Startup Law Glossary: 75+ Terms Every Founder Should Know

Building a startup requires navigating unfamiliar legal and financial terminology. This comprehensive glossary covers the essential startup law terms every founder should understand — from equity compensation and securities regulations to tax implications and corporate structure. Whether you're raising capital, granting options to employees, or planning for an exit, this reference guide breaks down complex concepts into practical, actionable knowledge.

Note: This is a living document. We regularly update it with new terms and clarifications. Last updated April 2026.

Jump to: A | B | C | D | E | F | G | I | L | M | N | O | P | Q | R | S | T | V | W

A

83(b) Election

A tax election that allows founders and employees receiving restricted stock to begin the vesting period immediately, triggering immediate taxation on the grant date rather than as the shares vest. This election is filed with the IRS within 30 days of receiving restricted stock and can create significant tax advantages if the stock price is low at grant. Learn more about 83(b) elections.

Accredited Investor

An investor who meets SEC income or net worth thresholds and is therefore allowed to invest in certain private securities offerings under Regulation D. Individual accredited investors must have annual income exceeding $200,000 (or $300,000 jointly) or a net worth exceeding $1 million (excluding primary residence). Read our complete guide to accredited investor rules.

Accelerated Vesting

A provision in a stock option or restricted stock agreement allowing shares to vest faster than the normal schedule in certain triggering events, typically upon a change of control or founder departure. Accelerated vesting can be full (all remaining shares vest immediately) or partial (a percentage vests upon the trigger event). This provision protects founders and key employees in acquisition scenarios.

Alternative Minimum Tax (AMT)

A federal tax system running parallel to the regular income tax system that aims to ensure high-income taxpayers pay a minimum amount of tax. Exercise of incentive stock options (ISOs) can trigger AMT, and founders should understand the potential impact when planning large option exercises.

Anti-Dilution

A provision protecting investors in a down round (fundraising at a lower valuation than previous rounds) by adjusting the conversion ratio or price of their preferred stock. Anti-dilution protections come in two main forms: "broad-based weighted average" (less punitive to founders) and "narrow-based weighted average" or "full ratchet" (more protective of investors). Explore anti-dilution provisions in depth.

Articles of Incorporation

The foundational legal document filed with the state that creates a corporation and establishes its basic structure, including the number of authorized shares, classes of stock, and initial board composition. Also called the "certificate of incorporation," this document is a matter of public record and can be amended through shareholder vote.

B

B&O Tax (Business & Occupation Tax)

Washington State's primary business tax based on gross revenue, not net income, with different rates depending on business classification. Washington's B&O tax applies to most service companies, product manufacturers, and retailers operating in the state, and founders should factor this into their Washington operations planning. See our Washington tax guide for more details.

Board of Directors

The governing body elected by shareholders to oversee company management and strategy on their behalf. In a startup, the board typically includes founders, investor representatives, and independent directors, and holds fiduciary duties to act in the company's best interests.

Blue Sky Laws

State laws regulating the offering and sale of securities within each state, separate from federal SEC regulations. Even if your offering complies with federal Regulation D, you must also satisfy the blue sky laws of any state where you sell securities.

Bylaws

The internal governance rules adopted by a corporation that establish procedures for board meetings, shareholder votes, officer duties, and other operational matters. Unlike the articles of incorporation, bylaws are not filed with the state and can typically be amended by the board without shareholder approval.

C

409A Valuation

An independent valuation of company equity performed by a third-party appraiser to determine fair market value for tax purposes under Section 409A of the Internal Revenue Code. This valuation is crucial for setting stock option exercise prices and avoiding adverse tax consequences, and should be updated annually or upon major financing events. Learn about 409A valuations for startups.

Cap Table (Capitalization Table)

A spreadsheet showing the complete ownership structure of the company, listing all equity holders (founders, employees, investors, and option holders) and their percentage ownership. The cap table must be meticulously maintained and updated with each financing round, option grant, and vesting event. Read our cap table management guide.

Capital Gains Tax

The federal tax on profits from selling an investment or asset, with long-term capital gains (held over one year) taxed at preferential rates of 0%, 15%, or 20% depending on income. Founders should understand capital gains implications for selling shares in a startup exit, especially in combination with QSBS benefits.

