Bad leaver: a departing shareholder who does not fall into the definition of a good leaver. Typically, the term bad leaver is used in relation to persons who leave for reasons such as fraud, dismissal for gross misconduct, breach of the shareholders’ agreement, disqualification from being a director or leaves the company before the agreed term.

Balance sheet: a financial statement on which a company reports its assets, liabilities, and equity as of a given moment in time.

Basis point: measures the variation in financial instruments, which often fluctuate in very small increments. One basis point is equal to .01% and 100 basis points are equal to 1%.

Board meetings: meetings of the board of directors. These can be regularly scheduled meetings, a calendar of which is usually set at the beginning of each year, or special meetings, which must be called in accordance with the company’s articles of association.

Board minutes: a summary of attendees and matters addressed at each board meeting, where a designated secretary of the meeting is responsible for preparing written notes summarising the discussions by the board and setting out any formal resolutions adopted at the meeting. Typically, these minutes will then be reviewed and approved by the board of directors at a subsequent meeting, signed by the secretary of the meeting and placed in the minute book.

Board of directors: the governing body of a company generally appointed by the shareholders and ultimately responsible for the management and oversight of a company. The board of directors should meet on a regular basis to discuss the business and ensure that the directors are performing their statutory duties. It is good practice to hold regular board meetings approximately four to eight times per year, with additional special meetings scheduled as needed (such as to approve a transaction or discuss a specific matter that requires the input of the board of directors). Significant corporate actions, like amending the articles of association or selling the company, require the approval of the board of directors.

Board: shorthand for the board of directors.

Bootstrapping: starting a company using your own funds or the funds of family members, friends, or mentors. This method of financing, which is very common for start-ups, is used to get a company up and running quickly before raising funds from third parties.

Bridge financing: a short-term cash infusion (usually debt) completed just prior to a preferred equity financing or in between preferred equity financings. Bridge financing provides the company with sufficient runway until the preferred equity financing option can be arranged without experiencing a cash crunch.

Broad-based weighted average anti-dilution protection: a type of anti-dilution protection for preferred shareholders, which is typically triggered in the event of a down round and results in preferred shares being convertible into additional ordinary shares as compared to the number of ordinary shares into which they were convertible prior to the down round. The size of the adjustment depends on several factors, including difference in the price.

Burn rate: the net cash (i.e., expenses in excess of cash generated) that the company uses over a specified period of time to keep the business running, usually expressed as a monthly amount. This metric helps the company and its investors to determine when they will need to raise funds again.

Business plan: is a written description of the company’s business’s goals, reasons why they are attainable and a plan for reaching those objectives. A business plan should include a business model, detailed information on the company’s target market, financial projections, and assumptions.

Buyer: another name for an acquirer or purchaser.

Cap table: a record of the company’s shareholders that reflects ownership of the various classes and series of shares that exist. A cap table can also include the holders of convertible debt.

Capital call: in the context of venture capital financing, typically is a demand issued to a limited partner by a general partner to transmit previously committed funds for the purpose of making an investment in a portfolio company.

Capital gains: the profit when you sell an asset that’s increased in value, for example, when shares are sold by a shareholder and no exemptions apply.

Cash flow statement: a financial statement in which a company reports its incoming and outgoing cash flows during a specified period of time (typically monthly, quarterly or annually).

Cash position: the amount of cash a company has at any point in time. If a company’s cash position and burn rate are known, the information can be used to determine roughly when the company will need funds additional in order to continue to operate.

CEO: acronym for Chief Executive Officer.

CFO: acronym for Chief Financial Officer.

Change of control: generally refers to the sale of a company, but change of control can also result from a partial sale of the company or the sale of a substantial proportion of the company’s assets.

Chief Executive Officer: the highest-ranking executive officer of a company, in charge of managing the day-to-day affairs of the company and typically reporting to the board of directors. In start-ups, the role of CEO is often held by one of the founders.

Chief Financial Officer: the senior officer of a company, primarily responsible for managing the company’s financing and (usually) accounting activities.

Cliff vesting: in the context of share option schemes or restricted stock units, means that the employees’ have the right to receive shares on the completion of the initial period (typically one to two years) rather than on a monthly basis.

Companies Act 2006: the primary source of company law to which all companies in the UK are subject to and which has replaced the Companies Act (1985). Also referred to as CA 2006.

Company Share Option Plan (CSOP): a share scheme that enjoys favourable tax treatment in the UK. Under CSOP, an employer may offer employees options to buy up to £30,000 worth of shares at a fixed price within a fixed period of time. There are complex statutory regulations controlling which companies may implement a CSOP, with the following conditions having to be met: (i) shares placed under option must be listed on a recognised stock exchange or free from control by another company; (ii) shares placed under option must be ordinary share capital and (iii) options may be issued by the employer or the parent company. See also EMI for a comparison.

Completion: the consummation of a transaction, when any remaining documents are signed, the money changes hands and our clients begin celebrations.

Confidentiality agreement: a written agreement stipulating that the disclosure of certain information is being provided for specific limited purposes only, entered into before any disclosure is made and where the recipient of such information agrees to keep it confidential. A confidentiality agreement (also commonly known as a non-disclosure agreement) can be one-way (only one party to the agreement is providing confidential information) or multi-party (two or more parties to the agreement are providing/receiving confidential information).

Conflict of interest: a situation in which a person is in a position to derive personal benefit from actions or decisions made in their official capacity. The term is often used in the context of directors’ fiduciary duties owed to the company and its shareholders. A director must put the interests of the company and its shareholders over the director’s own personal interests in making decisions for the company and evaluating opportunities. If there is a potential conflict of interest, the director must disclose it and allow for the board of directors to determine how to proceed.

Consultant: an individual or entity that works for a company on the basis of a contract as an independent contractor and not an employee. The tax and legal consequences of misclassifying someone as a consultant instead of an employee can be significant.

