Capdesk's Equity Glossary: Essential Terms & Definitions

Equity can be confusing for all of us. Both to manage, but sometimes even to talk about! Capdesk’s got you covered on both fronts: you already know we save you time, money, and a ton of headaches by streamlining your equity management, but now we’re also helping out with the talking about equity bit. Here’s our list of essential equity definitions, kept short and sweet to support you through puzzling conversations about ownership across time and space. Just keep this equity cheat sheet in your back pocket and take a quick sneak peak anytime you need a refresher on equity terms (we won’t tell!). 


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A

Acquisition: When a company buys a high enough stake in another company to be able to control it. 

Anti-dilution preferences: Certain clauses tied to an investor’s convertible loan, that aim to protect him/her from potential dilution of equity that may take place by the time that investor is repaid, if the company’s shares enter the market at a price lower than the one the investor had paid.


Angel Investor:
 An individual investor who contributes a small amount of funding to a company in its very early stages, in exchange for equity. 

Angel network/syndicate: A group of angel investors who pool their assets together in order to make a larger total investment in one or more early-stage company.

Articles of Association: A document determining how a company’s core internal functions should be carried out and managed (eg. how shares will be issued, what rights will be granted to shareholders, etc.).  

Asset Class: A set of financial properties (eg. shares, bonds) that can be classified as a group by virtue of sharing similar characteristics. 



B

Beneficial Shareholder / Owner: An investor who is entitled to the value and the rights of certain shares, but whose name is not actually registered as the owner of those shares. This is normally an arrangement that aims to relieve the investor from any administrative burden that comes with his/her shareholding (eg. through the use of trustees). 

Board of Directors: A group of individuals (typically investors and mentors) elected by a company’s shareholders to oversee its development and influence important decisions relating to it. It is not a requirement for a company to have a board of directors, but most investors will ask for a seat at the board as part of their requirements in exchange for their investment. 

Bootstrapped: A term used to describe a company that is financed either by its own revenue, or the entrepreneur’s personal capital.

Bridge Loan: A short-term loan in-between major funding rounds. Also known as a swing loan. 

Burn Rate: The rate at which a company is spending venture capital before it achieves positive cash flow. Normally measured as a monthly rate. 


C

 

Cap Table:  Short for ‘capitalisation table’. This is a spreadsheet or table that gives an overview of a company’s capital structure - i.e. the names of all the company’s investors, along with the types of securities each of them owns, and what stakes these represent in the company.  

 

Capital Under Management: The total market value of the investments that a third person or entity manages on behalf of someone else. 

Cashflow: The amount of cash moving in and out of a company. 

Cliff: The point in time after which the vesting period begins.

Common Stock:  A type of security, allowing its holders to vote for board of directors’ elections as well as company policies. Common stockholders are the last ones to be paid in the event of liquidation after preferred shareholders, debtholders, and bondholders are fully compensated. 

Company Share Option Plan (CSOP): A type of tax-optimised option plan enabling companies to grant equity to selected high-level or other employees, rather than all employees. 


Company Valuation:
The process of determining the current financial value of a company or one of its units as objectively as possible, using a variety of metrics such as an overview of its financial statements, cash flow models, and considering the market value of comparable companies. Setting a company valuation is notoriously complicated, and sometimes subjective, which is why can often become a point of debate among relevant company stakeholders. Valuations can be used for a multitude of purposes, such as reaching agreements with investors, determining a company’s sale price, taxation, and more. 

Conversion: The act or process of investors’ investment in a capital converts into shares (i.e. when shares are issued to them in return for their investment). 


Convertible Note:
A short term loan from an investor to a company, where instead of receiving cash plus interest the investor receives company equity plus interest on equity in return. 


Crowdfunding:
A form of funding that comes from a large number of investors who contribute very small amounts of capital to the business, typically through the internet (crowdfunding platforms, social media etc.). Some limitations apply to the process regarding who is eligible to contribute and how much. 


D


Debt:
A sum of money owed by the company to external individuals or entities. The company will have to repay the debt at a later, predetermined date (either in cash, equity, or other means/asset pre-agreed upon with the borrower), typically with an interest. 


