Definitions of common startup financing, equity-compensation, corporate, and tax terms. Each entry is a starting point; linked guides explain the conditions and exceptions.
Definitions reviewed September 10, 2026. Dollar limits and legal requirements should be checked for the applicable transaction year.
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
An election under Section 83(b) to include the transfer-date fair market value of substantially nonvested property received for services, less the amount paid, in current compensation income. It generally must be filed within 30 days after transfer, subject to the weekend and legal-holiday rule. It is not an election to pay tax on the full stock value regardless of purchase price. An option grant alone generally does not start the election period. Related: Learn more about 83(b) elections
Accredited Investor
A person or entity meeting a category in SEC Rule 501(a). Individual routes include income above $200,000 individually or $300,000 with a spouse or spousal equivalent in each of the two preceding years, with a reasonable expectation of the same level this year; net worth above $1 million under the residence and debt rules; and certain professional credentials. Income and wealth are not the only routes. Related: Regulation D; Read our complete guide to accredited investor rules. Source: Rule 501.
Accelerated Vesting
An award provision that accelerates vesting when specified events occur. A change of control, qualifying termination, or both may be required. Departure alone does not necessarily accelerate vesting; the agreement controls.
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: weighted average (the market standard, in broad-based and narrow-based variants—broad-based is more founder-friendly) and full ratchet (which reprices the investor’s shares to the new, lower price and is far more punitive to common shareholders). Explore anti-dilution provisions in depth.
Articles of Incorporation
The state-filed charter creating a corporation and specifying required matters such as authorized shares. Initial directors need not always be listed. Amendments require the approvals and filings prescribed by the governing statute and charter, often including both board and shareholder action.
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 securities laws. Federal law preempts state registration and qualification for certain covered securities, including Rule 506 offerings, but state notice filings, fees, and antifraud authority can remain. Other exemptions may require separate state registration or exemption analysis.
Bylaws
A corporation’s internal governance rules. Amendment authority depends on state law and the charter. In Delaware, shareholders retain amendment power, while directors need charter-conferred authority to amend bylaws.
C
409A Valuation
A fair-market-value determination used in applying Section 409A to equity awards. An independent appraisal is one valuation safe harbor, not a universal requirement. A value used for a new grant must reflect material information and cannot simply be reused after 12 months; material developments may require reassessment sooner. Related: 409A
Cap Table (Capitalization Table)
A record of the company’s securities, holders, and capitalization. It may be maintained in software or a spreadsheet. Ownership percentages depend on whether the calculation uses outstanding shares, an as-converted basis, or a defined fully diluted basis; an unexercised option is not issued stock. Related: Read our cap table management guide
Capital Gains Tax
Tax on gain from dispositions of capital assets. Most individual long-term capital gains use federal 0%, 15%, or 20% rates, but special categories can have different rates, including certain nonexcluded Section 1202 gain. Net investment income tax and state taxes may also apply. Related: QSBS
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 begins (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
Stock whose economic and voting rights are set by the charter. Common stock ordinarily ranks behind preferred stock for specified distributions, but common shares can have different voting rights or be nonvoting. Rights should be read from the actual documents.
Convertible Note
Debt that may or must convert into equity under specified contractual conditions. Maturity can require repayment, extension, or a conversion election; it does not universally cause automatic conversion. Interest, discounts, caps, and qualifying-financing thresholds depend on the note. Related: Convertible note; 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
A reduction in the financing price per share used to calculate a note or SAFE conversion price. A 20% discount to a $1 share price produces an $0.80 conversion price. Translating that into a company valuation requires consistent capitalization assumptions.
Disqualifying Disposition
A disposition of ISO shares before satisfying the statutory two-year-from-grant and one-year-from-transfer holding periods. It can create ordinary compensation income. The limitation to actual sale gain applies only when Section 422(c)(2)’s conditions are met, not to every transfer. Remaining gain or loss is analyzed separately. Related: ISO
E
Early Exercise
Exercising an option for unvested shares when the agreement permits it. The shares usually remain subject to forfeiture or repurchase provisions. A timely Section 83(b) election may affect taxation and the holding period; ISO treatment requires separate regular-tax and AMT analysis. Early exercise does not itself change an already fixed exercise price.
Equity Compensation Plan
A plan authorizing specified equity awards under its terms, applicable corporate approvals, tax rules, and securities exemptions. Shareholder approval may be required, including for an ISO plan. Some awards are exempt from Section 409A; others must comply with it. Related: Learn about stock option plan administration
ESSB 6346
Washington State's 2026 income tax law, signed by Governor Ferguson on March 30, 2026. The law imposes a 9.9% tax on income above $1 million, effective January 1, 2028. It is separate from Washington's capital gains excise tax (enacted in 2021 as ESSB 5096). ESSB 6346 has significant implications for high-income founders, investors, and startup employees. Read our Washington capital gains tax guide.
Exercise Price (Strike Price)
The contractual price paid per share to exercise an option. The spread is current stock value less exercise price, but its tax treatment depends on the award. Grant-date fair market value is important to ISO qualification and the usual Section 409A exemption for nonqualified options.
