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.

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

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.

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.

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.

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.

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.

Exercising: The act of purchasing stock from your company.

Fair market value (FMV): The FMV is the agreed-upon value of what one share of common stock is worth as of a specific date.

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

Strike price: What it will cost to exercise your stock options, as 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.

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 actually 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,” meaning that its stock is listed on a public exchange.

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

Tender offer: An event where your own 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, how many shares they hold, what type of equity they have, and how they will eventually get paid out.

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

Convertible note: A convertible note is 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 in the company.

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 has to pay back all her LPs for their original investment.

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 through a VC firm.

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

Management fee: A fee on a fund charged by the management company so it can handle overhead.

Preferred stock: A type of stock that is mainly issued to investors, who usually pay a higher price per share than for common stock.

Qualified purchaser: An entity allowed to invest in startups by the SEC.

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

Special-purpose vehicle (SPV): An SPV is like a VC fund, but it’s designed to only invest in one single thing.

Term sheet: A legal document that lists 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.