
An umbrella term for a company valuation approved by HMRC, for the purpose of issuing option grants under an EMI, CSOP or SIP scheme in the UK. It determines the lowest share price at which a company can issue options to its employees. |
Incentive pool |
A board-approved allocation of shares set aside by a company for employee equity awards. Also known as the option pool, it typically ranges between 10 and 20% of total company ownership. |
Investment round |
A round of funding raised by a private company from investors or venture capitalists, in exchange for equity. |
Initial public offering (IPO) |
The act of offering a company’s stock on a public stock exchange for the first time. |
Internal Revenue Service (IRS) |
The US federal government’s revenue service, responsible for collecting US federal taxes and implementing the Internal Revenue Code (IRC). |
Know your business (KYB) |
A security practice carried out by companies to verify the identity of other companies or suppliers in compliance with financial and legal regulations to avoid online fraud. |
Know your customer (KYC) |
A security practice carried out by companies to verify the identity of clients in compliance with financial and legal regulations to avoid online fraud. |
Leaver, bad |
An employee who leaves a company under specific circumstances, such as gross misconduct, which means they are longer entitled to any equity granted under an employee share scheme. Companies may set their own conditions for bad leavers. |
Leaver, good |
An employee who leaves a company under normal circumstances and has the right to purchase any vested shares within a fixed window. Exercise windows are typically set at 90 days from the employee’s departure. |
Liquidity |
The extent to which a security can be sold or purchased in the market at a price that reflects its current value. |
Liquidity event |
An event triggering the conversion of shareholders’ equity into cash. Includes an IPO, merger, acquisition or secondary transaction. |
Liquidation preference |
An investment contract clause which determines which shareholders are paid first and how much they receive when a company reaches a liquidity event. |
Market cap |
The open market valuation of a publicly traded company. Indicates the market’s perception of the company’s prospects as it reflects what investors are willing to pay for its stock. |
Notice of exercise |
Written notice of a grantholder’s desire to buy or sell the underlying security of their option contract. Also known as an exercise notice, this document specifies the number of options being converted. |
Notice of option grant |
A document given to each optionholder outlining the details of their issuance (e.g. the number of options granted, vesting schedule, exercise rules and strike price). |
Option |
A type of equity award which gives the optionholder the right to buy a certain number of shares at a fixed price in the future. |
Option agreement |
A legal contract that details the conditions that the optionholder must meet in order to purchase shares, and explains the terms associated with the purchase. |
Participation preference |
A contract clause giving a grantholder certain rights, including dividends and liquidation preferences. Typically introduced during an investment round. |
Pause vesting |
The suspension of the vesting schedule for a certain period of time due to circumstances such as parental or paid leave. Also known as delay vesting. |
Post-money valuation |
The estimated valuation of a company after it receives a round of funding, based on the value indicated by the investment round. |
Pre-clearance |
A term used to signify a company valuation approved by HMRC. While it’s not essential to secure HMRC pre-clearance before issuing option grants, doing so benefits a company and its employees. |
Pre-emption rights |
The right of first refusal offered to existing shareholders when new shares are issued. Often this is a contractual obligation related to anti-dilution preferences, designed to protect each stakeholder’s current ownership percentage in the company. |
Preferred share |
A share classification that gives shareholders a priority claim over earnings whenever dividends or assets are distributed. Does not relate to corporate governance or voting rights. |
Pre-money valuation |
The estimated valuation of a company at the point of fundraising, before it receives additional capital or any new shares are issued. |
Pre-seed investment |
Funding sought at the pre-seed stage, commonly from close friends, family and the founders themselves. Pre-seed investment may also come from angel investors or crowdfunding. |
Pre-seed stage |
The earliest stage of operating a startup. Often the period when a company establishes its minimum viable product (MVP). |
Refresher grant |
An additional equity award, typically offered to high-performing or long-standing employees. |
Restricted stock unit (RSU) |
A type of equity award which grants the right to shares at a fixed price in the future. RSUs are not exercised, but instead are issued automatically as they vest. |
Retail investor |
A non-professional investor who typically buys and sells securities through brokers, trading apps, crowdfunding platforms or mutual funds. |
Reverse vesting |
An inverse vesting process, where shares are granted upfront but may be repurchased by the company if the shareholder leaves during the vesting period. Typically applied to founder equity awards. |
Right of first refusal |
A contractual right giving a company’s existing investor the option to take part in a transaction before the company enters that transaction with a third party. |
Round modelling |
The process of calculating the potential impact of new funding on the company cap table, including the dilution of existing shares. |
Run rate |
A measurement of the financial performance of a company based on current financial information. Can be used to predict future performance. |
Safe harbor |
A legal provision which means 409A valuations performed by an independent provider are presumed to be reasonable. |
Save As You Earn (SAYE) |
A UK government-approved share scheme allowing employees to buy shares in a company by setting aside a portion of salary each month. Among other benefits, participants pay no tax upon exercising their shares, and only 10% capital gains tax on selling them. |
Scenario modelling |
The process of examining and evaluating possible future scenarios for a company, such as new funding rounds. Used to understand how a scenario may impact company ownership or shareholder payouts. |
Secondary market |
A market where investors purchase company equity from other investors or shareholders, rather than from the issuing company. |
Secondary transaction |
The sale of existing shares in a private company. Secondaries can take many forms, from a 1:1 share transfer between two stakeholders to multiple buyers, multiple sellers and even unknown buyers sourced from a secondary marketplace. |