F
Fair Market Value (FMV)
A valuation standard generally based on a hypothetical informed, willing buyer and seller, neither compelled to transact. The applicable tax rule and facts determine how it is established; a third-party 409A appraisal is not the only valuation method for every purpose.
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 other broad solicitation of an offering, determined from the facts and circumstances. Rule 506(b) prohibits it; Rule 506(c) permits it with accredited purchasers and reasonable verification steps. Certain Rule 504 offerings also permit solicitation under specified state-law conditions. Related: Rule 506(c)
Golden Parachute
Change-in-control-related compensation that may implicate Section 280G for covered individuals. The threshold generally uses the aggregate present value of contingent payments equal to or greater than three times the base amount. Exceptions and reasonable-compensation rules can affect the result. Related: Learn about golden parachute tax implications
I
Incentive Stock Option (ISO)
An option satisfying Section 422’s requirements. Favorable disposition treatment generally requires the two-year grant and one-year share-transfer holding periods; exercise can create an AMT adjustment. The $100,000 limitation measures grant-date stock value first exercisable in a calendar year across the employer group, not the number of options granted that year. Related: Compare ISOs and NSOs
L
Liquidation Preference
A preferred-stock distribution priority defined in the charter. A 1x nonparticipating preference generally gives the holder a choice between the preference and as-converted proceeds. It does not guarantee return of the investment if available proceeds are insufficient; debt and senior securities can rank ahead.
LLC (Limited Liability Company)
A state-law entity with limited liability. A domestic LLC is generally taxed as a partnership if it has multiple owners or disregarded if it has one, unless it elects otherwise. Eligible LLCs can elect corporate taxation; state-law form and federal tax classification are separate.
M
MFN (Most Favored Nation)
A contractual right to adopt or receive specified terms from later securities issuances. Notice, election requirements, exclusions, and whether an investor must accept an entire later instrument depend on the clause. It is not necessarily an automatic right to cherry-pick every favorable term. Related: SAFE
N
Nonqualified Stock Option (NQO/NSO)
An option that does not qualify as an ISO. A typical private-company NSO produces compensation income on exercise spread, with different timing possible for nonvested shares or other special cases. Discounted options can be subject to Section 409A; the absence of the ISO $100,000 limit does not permit tax-neutral grants at any price. Related: 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 relationship established at the relevant time that gives the issuer or an appropriate intermediary enough information to evaluate a prospective investor’s financial circumstances and sophistication. It is one way to demonstrate the absence of general solicitation, not an express universal relationship requirement for every Rule 506(b) purchaser. Related: Read about pre-existing substantive relationships. Source: SEC guidance.
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 charter-defined preferences or rights, such as distribution priority, dividends, conversion, or protective votes. Preferred stock does not automatically confer board control; board seats and voting rights depend on the governing documents.
Private Placement
A securities offering conducted under an exemption from registration rather than a registered public offering. Permitted investors, solicitation, disclosures, resale restrictions, and filings depend on the exemption; not every exempt offering is limited to accredited investors.
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
An interest in a partnership’s future profits and appreciation rather than its existing liquidation value. IRS safe-harbor guidance can permit qualifying compensatory grants without current tax, subject to conditions and exceptions. Recipients may become partners for tax purposes; favorable treatment is not automatic for every LLC award.
Q
QSBS (Qualified Small Business Stock)
Qualifying original-issue C-Corp stock potentially eligible for Section 1202 gain exclusion. Acquisition-date, holding-period, active-business, gross-assets, and redemption rules apply. For stock acquired after July 4, 2025, the tiers are 50%, 75%, and 100% after at least three, four, and five years. Earlier stock generally needs more than five years, with its acquisition period determining the percentage. Section 1045 provides a separate potential rollover. Related: Section 1202; 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. Tier 2 offerings (the tier used for larger raises, up to $75 million) preempt state blue-sky registration, while Tier 1 offerings remain subject to state review. 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)
A federal exemption permitting eligible issuers to raise up to $5 million in a 12-month period through a registered broker-dealer or funding portal. Both accredited and non-accredited investors may participate; investment limits apply to non-accredited investors. Disclosure, intermediary, issuer-eligibility, and reporting conditions apply.
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(b)) for equity financing rounds. Learn about Regulation D in detail.
Restricted Stock
Stock subject to contractual restrictions. For service-related stock that is substantially nonvested under Section 83, compensation generally arises when it becomes substantially vested, measured by value then less the amount paid, unless a timely Section 83(b) election applies. Transfer restrictions alone do not necessarily defer tax.
Restricted Stock Unit (RSU)
A contractual right to receive stock or cash under specified vesting and settlement terms. Vesting and settlement need not occur together. Stock ownership generally begins when shares are delivered; Section 409A and payroll-tax timing require separate analysis. An RSU itself is not property eligible for an 83(b) election.