Debt Financing:
The process of raising capital by selling debt instruments (such as bonds or notes) to investors. The two parties pre-agree on the date on which the lender must be paid back. 


Dilution:
When the value of holders’ options/shares decreases as a result of new shares being issued. 


Dilutive Secondary Offering:
A secondary public offering that is carried out through the creation of new shares in the company, which are then offered for public sale. 


Discount Rate:
A valuation discount offered to early investors in a company’s subsequent funding round, to reward them for the risk they took by investing in the company early on. 


Dividends:
Portions of a company’s profits that are distributed to its investors. 


Drag-Along Right:
A contractual right attributed to majority shareholders, allowing them to force minority shareholders to participate in the sale of the company under the same terms and given the same valuation as majority shareholders. 


Diversification:
An investment strategy aiming to eliminate the risk of losses, by spreading the investor’s capital across a wide range of investments within their portfolio. This could mean investing in diverse asset classes, industries, geographic locations, and more. 


Down Round:
A funding round where investors are offered the chance to buy shares at a price lower than the one set at the company’s last funding round. This is a measure companies are forced to take when they need to attract new investment but have discovered that their valuation is lower than it was during that last financing round. 


Due Diligence:
The research or audit carried out on a potential investment, to confirm all relevant facts before entering an investment agreement with that company.  

 

E

 

Employee Stock Option Plan (ESOP) / Employee Share Plan: A programme dictating the terms to which equity distribution among employees must abide within a company. 


Enterprise Management Incentive (EMI):
A UK tax-optimisation scheme, designed to incentivise investors to fund small/medium size startups. Read more about it here


Equity Management:
The process or manner in which a company distributes, tracks, and reports on its equity and any activity relating to that. 


Exercise Window:
A fixed period after an employee’s departure from the company during which he retains the right to exercise his remaining vested options. 


Exit:
An event which gives investors the opportunity to sell their shares and therefore cash out on what they own in a company (eg. an acquisition or IPO).  


Exit Strategy:
 A plan of how to liquidate an investment in a business or financial asset. Normally, this refers to an IPO, acquisition/buy-out, and sometimes bankruptcy. 


Equity:
Any type of security that represents ownership in a company. 

Equity Grant (aka Equity Award): A grant of equity with a vesting schedule. The grants can be part (or not part) of the incentive pool. The grant can have multiple transactions: issuance, exercise cancellation.


Everyday Investor (aka Restricted Investor):
An investor who has not and does not intend to invest more than 10% of his/her annual net assets in unlisted securities.  




F

 

Fully Diluted Equity (FDE): The total number of shares that would be held by each stakeholder if all of the company’s legal obligations towards its stakeholders (eg. repaying convertible notes) were fulfilled. 


Fund:
A specific amount of capital reserved for a specific purpose. 


Financial Conduct Authority (FCA):
The UK’s regulatory body for financial services. 


Floor Price:
A type of default valuation at which a convertible will convert to equity in the event that a trigger event (eg. external priced round or transaction) does not occur by the Longstop Date. The floor price is pre-agreed upon in the convertible’s terms, and is often set at the company’s valuation during its latest funding round. 



G

 

“Going Public”: Getting listed on the stock market (synonym = reaching an IPO). 

Grant: A contractual agreement whereby the company offers a certain individual (normally an employee) a certain amount of securities (eg. options) without the individual having to purchase them. 


Grant Cancellation: When a portion of a grant is cancelled.


Grant Exercise: When part of the grant is converted into shares (which normally involves the optionholder paying a pre-agreed price to purchase these shares).


Grant Issuance:
A grant comes to existence when an admin issues the grant.


Growth Investing:
Investing on growth stock. In other words, this investing strategy prioritises investment in early stage companies with exceptional expected growth and/or profit increase. In this way, the investor’s capital will increase over time. 


Growth-Stage:
The stage in a company’s development where it has outgrown the seed stage, has achieved proof of concept, and is now pursuing scalability. 


Growth Stock:
Company stock that is forecasted to grow at a much faster rate than the market average. Growth stock generally does not pay dividends, to allow for the company to reinvest potential earnings with a view to accelerating short-term growth. Growth stockholders will then make earnings through capital gains on selling their shares.