Consulting agreement: contract under which a consultant provides services to a company, which typically include, among other terms, compensation terms, a schedule of work to be completed, the duration of the relationship, provisions providing for confidentiality obligations, and the assignment of any intellectual property created while performing services for the company.

Controller: the natural or legal person, public authority, agency, or other body which, alone or jointly with others, determines the purposes and means of the processing of personal data (section 6 of the Data Protection Act (2018) and Article 4(7) of the UK GDPR).

Conversion discount: the discount that is typically offered to the holders of convertible debt who invest in early-stage companies or in companies attracting bridge financing. It is usually offered as a sweetener to encourage investment and balance the risks associated with such an investment. The holders of the convertible debt lend money in exchange for the right to have their loan converted into equity at a discount (typically between 10% and 20%) in a future equity financing.

Conversion price cap: a typical provision in convertible debt instruments used to determine the maximum price per share at which the convertible debt will convert into ordinary shares at the time of the financing. The lower the conversion price cap, the greater the potential discount in the conversion rate of the convertible debt compared to the price per share paid by later investors.

Conversion price: typically, either: (i) the price at which preferred shares will convert into ordinary shares or, (ii) the price at which convertible debt will convert into preferred shares.

Conversion ratio: the ratio at which preferred shares convert into ordinary shares typically calculated as the conversion price divided by the original issue price.

Conversion rights: the rights preferred shareholders hold to have their shares converted into ordinary shares. Conversion rights usually include anti-dilution protections so that a preferred shareholder could convert into more ordinary shares if there is a down round.

Convertible debt: a type of financing – evidenced by a convertible debt instrument – that early-stage companies most commonly use because it typically takes place prior to establishing the company’s valuation. Convertible debt usually converts into preferred shares with the company’s next equity financing.

Convertible debt instrument: a written agreement between an investor and the company under which the investor lends money to the company and, upon the company’s next equity financing, the company’s debt to the investor converts into shares (typically preferred shares).

Copyright: an intellectual property right and a form of protection provided to the authors of original works, which can include musical, literary, graphic, architectural, pictorial, sculptural, audio-visual, and other types of creations. Copyright protection attaches as soon as the work is created in fixed tangible form and no publication, registration or other action is required to secure the copyright. Copyright protection does not extend to works that have not been fixed in tangible form, works that are not original or things such as ideas, names, titles, short phrases, slogans and listings of contents or ingredients.

Covenant: a provision in a contract pursuant to which a party agrees to perform (a positive covenant) or abstain from performing (a negative covenant) a particular act.

Creditor: a person or body corporate to whom debts are owed and who has a claim of payment of a sum of money due to them from the debtor.

Crowdfunding: the practice of funding a project by raising small amounts of money from a large number of people, most commonly through the use of Internet platforms.

Cumulative dividend: a dividend payable on preferred shares (usually a fixed percentage of the nominal value of the preferred shares) which accumulates until it is paid.

Data room: a virtual or physical space used for storing information such as contracts or company documents typically with the intent to share that information in a secure and/or confidential fashion with others (such as with a potential acquiror). Data rooms are often used to facilitate the completion of legal or financial due diligence during a transaction but may be used for other purposes.

Data subject: an identified or identifiable individual to whom personal data relates (section 3(5) of the Data Protection Act (2018)).

Debt: an obligation owed by one party (the borrower or debtor) to a second party (the lender or creditor). Debt is generally subject to contractual terms such as the amount and timing of payments of principal and interest, events of default, covenants, maturity date, conversion rights (if applicable) and more.

Debtor: a person or corporate body that owes money to another person or corporate body, called a creditor.

Debt Warrant: a financial instrument which allows the company to grant a contractual right (not an obligation) to the warrantholder to subscribe for debt securities in the company. See also Equity Warrant for comparison.

Dilution: a reduction of a shareholder’s ownership percentage in the company because new shares are issued to a third party (such as an investor). Dilution can also occur when holders of share options (such as company employees) exercise their options. When the overall number of shares increases, each existing shareholder will own a smaller, or diluted, percentage of the company, and such shareholder’s voting power will be diminished. However, the potential upside of share dilution is that the additional capital the company receives from issuing additional shares can improve the value of the company’s shares and its profitability.

Director: a member of the board of directors.

Directors and officers insurance (D&O insurance): liability cover designed to protect company directors and senior management of a company from claims made by shareholders and third parties for alleged wrongdoings and arising from decisions and actions taken by such directors and officers as part of their duties.

Dividend: a distribution of a company’s post-tax profits made to its shareholders. Dividends are usually paid in cash but can also be satisfied by the transfer of non-cash assets or by shares in the company itself.

Down round: a type of funding when a company completes an equity financing at a per share price that is lower than the price at which the company’s shares were sold in the previous round. A down round normally triggers anti-dilution protection rights and is an indicator to new investors that they can now push for more investor-friendly terms.

DPA 2018: the abbreviation for the Data Protection Act (2018), which governs the collection and use of personal data in the UK. It sits alongside and supplements the UK GDPR.

Drag-along right: enables a majority shareholder to require that a minority shareholder vote to approve a sale of the company to a third party. This right is often negotiated by investors and is based on the idea that a majority shareholder may not be able to recognise the full value of the investment, unless the majority shareholder can sell the entire company to a third party by “dragging” along minority shareholders. Drag-along provisions typically provide that the minority shareholders receive the same terms in the sale as the majority shareholder. Founders, who are usually minority shareholders, may be resistant to granting these rights because they can enable investors, who usually have a liquidation preference, to negotiate sales where the investors benefit and the minority shareholders do not.

Due diligence: a process where parties to a transaction, as well as their lawyers and accountants, review legal and financial documents relevant to the transaction prior to the finalisation of a deal.

EEA: the abbreviation for the Economic European Area, which includes 27 member states of the European Union (EU) and three countries of the European Free Trade Association (EFTA) (Iceland, Liechtenstein, and Norway). It is founded on the four pillars of the internal market: the free movement of goods, people, services, and capital.