Rule 701
A federal registration exemption for eligible issuers’ compensatory securities transactions under qualifying written plans or contracts. It has recipient-eligibility, issuance-limit, and disclosure conditions, including enhanced disclosures above $10 million in the applicable consecutive 12-month period. State-law and antifraud requirements also matter; it is not a capital-raising exemption. Related: Read our Rule 701 guide
Rule 504
A Regulation D exemption allowing eligible issuers to raise up to $10 million in a 12-month period. Issuer exclusions, bad-actor rules, solicitation restrictions, and state securities requirements apply; specified state-law conditions can permit general solicitation.
Rule 506(b)
A Regulation D exemption with no dollar ceiling that prohibits general solicitation. It permits accredited investors and up to 35 non-accredited purchasers in a 90-calendar-day period under the counting rules. Non-accredited purchasers must meet the sophistication standard themselves or with a purchaser representative and receive required disclosures. Related: Compare Rule 506(b) and 506(c). Source: Rule 506.
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 contractual instrument providing rights on specified future events, usually without interest or a maturity date. Under common SAFE forms, an equity financing triggers conversion, while an acquisition or other liquidity event may provide a payout based on cash-out or conversion economics. An acquisition does not universally trigger stock conversion. Read the particular form. Related: Series A; 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 federal tax election available to eligible domestic entities, generally limited to one economic class of stock and 100 shareholders under special counting rules. Direct nonresident-alien shareholders and most entity shareholders are prohibited. Ordinary venture preferred-stock and fund-ownership structures generally do not fit. Section 1202 separately requires C-Corp status at issuance and during substantially all of the relevant holding period.
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
Section 280G can deny a deduction for excess parachute payments to covered individuals following specified corporate changes. The trigger is generally aggregate contingent payments with present value at least three times the base amount; excess payments generally are measured above the allocated base amount, not merely above three times it. Section 4999 imposes a 20% excise tax on excess payments. Statutory exceptions can apply. Related: Read about Section 280G implications. Source: Section 280G.
Section 409A
The federal tax rules for nonqualified deferred compensation. Many properly structured options and short-term deferrals are exempt. For a covered arrangement that fails the rules, affected vested deferred amounts may become currently includible, with a 20% additional federal tax and premium-interest charge. It is not an automatic 20% charge on every employee or every RSU grant.
Section 1045 Rollover
An elective rollover for eligible noncorporate taxpayers selling QSBS held for more than six months and buying replacement QSBS within the 60-day period beginning on the sale date. Gain is generally recognized to the extent amount realized exceeds qualifying replacement cost; deferred gain reduces replacement-stock basis. It is deferral, not an automatic permanent exclusion. Related: Learn about Section 1045 rollovers. Source: Section 1045.
Section 1202
The federal QSBS exclusion provision. The eligible-gain cap generally uses the greater of the remaining applicable $10 million or $15 million per-issuer dollar limit, depending on statutory acquisition date, or 10 times qualifying basis in stock sold that year. Prior eligible gain, married-return rules, and post-2026 inflation adjustments matter. The holding-period exclusion percentage is applied to eligible gain. Section 1202(i)’s contributed-property basis floor does not erase ordinary pre-contribution gain. Related: Explore Section 1202 in depth
Securities Act of 1933
The federal statute governing securities offers and sales, including registration, exemptions, disclosure liability, and antifraud provisions. Other statutes, including the Securities Exchange Act of 1934, also govern securities activity; the 1933 Act is not the sole source of securities regulation.
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 summary of proposed transaction terms. Financing terms are often nonbinding until definitive agreements are signed, but confidentiality, exclusivity, expenses, or other specified provisions can be binding. Enforceability depends on the language and applicable law. Related: Read about binding vs. non-binding term sheets
V
Valuation Cap
A contractual input used to calculate a note or SAFE conversion price. It is not necessarily the company’s current valuation or a guaranteed ownership percentage. The cap, discount, capitalization definition, and pre-money or post-money structure determine the result.
Vesting Schedule
The schedule on which an award becomes vested. Restricted stock may already be owned before vesting, while vested options remain rights to buy shares until exercised. A common schedule vests 25% after one year and 1/48 of the original award monthly thereafter for three more years; the agreement controls.
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’s excise tax on qualifying long-term capital gains, effective beginning in 2022. Since 2025, it applies at 7% to taxable Washington capital gains, with another 2.9% on the portion above $1 million. That bracket applies to the statutory taxable base after applicable deductions, not automatically to gross sale proceeds or federal gain. Use the standard deduction for the relevant year. Federal QSBS-excluded gain generally does not enter the starting federal net long-term gain.. Source: RCW 82.87.040.
Washington Income Tax
Washington State has no personal income tax on wages, business income, or investment income until January 1, 2028, when ESSB 6346 takes effect imposing a 9.9% income tax on income above the $1 million standard deduction ($1 million per individual; married couples and registered domestic partners share one). Washington also has an existing capital gains excise tax (ESSB 5096, effective 2022) on long-term gains above the annual threshold. Washington remains attractive for startup founders, but the tax landscape is changing — consult a tax advisor about state tax planning before 2028. Read our complete Washington tax guide.
Related: QSBS pillar