C Corporation

The standard corporate structure used by most venture-backed startups, where the company is taxed as a separate entity and profits can be retained or distributed to shareholders as dividends. C corporations allow multiple classes of stock (useful for investor preferred stock) and are favored by VCs due to their compatibility with venture financing structures.

Cliff (Vesting Cliff)

The initial period in a vesting schedule during which no shares vest, after which vesting accelerates (typically monthly or quarterly). A common startup vesting structure is a 1-year cliff with 4-year total vesting, meaning no shares vest for 12 months, but 25% vest on the cliff date, then 1/48th per month thereafter.

Common Stock

Shares of ownership in the company typically granted to founders and employees, with equal voting rights per share but subordinate liquidation preferences compared to preferred stock. Founders and most employees receive common stock options or restricted common stock, while early investors typically receive preferred stock with more protections.

Convertible Note

A short-term debt instrument that converts to equity (usually preferred stock) upon a future qualifying financing event or at a specific maturity date. Convertible notes are popular for early-stage fundraising because they defer valuation discussions and include investor incentives like discount rates and valuation caps. Explore convertible notes in detail.

Corporate Structure Terms

See individual entries for Articles of Incorporation, Board of Directors, Bylaws, C Corporation, Delaware Corporation, Fiduciary Duty, Franchise Tax, LLC, Operating Agreement, S Corporation, and Shareholders' Agreement.

D

Delaware Corporation

A corporation formed under Delaware law, favored by venture-backed startups for its well-developed corporate law, specialized Chancery Court, and investor-friendly statutes. Most VCs expect portfolio companies to be Delaware C corporations because of the predictable legal framework and established case law.

Discount Rate

The percentage discount convertible note investors receive on the conversion price when converting to equity in a qualified financing round, typically ranging from 15-30%. A 20% discount means an investor converting at a $20 million valuation round gets shares as if the round valued the company at $16 million (20% lower).

Disqualifying Disposition

The sale of shares acquired through incentive stock options (ISOs) that doesn't meet the holding requirements, resulting in loss of favorable tax treatment and ordinary income tax on the entire gain. A disqualifying disposition occurs when you sell ISO shares within two years of grant or one year of exercise, converting what would be long-term capital gains to ordinary income.

E

Early Exercise

The practice of exercising stock options before they vest, purchasing all granted shares upfront and triggering immediate vesting acceleration through an 83(b) election. Early exercise is attractive to founders and key employees because it locks in a low exercise price and can significantly reduce tax burden if filed properly.

Equity Compensation Plan

The formal plan adopted by the board establishing terms for granting stock options, restricted stock, restricted stock units, or other equity awards to employees and consultants. The plan must reserve shares for issuance and comply with Section 409A tax rules and any applicable securities law exemptions. Learn about stock option plan administration.

ESSB 6346

Washington State's landmark capital gains tax law passed in 2021, imposing a 7% tax on long-term capital gains over $250,000 for Washington residents and entities. This law has significant implications for founders selling shares in a startup exit and applies to QSBS gains. Read our Washington capital gains tax guide.

Exercise Price (Strike Price)

The price per share at which an option holder can purchase shares under a stock option agreement, typically set at fair market value on the grant date. Exercise price is crucial because the gain from exercising options is the difference between exercise price and current stock value.

F

Fair Market Value (FMV)

The price at which property would change hands between a willing buyer and seller in an arm's-length transaction, used for valuing company equity for tax and option pricing purposes. FMV is typically established through a 409A valuation and is critical for ensuring compliance with tax rules.

Fiduciary Duty

The legal obligation of directors and officers to act in good faith and in the best interests of the company and all shareholders, not just particular investors or themselves. Fiduciary duty encompasses duties of care (making informed decisions) and loyalty (avoiding conflicts of interest).

Form D

The SEC form used to notify the SEC of an exempt offering under Regulation D, typically filed after the first sale of securities. Form D filing is required within 15 days of first sale and helps the SEC track unregistered offerings, though it does not constitute SEC registration.