EMI: stands for the Enterprise Management Incentive and means a share option scheme that enables companies to attract and retain key personnel by rewarding them with equity participation in the business, while enjoying a special tax regime in the UK. It is specifically designed for companies with assets of £30 million or less, who wish to grant options to employees or directors who work for at least 25 hours per week. Other criteria must be met to implement an EMI scheme, with further information available through the UK government website.

Employee: a person who is hired for a wage or salary to perform work for and under the direction of an employer. It is important to determine if one is acting as employee (rather than as a consultant), as one’s status as an employee comes with some legal issues and requirements, including employer liability for the actions of the employee, minimum wage requirements, tax withholding and reporting obligations, union eligibility and worker’s compensation, among other things.

Employment contract: defines the terms and conditions of employment, including employer and employee obligations, rights, and responsibilities. An employment contract can be written or verbal. It should not be confused with the written statement of employment particulars.

Enterprise Investment Scheme (or EIS): a form of income, capital gains and loss tax relief, that is available to individuals who make equity investments in companies that qualify under the scheme. Under an EIS, individuals can invest up to £1 million per tax year (or £2 million, providing anything above £1 million is invested in one or more ‘knowledge intensive’ companies) into new shares of qualifying companies and may have its income tax liability reduced by 30% of the sum invested. An investor can also be exempt from capital gains tax, provided that when the shares are disposed of, they have been owned by an investor for at least 3 years. The rules surrounding EIS are complex, and individuals should seek independent legal advice to assess their eligibility. For more details as to which companies can qualify and how the scheme works individuals may find it useful to consult the following HMRC Guidance.

Equitable assignment: where the statutory requirements for a legal assignment have not been met, an assignment can occur in equity. An equitable assignment takes place where (i) an assignor informs the assignee that they transfer a right (or rights) to them or (ii) the assignor instructs another party (or parties) to the agreement to discharge their obligation to the assignee. In comparison to a legal assignment, there are no requirements for a notice of equitable assignment to be given in writing.

Equity financing: a financing in which a company receives funds from investors in exchange for equity in the company. The equity issued to investors can be either ordinary shares or preferred shares.

Equity Warrant: a financial instrument which allows the company to grant a contractual right (not an obligation) to the warrantholder to subscribe for a specified class of shares in the company. An equity warrant is commonly referred to as a share warrant. Contrast this with a Debt Warrant.

Equity: an ownership interest in the net value of a company represented by one or more classes of shares. In accounting parlance, equity is the value of a company’s assets minus its liabilities. While equity is subordinate to debt, equity is entitled to all of the residual value of a company, after payment of its debts, and grows as the company grows, while debt has a ceiling on the interest it receives from a company.

Event of default: an event, circumstance or condition giving lender immediate rights under the loan agreement. For a lender to declare the event of default, the default should be continuing (or existing). If the borrower takes steps to remedy the event, for example by repaying the amount owed under the agreement, a lender cannot declare an event of default or exercise any of its rights. Generally, rights available to lenders are the right to demand immediate payment of any outstanding sums of the loan, terminate any of its commitment to advance further loans, and exercise a right against any collateral used to secure the loan.

Exclusivity: temporary fixed-term exclusivity that requires one or both parties to negotiate exclusively with the other for a limited time or under certain conditions so that the investment of resources and time into due diligence and negotiations intended to finalise the agreement does not get wasted because of another offer.

Executive summary: a short summary of the business plan of a company prepared for potential investors.

Exercise Price: the per-share price (also called “strike price”) that must be paid to exercise a right under an option or warrant to acquire the shares.

Exit: for private companies, this is normally a sale (change of control) or an IPO.

Exit strategy: a strategy that a company may develop to provide liquidity to its investors. In the context of start-ups, this typically means a sale (change of control) or an IPO.

Expert advisor: an independent expert who opines on a technical or specialist matter within the expert’s area of expertise at any stage of a dispute or claim.

Fair market value: for equity, the current value that a third party would pay for shares in a company on an arm’s length basis, usually without regard to any minority or other discounts.

Fiduciary duties: are duties owed by directors to the company, covering the duty of trust and confidence, duty of care and skill as a director at common law and the statutory duties set out in sections 171-181 of CA 2006. These codified duties include a duty to act within powers, duty to promote the success of the company, duty to exercise independent judgement, duty to exercise reasonable care, skill and diligence, duty to avoid conflicts of interest, duty not to accept benefits from third parties and duty to declare an interest in the proposed transaction or arrangement.

Financing: a transaction in which a company receives funds from investors, in exchange for equity or debt.

Financing round: usually describes the type of financing by referring to the nature of the investors (for example, a friends and family round) or to what the investors are being offered in return (for example, an equity round).

Founder: one of the initial shareholders of a company who brings intellectual property or other valuable contributions to the company to get the business started. It is not a legal term, and despite the common misconception, being a founder does not bring with it any special rights.

Freemium: a pricing strategy that offers a basic version of a product to users for free with the goal of selling them additional features for a fee.

Friends and family round: one of the first financing rounds in the lifecycle of a start-up. It is typically structured as a convertible debt financing, so that the company does not establish its valuation too early. Most investors in this financing round invest small amounts and are friends and family members of the founders.

Full Ratchet Anti-Dilution Protection: the most extreme and rarely used type of anti-dilution protection. It essentially means that if a company sells its shares at a price below that paid by investors in the company’s most recent financing (i.e. in the event of a down round), the investors with full ratchet anti-dilution protection have their conversion ratio adjusted so that when their preferred shares convert into ordinary shares they would receive the same number of ordinary shares as if they had originally purchased them at the new lower price.

