Equity 101 Glossary

First things first

Equity: an ownership interest in a company, as with shares of stock. In Equity 101, we talk about equity in privately held companies.

Equity compensation: a way for your employer to reward you with partial ownership in their company—and for you to share in the success of the company as it grows.

Equity helps you own your future. When you understand the basics of equity, you’ll be able to ask informed questions and make confident decisions about building your wealth.

Types of stock

Incentive stock options (ISOs): A type of stock option that’s typically taxed only when you sell your shares.

With ISOs, you’re likely to be off the hook for taxes when you exercise, but you’ll still need to pay them when you sell the resulting shares. But that’s not always the case, and it’s always a good idea to consult a tax advisor before you lock in a plan to exercise your options.

Non-qualifying stock options (NSOs): If you have NSOs, you’ll typically pay taxes both when you exercise them and when you sell the resulting shares.

If your equity grant says you have NSOs, you will definitely want to make a plan so that you’re prepared to pay both the exercise price and the tax.

Restricted stock units (RSUs): This is a type of equity grant where you own shares automatically if certain conditions—like vesting—are met. RSUs are more likely to be issued by more mature companies.

You don’t need to plan to exercise your RSUs; they’re yours outright once they vest. But when they do vest, you’ll need to pay taxes.

Stock options: A type of equity compensation that gives you the option to buy shares at the price listed on your equity grant. Early-stage companies tend to give stock options.

Stock options aren’t stock. You still need to buy (“exercise”) them at the agreed-upon price (“strike price”) to be an owner.

Navigating your equity grant

Cliff: The date when the first part of your equity grant vests and you’ve earned your shares or the right to buy stock options.

Many companies have a one-year cliff, meaning you’ll earn your first set of shares after a year. And if you leave before the cliff, you won’t vest any shares.

Common stock: Just like you’d think from the title, it’s the most common and simplest form of stock. This is the type of stock that’s typically issued to employees and founders.

Shareholders of common stock are typically paid after holders of preferred stock in liquidity events.

Employee stock option pool: A portion of shares in a company that is set aside for employees as equity compensation.

Equity grant: A record that you receive when your employer grants you equity as part of your compensation. It tells you how many shares you’ll get, the amount of money each share is worth, and how your shares will be made available to you.

Exercising: The act of purchasing stock from your company.

If you were issued stock options, you don’t own shares until you actually exercise them.

Fair market value (FMV): The FMV is the agreed-upon value of one share of common stock as of a specific date, typically determined by a 409A valuation.

Post-termination exercise period (PTEP): A period your company gives you to exercise your vested options after you leave.

Strike price: What it will cost to exercise your stock options, specified on your equity grant.

Trigger: An event after which you actually begin to receive your shares.

Vesting: Earning the right to actually own your equity.

Your equity grant will likely contain the timeline by which your shares will be made available to you—your “vesting schedule.”

Equity and taxes

83(b) election: A tax form that you file if you choose to exercise your options early.

Alternative minimum tax (AMT): The minimum amount a taxpayer must pay to the IRS.

Capital gains tax: Taxes on the profit you make from an investment.

Early exercise: A way companies can allow employees to exercise options before they vest.

Qualifying disposition: Shares that meet the holding requirements to receive preferential tax treatment from the IRS.

Selling your shares

Liquidity: The ability to sell your shares for cash.

Initial public offering (IPO): When your company “goes public.”

Merger/acquisition (M&A): When your company gets bought by another entity or merges with another company.

Tender offer: An event where your company or a third party offers to buy shares back from you.

Private companies, equity, and fundraising

409A valuation: An assessment of the fair market value of a private company’s common stock.

Cap table (aka “capitalization table”): A record of who has equity in a company.

Convertible instrument: A way private companies raise money from investors.

Convertible note: A type of convertible instrument that some early-stage startups use to raise funds.

Pre-money valuation: A calculation of the amount of money the company is worth before an investment comes in.

Priced round: A way private companies can raise funds from investors by taking money in exchange for shares.

Post-money valuation: A calculation of the amount of money the company will be worth after an investment comes in.

SAFE (aka the Simple Agreement for Future Equity): SAFEs are a way startups raise money from investors.

Valuation: A way to determine the fair market value of your company’s common stock.

Investing in startups

Accredited investor: One of two types of investors permitted to invest in startups by the SEC.

Angel investor: An individual person with enough capital to invest in startups who invests directly into the company.

Carried interest: When a fund makes money, the general partner of a VC firm keeps a percentage of the profits.

Fund: A legal structure that pools other people’s money together to invest.

General partner (GP): In a VC firm, the GP is the manager that controls a fund.

Limited partner (LP): Institutional investors who invest in venture capital funds.

Management company: A company that is part of a VC firm.

Management fee: A fee on a fund charged by the management company for overhead.

Preferred stock: A type of stock that is mainly issued to investors.

Qualified purchaser: An entity with significant investment capital permitted to invest in startups.

The SEC: The Securities and Exchange Commission, a government regulatory agency.

Special-purpose vehicle (SPV): An SPV is designed to only invest in one single thing.

Term sheet: A legal document listing the terms and conditions under which an investor will give money to a company.

Venture capital firm (aka “VC firm”): A company that makes startup investments on behalf of pooled funds from institutional investors.