Founder Vesting

The schedule under which founder shares vest over time, establishing both an incentive to remain with the company and a mechanism to reclaim unvested shares if a founder departs. Standard founder vesting is often 4 years with a 1-year cliff, though terms vary by agreement and circumstance. Explore founder vesting schedules.

Franchise Tax

An annual tax assessed by states on corporations for the privilege of doing business, typically based on a company's net worth, revenue, or authorized shares. Delaware's franchise tax is particularly important for Delaware corporations and should be factored into annual compliance costs.

G

General Solicitation

Public advertising or marketing of a securities offering (beyond a pre-existing relationship), which is generally prohibited in Regulation D offerings except under Rule 506(c). Rule 506(c) allows general solicitation but requires all investors to be verified accredited investors, while Rule 506(b) bans general solicitation entirely.

Golden Parachute

Severance or acceleration arrangements for executives upon a change of control, which can trigger tax consequences under Section 280G if the payments exceed 3x the executive's base amount. Founders and key executives should understand the tax implications of golden parachute provisions in acquisition scenarios. Learn about golden parachute tax implications.

I

Incentive Stock Option (ISO)

A tax-qualified stock option eligible for favorable long-term capital gains treatment if holding requirements are met (exercised, then held 2+ years from grant and 1+ year from exercise). ISOs have a $100,000 per-year vesting limit and are subject to alternative minimum tax, but offer significant tax advantages compared to non-qualified options. Compare ISOs and NSOs.

L

Liquidation Preference

The right of preferred stockholders to receive distributions before common stockholders in a company liquidation or exit, typically at least their initial investment. A 1x non-participating preference means investors get at least their money back before founders; more aggressive preferences (2x, 3x, or full ratchet) can eliminate founder proceeds in modest exits.

LLC (Limited Liability Company)

A business structure providing liability protection like a corporation but with pass-through taxation like a partnership, often used for real estate or service businesses. Most venture-backed startups use C corporations rather than LLCs because investors prefer the C corp structure.

M

MFN (Most Favored Nation)

A provision in convertible note or SAFE agreements entitling the investor to the best terms offered to any other investor in subsequent convertible notes or SAFEs. An MFN clause protects early investors by automatically granting them any better discount rates or valuation caps negotiated with later investors.

N

Nonqualified Stock Option (NQO/NSO)

A stock option not meeting the requirements for ISO status, subject to ordinary income tax on the gain between exercise price and fair market value at exercise. NSOs offer more flexibility than ISOs (no annual vesting limit, can be granted at any price) and are commonly used for consultants and broad-based employee grants. Learn ISO vs. NSO differences.

O

Operating Agreement

The foundational governing document for an LLC establishing management structure, member rights, profit distribution, and operational procedures. Operating agreements are not filed with the state but are essential for defining the relationship between LLC members and protecting their liability protection.

Option Pool

The shares reserved under the equity compensation plan available for future issuance as employee stock options or other equity awards. Investors typically expect option pools of 10-20% of fully-diluted share count to provide adequate recruiting and retention incentive for key hires.

P

Phantom Stock

A virtual equity award representing the right to cash payments equal to the appreciated value of company shares, without actual share ownership. Phantom stock is useful when real share grants aren't practical, such as for consultants or in private partnerships, but doesn't provide voting or liquidation rights.

Post-Money Valuation

The company valuation calculated after a financing round closes, equal to the pre-money valuation plus the investment amount. Post-money valuation determines the investment percentage and stock price for new investors and is the basis for calculating founder dilution.

Pre-Existing Substantive Relationship

A prior business or investment relationship satisfying Regulation D requirements, allowing issuers to accept investments from non-accredited investors under Rule 506(b). Without a pre-existing substantive relationship, Rule 506(b) offerings are limited to accredited investors. Read about pre-existing substantive relationships.

Pre-Money Valuation

The company valuation before a financing round closes, used as the basis to calculate the investment price and investor ownership percentage. Pre-money valuation is negotiated between founders and investors and determines how much dilution founders experience in the round.