GDPR (or EU GDPR): the General Data Protection Regulation (EU) (GDPR) (EU) 2016/679, EU law on data protection and privacy in the European Union, was adopted on 14 April 2016 and became enforceable on 25 May 2018. Since the GDPR is a regulation and not a directive, it had direct application in all EU member states, including (until Brexit) the United Kingdom. Following the Brexit transition period, which ended on 31 December 2020, the GDPR ceased to have direct effect in the UK. Given the UK’s commitment to maintaining an equivalent data protection regime, the provisions of the GDPR have been incorporated directly into the laws of the UK as the UK General Data Protection Regulation (the UK GDPR) by virtue of the European Union (Withdrawal) Act 2018. In practice, there is little change to the core data protection principles, rights, and obligations between the GDPR and the UK GDPR. Notably, the GDPR continues to apply to UK controllers or processors, who either: (i) continue to have an establishment in the EU or, (ii) offer goods or services to data subjects in the EU, or (iii) monitor their behaviour within the EU.

General partner: in a limited partnership, a general partner is liable for any debts the business cannot pay, the controls and management of the business, and making binding decisions for the business. Compare to a limited partner and consider a limited liability partnership.

Good faith: there is no generally applicable definition of “good faith”. English law does not currently recognise a universal implied duty on contracting parties to perform their obligations in good faith. This differs from the position in many other countries, including United States and most civil law countries in the EU, which, to some extent or another, recognise some form of overriding principle that, in agreeing and performing contracts, the parties should act in good faith. Under English law, the content of a duty of good faith is heavily conditioned by its context. Examples of different interpretations by the courts include: faithfulness to an agreed common purpose, acting within the spirit of the contract, observing reasonable commercial standards of fair dealing, and acting consistently with the justified expectations of the parties.

Good standing: in the context of a company registered in England and Wales, means that the company is duly incorporated and is not in liquidation. Companies House handles issuing certificates of good standing for companies in the UK.

Governing law: the law that governs a particular agreement and all disputes that may arise as a result of the agreement.

Gross misconduct: refers to acts such as theft, fraud, negligence or breach of regulations, amongst others stipulated by the corporate governance procedures of each company, which in turn breach terms of a contract and often provide the basis for employee dismissal.

Heads of terms: a non-binding document which sets out the terms of a commercial transaction agreed in principle between parties during negotiations. It is occasionally referred to as a term sheet, heads of agreement, letter of intent or memorandum of understanding. It evidences serious intent but does not legally compel the parties to conclude the deal on those terms or even at all. However, certain provisions relating to confidentiality and costs may be made binding on the parties.

Holding company: a company that holds all of the shares (sits on top) of another company (subsidiary). Typically holding companies are not involved in any operations and their role is limited purely to holding shares in one or more subsidiaries.

Holding period: period of time in which a shareholder must hold its shares in a company for a specified reason, for example, to become eligible for a particular tax relief such as business asset disposal tax relief.

Incorporation: the act of officially forming a company by Companies House, an executive agency sponsored by the Department for Business, Energy & Industrial Strategy.

Indemnity: generally, refers to compensation for a loss or liability. A claim for indemnity can arise by operation of law, for example in the law of agency, where the principle is liable to indemnity its agent, but can also be created by contract, such as payment guarantee and indemnity contract. Indemnities can be used in a variety of contexts, for example in intellectual property transactions, where the owner of intellectual property gives users an indemnity against loss that may be caused by defects in those rights. Other areas where indemnities often arise are share sales and property transactions.

Independent contractor: a person or business engaged to provide goods or services to another person or business. Individuals acting as independent contractors are treated differently than employees for tax and employment law purposes.

Information rights: rights a company gives to major investors to receive regular financial reports and statements and have access to inspect the books and records of the company. Typically, an investment above a specified threshold is required.

Infringement: a violation of a law or right, and with respect to intellectual property, it is the act of using another’s protected intellectual property without permission, intentionally or unintentionally.

Initial public offering: the procedure by which a company achieves its first listing on a recognised stock exchange such as the Main Market of the London Stock Exchange or the Alternative Investment Market of the London Stock Exchange and makes its shares available to the public for the first time.

Inside round: a financing round led by existing investors in the company.

Inspection rights: rights a company gives to major investors to inspect the books and records of the company and communicate with certain executives of the company. Typically, an investment above a specified threshold is required.

Institutional investor: investors that are organised for the purpose of investing in multiple companies.

Intellectual property: an all-inclusive term covering copyright, patents, trademarks, and designs. The terms refer to the rights safeguarding the result of an individual’s work by hand or brain against unauthorised use or exploitation by a third party. The majority of intellectual property rights are created by statute and frequently only provide protection if they are registered.

Interest: additional amount added to a loan that accrues over time (typically expressed as a percentage) and is payable by a debtor to a creditor.

Interest rate: the annual rate at which interest accrues on a debt (such as a promissory note) while it is still outstanding. It can be fixed at a certain percentage, or adjustable according to fluctuations in a benchmark interest rate index such as the London Interbank Offered Rate (LIBOR).

Internal rate of return (IRR): the compounded rate of return of an investment. As an example, if you invest £1,000 on day one, and a year later you liquidate your investment and receive £1,500, then your IRR was 50%.

Investor: a person or entity who puts money in a company either to purchase equity or make a loan to the company and get repaid or converted into equity upon a triggering event in the future.

Investor representations: representations made by investors to the company in connection with their investment (usually found in a share purchase agreement or other equity or debt documentation), which typically relate to investor status and compliance matters.

IPO: acronym for an initial public offering.

Issued shares: shares in the company are said to be ‘issued’ when the name of the person to whom those shares have been allotted is entered into the register of members against them. Once issued, then a person may exercise their rights as a member of a company.

Key employees: employees of a company, normally founders and senior employees, whose knowledge or services are key to the company’s success. Which employees are considered key is usually determined in connection with the first equity financing, and such employees would normally be expected to provide certain representations and warranties and to be bound by certain covenants.

Launch: the date – following a beta or testing period of a product or service – when a start-up begins offering a product or service to the public.

Lead Investor: an investor who negotiates with the company on behalf of all investors, so that there are no multiple ongoing negotiation streams. It is not a legal title, but more of an implied role.

Legal assignment: a transfer of the benefit of any debt or agreement by the assignor to the assignee. The assignment must be absolute, in writing and signed by hand by the assignor, and cannot be partial (the rights to be assigned must be wholly ascertainable). Notice of the assignment must be received by the other party or parties for the assignment to be effective.