Security |
A financial instrument that represents company ownership. May take many forms including ordinary shares, preferred shares, share options and convertible loan notes. |
Seed Enterprise Investment Scheme (SEIS) |
A government-approved scheme which offers tax relief and benefits to investors in return for investment in small or early-stage startups in the UK. |
Seed round |
Funding sought at the seed stage, commonly from close friends, family and the founders themselves. Seed investment may also come from angel investors or crowdfunding. |
Series A |
A round of funding that follows the seed stage. Typically sought once a company has developed a core product and user base. Venture capital firms are the most common investors at series A. |
Series B |
A round of funding that follows the series A. Typically sought in order to increase market reach and scale the company. Venture capital firms are the most common investors at series B. |
Share |
A unit of ownership in a specific company. |
Share capital |
The nominal value of all the shares issued by a private company. |
Share class |
A classification that indicates the level of shareholder ownership in a company in relation to voting rights and liquidation preferences. |
Share Incentive Plan (SIP) |
A tax-advantaged share plan that offers companies the ability to award equity to employees. Shares awarded under a SIP are held in a trust and must be held for at least five years to qualify for tax-relief benefits. |
Share option plan rules |
The blueprint for an employee share scheme. Sets out company policies including optionholders’ rights, the treatment of leavers and option lapsing. These rules apply to all employees on the scheme, and must be approved and adopted by the board of directors. |
Share price |
The price paid per single share of a company, as determined by the particular conditions of the transaction. Share price varies depending on factors including share class, investment round and shareholder type. |
Share split |
The process of dividing a share into two or more parts. The total value of the original share is unchanged, but split across multiple parts. |
Shareholders' agreement |
A document outlining shareholder rights and obligations, the relationship between shareholders, the financing and management of the company, and share-related policies. Designed to minimise disputes and protect shareholders in the event of a crisis. |
Shareholder register |
A list of active owners of a company's shares and the number of shares they own. Different jurisdictions require different levels of detail to feature on the register. Also known as register of members in the UK. |
Shares and assets valuations (SAV) |
A specialist team within HMRC that manages requests for share scheme valuations, and ensures share options are issued to employees at a fair price. |
Simple Agreement for Future Equity (SAFE) |
An agreement between an investor and a company, giving the investor the right to future equity in the company without determining a specific price per share at the point of investment. |
Significant event |
An event which affects a company’s value, and therefore its share price. Significant events call for a new company valuation to be performed. Known as a material event in the US. |
Share Appreciation Right (SAR) |
A type of compensation granted to employees that does not rely on an exit event for a pay out. It is linked to the company's share price during a predetermined period. When the share price rises, employees receive the sum of the increase in shares or cash. |
Stock |
Another term for share, a unit of ownership in a specific company. Commonly used in the US. |
Strike price |
The price paid per share by an employee grantholder to exercise their shares. Typically heavily discounted from the investor share price. |
Trigger event |
An event that signals the conversion of an option, convertible note, warrant or other convertible grant into equity. Most commonly, these are an IPO, a significant funding round, or a change of control in the company. |
Term sheet |
A nonbinding agreement summarising the key deal terms of a funding round. Serves as a basis for detailed, legally binding documents. |
Unapproved share option plan |
A share plan which doesn’t need pre-clearance from local tax authorities and doesn’t provide any specific tax advantages. Grants are not limited to employees of the company. |
Unrestricted market value (UMV) |
A company’s share price determined by valuing all shares as if they have no restrictions, presuming all shares can be sold equally easily. |
Unvested share |
An equity award that has been allocated to a particular grantholder, but is not yet available to convert into a common share. Until the terms of the vesting schedule are met, the grantholder only has the right to purchase the share in the future. |
VAL231 |
The form submitted to HMRC in order to get an EMI valuation. Must include a proposed unrestricted market value and actual market value. |
Valuation |
The estimated monetary value of a company, based on existing capital, previous raises, perceived market fit and growth potential. |
Valuation cap |
The upper limit of a company valuation at which an investor can convert their convertible loan note or SAFE into equity. Often set to protect early investments. |
Venture capital (VC) |
A form of private equity financing provided by venture capitalist firms. VCs typically invest in startups which are growing rapidly and have high potential.
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Vesting |
The process of earning an asset or equity award like share options. The grant is awarded over time according to a vesting schedule. When options are fully vested, the grantholder is entitled to the full grant. |
Vesting schedule |
A schedule which determines when a grantholder is entitled to their equity award. Typically begins with a cliff, after which shares vest at regular intervals for the duration of the schedule. |
Virtual share |
An equity award that entitles the shareholder to a cash payment in case of an exit event. The cash payment corresponds to the market value of company shares at that point, minus the hurdle price where applicable. Also known as a phantom share. |
Virtual share option plan (VSOP) |
A share scheme for awarding virtual share options to employees under the German legal system. |
Voting rights |
The right of a shareholder to vote on certain company matters beyond the scope of the board of directors. |
Warrant |
A type of equity award which gives the warrantholder the right to buy a certain number of shares at a fixed price in the future. |
Waterfall analysis |
The process of calculating possible future payouts for each shareholder in the case of an exit event. |