Preferred Stock

Stock with preferential rights such as liquidation preference, dividend rights, or redemption rights, typically issued to institutional investors in venture financing rounds. Preferred stock usually includes voting control through board seats and protective provisions while common stock is held by founders and employees.

Private Placement

The sale of securities directly to a limited number of accredited or qualified investors without a public offering or SEC registration. Private placements are exempt from registration requirements under Regulation D and other exemptions, allowing private companies to raise capital efficiently.

Pro-Rata Rights

The right of investors to participate in future financing rounds proportional to their ownership, allowing them to maintain their ownership percentage. Pro-rata rights are a standard investor protection in venture financings, sometimes called "preemptive rights" or "participation rights."

Profits Interest

A partnership equity award granting a partner the right to share in future profits and appreciation without having to pay the fair market value of current equity. Profits interests are commonly used in partnerships and LLCs as a tax-efficient alternative to restricted stock for taxable entities.

Q

QSBS (Qualified Small Business Stock)

Stock in a C corporation meeting IRS requirements, eligible for federal tax deferral and exclusion of up to $10 million in capital gains under Section 1202. QSBS is one of the most powerful tax benefits for founders and early investors, allowing complete tax-free treatment of gains if held for 5+ years. Explore QSBS and Section 1202 in detail.

R

Regulation A+ (Reg A+)

"Mini-IPO" regulations allowing companies to raise up to $75 million through public offerings without full SEC registration, though companies must still comply with state blue sky laws. Reg A+ is rarely used by early-stage startups but can be attractive for later-stage growth companies seeking capital without a full IPO.

Regulation CF (Reg CF)

The "crowdfunding" exemption allowing companies to raise up to $5 million annually from non-accredited investors through SEC-registered crowdfunding platforms. Reg CF is useful for companies with large consumer bases but includes significant compliance obligations and limited investor sophistication.

Regulation D (Reg D)

The primary federal exemption from SEC registration for private securities offerings, including Rules 504, 506(b), and 506(c) with varying investor restrictions and disclosure requirements. Most venture-backed startups rely on Regulation D exemptions (primarily Rule 506(c)) for equity financing rounds. Learn about Regulation D in detail.

Restricted Stock

Shares of company stock with restrictions on transfer and vesting, taxed upon grant at fair market value unless an 83(b) election is filed. Founders sometimes receive restricted stock instead of stock options because the shares exist immediately, though this requires careful tax planning.

Restricted Stock Unit (RSU)

A contractual right to receive shares at a future vesting date, typically used for equity awards in later-stage companies or international employees. RSUs are not technically shares until they vest, but are commonly used as an alternative to stock options.

Rule 701

An SEC exemption allowing companies to issue securities under written compensatory benefit plans (like stock option plans) without registration or Reg D compliance. Rule 701 is essential for early-stage startups as it allows option grants to employees and consultants with minimal securities law compliance. Read our Rule 701 guide.

Rule 504

The most permissive Regulation D exemption allowing any company (including non-reporting companies) to raise up to $10 million annually from unlimited investors. Rule 504 offerings are rarely used by venture-backed startups because they allow general solicitation but require ongoing state blue sky compliance.

Rule 506(b)

The traditional Regulation D exemption for unlimited capital raises from accredited investors plus up to 35 non-accredited investors with prior relationships, prohibiting general solicitation. Rule 506(b) has been the standard for venture fundraising but requires the issuer to reasonably believe investors are accredited. Compare Rule 506(b) and 506(c).

Rule 506(c)

The amended Regulation D exemption allowing unlimited capital raises from accredited investors only, with verified accreditation and permission for general solicitation. Rule 506(c) is increasingly popular for venture fundraising because it allows marketing but requires stricter investor verification. Compare Rule 506(b) and 506(c).

S

SAFE (Simple Agreement for Future Equity)

A lightweight investment instrument converting to equity upon a future qualifying event (Series A financing, IPO, or acquisition), without interest or maturity date. SAFEs are popular for early-stage fundraising because they're simpler than convertible notes and move valuation discussions to the Series A round. Explore SAFEs in detail.