Licensing: a permission or authorisation provided by a person or company to another person or company to make, use, or sell a specific product or item in exchange for money or other consideration.

Limited company: a company in which the liability of its members is limited either by shares or by guarantee. Limited by shares companies are usually businesses that make a profit. They are legally separate from the people who run them, have shares and shareholders, and can keep any profits after paying tax. Limited by guarantee companies are usually not for profit companies that have guarantors (as opposed to shareholders) and invest any profits back into the company. See also unlimited company.

Limited liability partnership (LLP): a hybrid between a partnership and a limited company formed under the Limited Liability Partnership Act (2000). It has a separate legal personality from its members and provides its members with protection from liability, similar to a company. In comparison to a limited partnership, all partners in an LLP have limited liability. The partners of an LLP are generally taxed as partners in a partnership (and not as shareholders in a limited company).

Limited partner: a partner in a limited partnership whose liability is limited to their original investment in the partnership. The limited liability is contingent upon the limited partner: (i) not controlling or managing the limited partnership, (ii) not having the power to take legally binding decisions on behalf of the limited partnership, and (iii) not withdrawing their contributions from the limited partnership for as long as it remains in business. If any of the aforementioned conditions are breached, the limited partner will lose the limited liability protection.

Limited partnership (LP): a partnership with limited partners and at least one general partner established under the Limited Partnerships Act (1907).

Liquidation: in the context of equity or debt financings, typically means either a change of control or the bankruptcy or insolvency of a company (where assets are sold and the proceeds are distributed to the company’s creditors and shareholders).

Liquidation amount: aggregate amount of proceeds that are distributed to the shareholders of a company in connection with a liquidation.

Liquidation preference: a right that one class of shareholders may have to be paid ahead of other shareholders upon the company’s liquidation. For example, the investors may have a liquidation preference that allows them to get their invested capital back in a liquidation event before any proceeds from the liquidation event are distributed to the holders of ordinary shares (founders, management and employees).

Liquidity: the ability to sell shares and receive cash (such as shares of public companies).

Lock-up: a period of time during which a shareholder is not permitted to sell their shares. In the context of a public offering, a lock-up period lasts between 90 and 180 days and is aimed at stabilising the share price immediately following the IPO.

Maintenance covenants: a covenant requiring the company to maintain a certain state of affairs, for example, to maintain certain levels of insurance.

Mandatory conversion: generally, refers to the conversion of preferred shares upon the occurrence of certain specified events such as, for example, an IPO.

Maturity date: generally, in the start-up context, the date on which a convertible loan note or other outstanding debt must be repaid in full.

Member: see shareholder.

Minimum viable product (MVP): a product that has been developed while expending minimum cost and effort but allowing the start-up team to collect a substantial amount of validated learning about the product.

Model Articles: a set of default articles called “Model articles of association for limited companies” (“Model Articles”) adopted by the UK government which can be found here.

NDA: acronym for a non-disclosure agreement.

Negative covenants: an agreement to refrain from doing something, for example, from issuing new shares. Compare to positive covenants.

Nominal value: the face value of the company’s shares, as opposed to its market value, set forth in section 542 of the Companies Act (2006).

Non-competition clause: provides that an employee cannot engage in business activities that compete against the company at which he or she works or worked. The prohibition at a bare minimum lasts through the entire employee term of employment, and in some states can legally extend beyond the employee’s term of employment.

Non-cumulative dividend: a dividend that does not automatically accrue.

Non-disclosure agreement: another name for a confidentiality agreement.

Non-solicitation: an agreement in which an employee or other party agrees to refrain from encouraging another party’s employees or customers to change their relationship with the other party in a way that would disadvantage the other party. In certain jurisdictions, non-solicitation clauses have limited enforceability.

Novation: the ending of an original contract which is then replaced by a new contract through which a third party assumes the rights and obligations of one of the parties to the original contract.

Offer letter: generally, a letter provided by a company to a prospective employee setting forth key terms of the prospective employee’s employment.

Option: a contract issued by a company, typically pursuant to a share option scheme, allowing the holder to acquire the company’s shares under certain conditions and upon the payment of the exercise price.

Option agreement: agreement that sets forth the terms and conditions of an option, including, among other things, the number of shares subject to the option and the exercise price.

Option grant: a right to acquire a set number of shares of a company at a set price typically awarded to an employee, advisor or other individual who performs services for the company.

Option pool: the number of shares set aside by the company for issuance to employees, advisors, or other individuals as part of a company’s share option scheme, such as an EMI scheme. Importantly, such shares do not exist; rather, the shareholders undertake to give shares to employees or other persons when the options become exercisable or on exit, based on the vesting schedule agreed upon by the parties.

Optional conversion: conversion of preferred shares at the option of a preferred shareholder. Compare to mandatory conversion.

Ordinary resolution: a resolution passed at a meeting of shareholders on a show of hands or on a poll taken at a meeting, if it is passed by the shareholders representing not less than a simple majority of the total voting rights (Section 282, CA 2006). Most shareholder decisions require an ordinary resolution, unless the articles of the company or the Companies Act 2006 require otherwise.

Ordinary shareholders: holders of ordinary shares.

Ordinary shares: the most common type of shares in a company. Ordinary shares generally provide voting and dividends rights and sit at the bottom of the waterfall. In the event of a liquidation, ordinary shareholders have rights to a company’s assets only after secured lenders, other creditors and preferred shareholders have been paid in full.

Pari passu: refers to equality of treatment (on equal footing) in relation to, for example, a right of payment.

