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!

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Acquisition

When one company buys a stake of more than 50% in another company to take majority ownership and control over it.

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 and what rights are granted to shareholders.

 

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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.

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.

 

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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.

 

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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.
 
 
 
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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.

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. After the window closes, the options lapse and return to the incentive pool.

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.
 

 

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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.

 

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Grant

An agreement allowing the grantholder to exercise 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.

 

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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.

 

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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.

 

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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.

 

L-1

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.

 

M

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.

 

O-1

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.

 

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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-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).

 

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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.

 

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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.

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.

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 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 price

The price per single share of a company, as determined by the current valuation divided by the total number of shares.

Share split

The process of dividing a share into two or more parts without creating new shares. The total value of the original share is unchanged, but split across multiple parts.

Shareholder agreement

A document outlining shareholder rights and obligations, the relationship between shareholders, the management of the company and the way the company agrees to operate.

Share

A unit of ownership in a specific company.

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.

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.

 

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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.

 

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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.

Unapproved share option plan

A share plan which doesn’t need approval from local tax authorities and doesn’t provide any specific tax advantages. Grants are not limited to employees of the company.

 

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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.

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 shares 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.

 

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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.

 


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