Stock Appreciation Right (SAR)

A right allowing the holder to receive cash or shares equal to the appreciation in company stock value over the grant price, without requiring exercise payment. SARs are less common than options but offer benefits in certain tax or incentive structures.

S Corporation

A tax-elect designation for a C corporation allowing pass-through taxation with up to 100 shareholders, subject to strict ownership and structure requirements. Most startups don't elect S corporation status initially but may do so later to reduce self-employment taxes once profitable.

SEC (Securities and Exchange Commission)

The federal regulatory agency responsible for enforcing securities laws, regulating public markets, and reviewing disclosed private offering information. Startups typically interact with the SEC through Regulation D filings (Form D) and compliance with securities law exemptions.

Section 280G

The tax code section limiting deductions for "golden parachute" severance payments to executives upon a change of control, applying when payments exceed 3x base amount. Section 280G violations don't penalize the executives but eliminate the company's tax deduction for excess payments. Read about Section 280G implications.

Section 409A

The tax code section governing deferred compensation arrangements, requiring detailed compliance with valuation, documentation, and payment timing rules to avoid tax penalties. Section 409A is critical for startups because improper option pricing, RSU grants, or bonus structures can trigger 20% penalties on all affected individuals.

Section 1045 Rollover

A tax deferral mechanism allowing QSBS holders to reinvest sale proceeds into other QSBS within 60 days and defer capital gains indefinitely. Section 1045 rollovers are useful for founders wanting to diversify but maintain tax benefits. Learn about Section 1045 rollovers.

Section 1202

The tax code section excluding up to $10 million in QSBS capital gains from federal taxation if specific holding and company requirements are met. Section 1202 is the primary mechanism enabling founders to exclude QSBS gains from taxation. Explore Section 1202 in depth.

Securities Act of 1933

The foundational federal law requiring registration of public securities offerings with the SEC or compliance with exemptions like Regulation D. The Securities Act of 1933 is the legal basis for all securities regulation, establishing the framework for private placement exemptions.

Shareholders' Agreement

A contract among shareholders establishing governance terms, voting provisions, drag-along rights, tag-along rights, and dispute resolution mechanisms. Shareholders' agreements typically cover founder voting agreements, investor protective provisions, and transfer restrictions.

Stock Appreciation Right (SAR)

See entry under "S" — included here for completeness as a compensation vehicle.

Stock Option

A right granted to employees, founders, or consultants to purchase shares at a predetermined exercise price, vesting over time. Stock options (both ISOs and NSOs) are the primary equity compensation vehicle in startups, providing employees with upside potential tied to company success.

T

Term Sheet

A non-binding summary of proposed investment terms including valuation, investment amount, liquidation preference, board composition, and key investor rights. Term sheets establish the framework for due diligence and legal documents in a financing round, though most term sheet provisions are ultimately non-binding until definitive documents are signed. Read about binding vs. non-binding term sheets.

V

Valuation Cap

The maximum valuation at which convertible note or SAFE investors can convert to equity, protecting early investors from excessive dilution if the company receives a high valuation in a Series A. A $30 million valuation cap means investors convert at $30M even if the Series A values the company at $100M.

Vesting Schedule

The timeline under which granted shares, options, or awards become owned by the grantee, typically structured with a cliff period followed by monthly or quarterly vesting. Standard vesting is 4 years with 1-year cliff, meaning 25% vests on the one-year anniversary, then 1/48th monthly for the remaining three years.

W

Warrant

A security giving the holder the right to purchase company shares at a specified price for a specified period, similar to long-dated options. Warrants are typically issued to investors or lenders as an additional incentive and can be exercised independently of other equity awards.

Washington Capital Gains Tax

Washington State's tax on long-term capital gains over $250,000, imposed at 7% and modified by ESSB 6346, effective beginning in 2022. This tax significantly impacts founders and early investors selling shares in a startup exit and applies to QSBS gains not excluded under federal law.

Washington Income Tax

Washington State currently has no income tax on wages or salaries (though ESSB 6346 introduced capital gains taxation), making it attractive for startup founders. However, other states tax income generated by Washington residents and employees, and founders should consult with tax advisors about state tax implications. Read our complete Washington tax guide.