Partnership: commonly referred to as a general partnership, occurs where two or more people agree to carry on a business in common with a view of profit (section 1 of the Partnership Act (1890)). This partnership agreement may be oral, in writing or implied by conduct. To form a partnership, no formal steps, such as a registration with a public body, are required. The partners have the option to enter into a written partnership agreement. If they do not wish to do so, several provisions of the Partnership Act (1890) will be implied by default. For example, that partners will share income profit and losses of the partnership equally (s24(1) of the Partnership Act 1890). It is therefore common for partners to enter into a written partnership agreement, disapplying provisions of the Partnership Act (1890), which they do not wish to apply to their partnership. Unlike a limited company, a general partnership does not have a separate legal personality and its partners have unlimited liability for the debts of the partnership. A partnership under the Partnership Act 1890 differs to a Limited Partnership and a Limited Liability Partnership.

Partnership agreement: a written agreement among partners governing their relative rights and obligations among one another with respect to the partnership. The contents of the partnership agreement will depend on the type of partnership chosen. A partnership agreement can be used to set out terms of a partnership governed by the Partnership Act 1890 or terms of a Limited Liability Partnership or terms of a Limited Partnership. Please consult the definitions of different types of partnerships to understand which partnership agreement may be suitable for your business.

Patent: an intellectual property right granted by the UK Intellectual Property Office in respect of a new invention. It is not granted automatically, and an application must be filed with the UK Intellectual Property Office to obtain protection. In the majority of countries, the right has a maximum lifetime of twenty years from the date of the patent application. A patent for an invention may only be awarded in the United Kingdom if the following conditions are met: (i) the invention is new; (ii) it involves an inventive step, (iii) it is capable of industrial application and (iv) it is not specifically excluded from protection as a patent, in accordance with section 1 of the Patents Act (1977).

Per share price: price paid for one share in a limited company.

Personal data: any information relating to an identified or identifiable individual who can be identified, directly or indirectly, in particular by reference to an identifier such as a name, an identification number, location data, an online identifier, or one or more factors specific to the physical, psychological, genetic, mental, economic, cultural or social identity of that individual (section 3(2) of the Data Protection Act (2018) and Article 4(1) of the UK GDPR).

Pitch: a presentation that entrepreneurs make to investors or other constituents to describe why the company is a good investment, often focusing on a description of the company, its products or services, the problem the company is trying to solve, the market opportunity, financial projections and what the funding will be used for, among other things.

Pivot: to change directions. For a start-up, this typically means when the company decides to go after a different market or product or use a product/service for a different purpose then originally intended.

Positive covenants: an agreement to do something, an obligation to carry out some positive action, for example, to make a certain expenditure. Compare to negative covenants.

Post-money valuation: the valuation of the company following a financing transaction. With limited exceptions, the pre-money valuation plus the amount invested in a financing equals the post-money valuation. For example, if a company has a pre-money valuation of £10 million and raises £5 million, the post-money valuation is £15 million.

Pre-money valuation: valuation of a company prior to the receipt of the investment in connection with a financing calculated by taking the per share price to be paid by investors and multiplying that amount by the number of shares outstanding immediately prior to the financing.

Pre-payment: a whole or partial repayment of Debt before the Maturity Date. In the context of convertible notes, pre-payments are generally resisted by the lender because it prevents the lender from receiving interest payments that is has previously negotiated (unless the company is in a position to repay off the notes that are about to convert at an attractive price).

Pre-emption Rights: the right of existing shareholder to have first refusal on the transfer of existing shares or the issue of new shares by a company. This is a statutory right set out in section 561 of the Companies Act 2006, whose main purpose is to protect shareholders of the company from dilution of their shareholding. Pre-emption rights on allotment of shares should not be confused with pre-emption rights on share transfers. The main purpose of pre-emption rights is to protect shareholders of the company against dilution of their shareholding. Please consult our article on share transfer provisions for more details.

Preferred equity financing: a transaction in which a company receives funds from investors in exchange for preferred shares that provide certain specified (preferential) rights.

Preferred shareholder: a holder of preferred shares in a company.

Preferred shares: in general, shares which rank ahead of other shares either as to dividends or capital or both, but which carry limited voting rights. The exact nature of preferred shares and the rights attaching to them are usually set out in the company’s articles of association.

Private company: is defined in section 4(1) of CA 2006 and is a company which does not offer or trade its company stock to the members of the general public. The term is often used in counter-distinction to the term public company.

Private equity: a generic term sometimes used as shorthand for a private equity funds, which invest primarily in mature companies with the goal of buying a controlling stake in a company to make operational and other improvements prior to an exit. Compare to venture capital.

Pro rata amount: a prorated amount. Often refers to the number of shares one investor will be able to purchase in a financing pursuant to its pre-emptive or other rights.

Processing: any operation or set of operations that are performed on personal data or on sets of personal data, whether or not by automated means. Processing includes, collection, recording, organisation, structuring, storage, adaptation or alteration, retrieval, consultation, use, disclosure by transmission, dissemination or otherwise making available, alignment or combination, restriction, erasure, or destruction. Please see, section 3(4) of the Data Protection Act (2018) and Article 4(2) of the UK GDPR.

Processor: a natural or legal person, public authority, agency, or other body which performs processing operations on personal data or sets of personal data on behalf of the controller. Please see, section 3(6) of the Data Protection Act (2018) and Article 4(8) of the UK GDPR.

Profit: a financial benefit realised when the amount earned from a specific activity exceeds the amount spent on such activity.

Public company: defined by section 4(2) of CA 2006, is a company with public ownership and has shares that trade on a public market. For a company to be public in the UK, its articles must indicate that it is a public company, ‘public limited company’ (or its abbreviation ‘plc’) must be added to the end of the company name, and it should have a minimum share capital of £50,000, referred to as the “authorised minimum”. A public company, if it wishes to do so, may apply to join the stock market. A public company’s shares typically are initially issued through an IPO and any following issuances typically are done by a follow-on public offering. The primary benefit of a public company is that, unlike a private company, it may raise funds from the general public, however, this also means that public companies are subject to stricter regulation.

Purchaser: another name for an acquirer or buyer.

Put Option: a type of option which grants a right (but not an obligation) for a seller to sell shares, securities, or assets to the buyer at a pre-determined price and within an agreed time period. A put option safeguards the seller by guaranteeing a price for a particular asset for a limited period of time.

Ratification: approval by the Board of a prior action.

Reorganisation: a term that is commonly used to describe a fundamental change in the company’s operations, including changes to its constitution, capital structure, debt financing or ownership.

Representations and warranties: an assertion of fact in a contract. Representations and warranties are the means by which one party to a contract tells the other party that something is true as of a particular date and if that something is not, then the company will provide appropriate disclosures in the corresponding disclosure schedule (or be liable for failure to disclose).

Resolutions: there are two types of resolutions under the Companies Act 2006 (CA 2006) which may be put to a general meeting – an ordinary resolution and a special resolution. Both require notice of the meeting and of the resolution given, and that the meeting be held in accordance with the CA 2006 and the company’s articles.

Return on investment (ROI): a metric used to measure how profitable a given business investment is. ROI is calculated by taking the amount of proceeds received from the sale of an investment, subtracting the cost of the investment, and dividing it by the cost of the investment.

Runway: the number of months a company can continue to operate before it runs out of money. Runway is a particularly important metric for start-ups or venture backed business and is calculated by taking your current cash balance and dividing it by your monthly burn rate. To calculate the burn rate, start by subtracting your ending balance from the starting balance and dividing by the appropriate number of months, which will depend on your chosen period (e.g 1 month or 2 months).

SAFE: stands for Simple Agreement for Equity and was developed in the United States to provide early-stage investors with some of the benefits of convertible promissory notes. SAFEs are set up to, among other things, convert into preferred shares in a future equity financing of the company. Depending on the form of SAFE used, that conversion may be subject to conversion price discount and/or a conversion price cap.

Scalable: the capacity of a business to expand its customer base, product line, and service offerings at a rate in excess of that at which it must expand its underlying infrastructure.

Seed Enterprise Investment Scheme (or SEIS): is a form of income, capital gains, loss and inheritance tax relief that is available to individuals who invest in early-stage companies in the England and Wales. Investors may claim relief on up to £100,000 for funds used to subscribe for new ordinary shares issued by qualifying companies (s257AB of the Income Tax Act 2007). There are complex rules that qualifying companies must follow in order for investors to benefit from SEIS tax relief and individuals should seek independent legal advice to assess their eligibility. For more details as to which companies can qualify and how the scheme works individuals may find it useful to consult the following HMRC guidance.

Series financing: refers to the financing rounds that start-ups companies rely upon for investment. The stages typically include Series Seed, Series A, Series B, Series C and so on. A Series Seed or Series A round is typically the first round of venture financing and may follow an angel round or convertible debt or SAFE financing.

Service agreement: governs the provision of services by an individual (other than an employee) or entity to another party.

Service mark: similar to a trademark, except a service mark is a word, phrase, symbol and/or design that distinguishes the source of a service rather than goods.

Service provider: is an individual or entity that provides services to another party.

Share certificate: is a document issued by a company with a share capital that certifies that the individual identified on it is a member of the company in relation to the number and class of shares indicated on the certificate.

Share option scheme: is a scheme that can be adopted by the company to help incentivise and retain employees or other individuals, such as advisors, by giving them a right to buy shares in the company at a fixed price at a future date. There are four tax-advantaged schemes approved by the HMRC in England and Wales, the most common of which are EMI and CSOP, which have certain tax advantages with regards to Income Tax and National Insurance Contributions, provided the relevant statutory conditions are satisfied. Individuals may find it helpful to consult the following HMRC Guidance for an overview of the approved schemes.

Share purchase agreement (or SPA): is the main transaction document setting out the terms relating to share and purchase of shares in the company. The provisions of the SPA will largely depend on the commercial terms agreed by the parties and will be drafted on the basis of legal due diligence conducted by the solicitors on both sides of the transaction, that is performed prior to the drafting process. The common clauses found in an SPA include price and consideration, any conditions to which the transaction is subject to (such as shareholder consents or regulatory approval), representation and warranties made by the parties to the agreement, tax provisions and any post-completion matters to be addressed.

Share split: the division of company’s existing shares into more shares, with the shareholder’s proportionate shareholder remaining the same.

Share warrant: see equity warrant.

Share: a portion of the share capital of the company that is owned by a shareholder. The company’s articles of association define the rights attached to shares and govern how shares may be transferred.

Shareholder: a person or entity who purchases and holds shares in a company. A shareholder becomes a member of the company when their name is entered on the company’s register of members. The Companies Act (2006) (CA 2006) refers to owners of the company as members, however more informally they are known as shareholders. It is important to understand the distinction that where a limited company is limited by shares, members can be referred to as shareholders as well. Comparatively, owners of the company limited by guarantee can only be referred to as members.

Shareholders’ agreement: a private contract which shareholders of the company may choose to enter into to specify how they will behave in relation to the company. The company itself is usually not a party to this agreement. The benefit of a shareholders’ agreement is that it can help address matters that are important to shareholders, such as agreement on dividend policy, future financing, method of dispute resolution or what should happen if a deadlock is to arise in decision-making. Also, shareholders’ agreement can include provisions dealing with tag along and drag along rights as well as the transfer of shares. Please see our articles discussing both types of provisions in shareholder agreements for more detail.

Sophisticated investor: an investor who either alone or together with his, her or its purchaser representative, has sufficient knowledge and experience with financial and business matters that the investor can evaluate the risk and merits of a contemplated investment. In the USA, such persons are generally referred to as “accredited investors” or “qualified institutional buyers”.

Special articles: are changes made to the Model Articles, a copy of which should be attached to the Model Articles when submitting an application for registration of the company.

Special categories of data: personal data revealing racial or ethnic origin, political opinions, religious or philosophical beliefs, or trade union membership, and the processing of genetic data, biometric data for the purpose of uniquely identifying a natural person, data concerning health or data concerning a natural person’s sex life or sexual orientation (Article 9 of the UK GDPR).

Special resolution: a resolution passed at a meeting on a show of hands or on a poll taken at a meeting, if it is passed by the shareholders representing not less than 75% of the total voting rights (Section 283, CA 2006). Special resolutions are required for changes to the company’s share capital, amendments to the articles of association and certain other matters.

Spin off: the division of a business into two or more separate legal entities.

Subscription agreement: this is an agreement by which an investor subscribes for the purchase of shares from a company, similar to a share purchase agreement.

Subsidiary: a company that is owned by another company, which is the subsidiary’s parent entity.

Sweat equity: where a party (for example, a founder) receives an ownership interest in a business or project in return for non-financial contributions, such as their work or effort.

Tag along rights: the contractual rights of a minority shareholder to be included in (or to tag along in) a transaction where the majority shareholder is selling its interests to a third party.

Term sheet: summary of a transaction’s principal terms normally intended simply to serve as a guide to assist in the preparation of definitive documents for the transaction. Term sheets are normally not binding but there have been instances, in which a party has tried, sometimes successfully, to enforce a term sheet in court.

Trade secret: an intellectual property right that includes formulas, patterns, plans, programs, devices, methods, techniques, and others. Trade secrets are governed by the Trade Secrets (Enforcement, Etc.) Regulations (2018), which was implemented into UK legislation following the end of the transition period. To be defined as a trade secret under the Regulation, it must be (i) a secret, in that is not generally known among, or readily accessible to, persons within the circles that normally deal with the kind of information in question, (ii) have a commercial value by virtue of it being a secret and (iii) has been subject to reasonable steps to keep it secret (section 2 of the Trade Secrets (Enforcement, Etc.) Regulations 2018).

Trademark: an intellectual property right that could either by a word, symbol and/or design that differentiates the goods (or services) of one party from another. Trademarks are registered for specific goods or services within individual subjects, known as classes. The lifetime of a trademarks is 10 years, and it must be renewed every 10 years to stay in force and receive the benefit of protection.

Tranche: originating from the French for slice or portion, these are sections of a group of securities, typically debt financial instruments, divided up based on characteristics including maturity, risk, and reward. Each collection of securities is offered at the same time but with varying levels of marketability and appeal to a range of potential investors.

Transfer restrictions: restrictions that limit a shareholder’s ability to transfer shares in a company.

UK GDPR: is an acronym for the retained EU law version of the General Data Protection Regulation (EU) (2016/679) (EU GDPR). The provisions of the EU GDPR have been incorporated directly into the laws of the UK as the UK General Data Protection Regulation (UK GDPR) by virtue of the European Union (Withdrawal) Act 2018. The UK GDPR came into effect on 1 January 2021, following the end of the transition period on 31 December 2020 and sits alongside and supplements the Data Protection Act (2018) (DPA 2018).

Unlimited company: is defined in s3(4) of CA 2006 and is a company whose members do not have any limit on their liability. If individual(s) wish to run their business as an unlimited company, and the company subsequently runs into difficulties and is not able to satisfy its debts, they will be required to contribute their personal assets to repay those debts. Contrast this with a limited company.

Valuation cap: an investor protection that refers to a cap/limit on the pre-money valuation of the company that will be used to determine the conversion price in the event of a convertible debt financing.

Valuation: the value of a company. This value can refer to either enterprise value or equity value, which is often the same for early-stage start-ups with little cash and no debt. A VC discussing valuation is almost certainly referring to equity value.

VC: acronym for venture capitalist or venture capital.

Venture capital financing (VC financing): an equity financing (typically preferred shares) led by a venture capital (VC) firm.

Venture capital: risk capital in the form of equity, and occasionally debt, that a VC firm provides to back a business, generally a start-up, which is expected to grow quickly in value.

Venture capitalist: person or investment firm that provides early-stage funding and technical or other expertise to a start-up in return for an equity interest.

Vesting schedule: the schedule provided in the equity grant documentation that specifies the vesting terms for the grant. A typical vesting schedule provided to employees in a start-up is four years, with cliff vesting for the first year and monthly straight-line vesting thereafter.

Vesting: a technique commonly used in relation to share options or restricted stock units (RSUs) granted to employees and other service providers in start-ups, whereby the ownership rights are released to employees in a staggered manner, over a specified time or upon the occurrence of a triggering event such as the sale of the company, an IPO, or an involuntary termination of employment.

Voting right: generally, a shareholder’s right to vote on certain matters pertaining to the company.

Warrant: an instrument which gives the holder the right (but not an obligation) to buy or sell securities at a specified price on a specified date. See also Equity Warrant and Debt Warrant.

Waterfall: means the order of application of funds or proceeds. Normally, the most likely group to end up at the bottom of the waterfall are ordinary shareholders (in the context of start-ups, these are mostly founders and employees).

Weighted average anti-dilution protection: an anti-dilution protection – often seen in venture capital financings – that applies a formula that adjusts the rate at which preferred shares convert into ordinary shares so that existing holders of preferred shares will see their conversion price reduced (and therefore be entitled to more ordinary shares upon conversion). The formula is applied when the company issues shares at a lower price per share in a later financing.

Written resolution: a resolution adopted by a private company. Written resolutions may be proposed by the directors or be required by the members of private companies. A written resolution is passed when the required majority of eligible members (shareholders) have signified their agreement to it. In the context of start-ups, members (shareholders) almost always act by written resolutions and very rarely, if ever, hold formal meetings.

Written statement of employment particulars (or ‘section 1 statement’): a written statement which employers must give to employees and workers when they start work. The written statement consists of a principal statement and a wider written statement. The principal statement must be provided on the first day of employment and sets out, among other things, contact details of the employer and employee, days and hours on which the employee is required to work, their holiday entitlement, how much and when they will get paid and others (see the following government guidance). A wider written statement must be given within 2 months of the commencement of employment and includes information relating to pension contributions, collective agreements, any rights relating to non-compulsory training provided by employer and employer’s disciplinary and grievance procedure. More frequently, employers chose to incorporate all the necessary conditions into one written employment contract.