H


High Net Worth Investor:
An individual investor who had an income of minimum £100,000 and/or net assets valued at minimum £250,000 in the previous financial year.

 

I

Incentive Pool:The percentage of the company’s total outstanding shares reserved for employees. 

Investment Round/Series: A period of time over which a company is actively raising capital through negotiations with investors. After outgrowing its seed stage, a company can go through multiple funding rounds, each of which will be given a letter to represent its place in the sequence of funding rounds. In other words, the company will start with a Series A, followed by a Series B, C, and so on.

Initial Public Offering (IPO): When a company offers its stock for sale to the public (i.e. enters the stock market) for the first time. 

Incentive Stock Options (ISOs): Stock options that carry certain tax and capital gains benefits, as they are designed to incentivise their holders (typically employees). These benefits are normally alleviation of regular federal income tax upon exercise, and/or long term capital gains treatment. 

Incentive Stock Options (ISOs): Tax-optimised options which, when exercised, are taxed at a capital gains rate rather than an ordinary income rate. 



K

 

Know Your Client (KYC): The regulatory process that financial firms have to go through to verify the details of their customers, in order to help prevent financial crimes. 



L

 

Liquidity: The degree or ease with which a security can be bought or sold, and therefore converted into cash. 

Liquidity Event: An event triggering the conversion of stakeholders’ options or shares into cash (eg. an acquisition). 

Liquidation Preference: A clause in a company’s contract with stakeholders dictating the order in which shareholders will be paid out in case of a liquidation event. Most commonly, priority will be given to investors and preferred shareholders. 

Longstop Date: A pre-agreed deadline by which the convertible trigger must occur before the conversion is set by default to the floor price.  

M


Maturity Date (for convertible notes):
The date on which the short-term loan granted to the company expires, and therefore needs to be repaid.  

 

N

 

Nominee: An individual or entity assigned the responsibility to administer assets on behalf of and in the best interest of a beneficial owner. Such responsibilities may include making decisions relating to bankruptcy, charity, pension, and more. A nominee often serve to conceal the beneficial owner’s identity and/or relieve him/her from the administrative burdens of shareholding. 

Non-Dilutive Secondary Offering: When a secondary public offering takes the form of one or more major stockholders offering all or a significant part of their shares for public sale. 

Non-Disclosure Agreement (NDA): A legally binding contract that preventing the parties signing it from sharing with any other parties the information that they will receive within a specific context context (eg. a meeting). 

Non-Qualified Stock Options (NSO’s): Options that are taxed upon exercise (at ordinary income rates), rather than when their corresponding stock is sold. The taxation occurs on the difference between the options’ exercise price, and the fair market value of the corresponding stock at the time of the exercise.  



O

 

Options (ESOs): A contract granting employees the right to buy a certain number of company shares at a predetermined price, within a specific time window. 


Ordinary Shares:
Shares offering their holders normal equity in a company, along with certain rights - typically including the right to vote at shareholder meetings, receive dividends, as well as distributions, but not preferred rights. 



P

 

Participation Preference: A right attributed to holders of certain types of preferred stock. Participation preference entitles relevant stockholders to receive preferred dividends as well as an additional dividend based on some predefined condition. 

Phantom Shares (Virtual Shares/VSPs): Gives holders the right to a cash payment corresponding to the market value of a specific amount of company shares at a specific time in the future/when certain events occur (eg. exit). 


Portfolio:
A set of financial assets held by a certain individual or entity. Examples may include shares or bonds. 

Portfolio Company: A company in which a certain VC, buyout firm, holding company, or independent investor has invested in. 

 

Post-Money Valuation: A company’s valuation after an investment or financing. 

Pre-Emption: Also referred to as ‘anti-dilution’. A company’s contractual obligation towards its shareholders to offer them the opportunity to buy additional shares, with a view of maintaining their current ownership percentage in the company, before any shares are issued to further shareholders. 

Preferred Stock: A type of company stock that entitles its holders to higher claims on assets (such as dividends) in the event of a liquidation compared to common stockholders. However, preferred stockholders still have less claims than bondholders, and typically have zero or more limited voting rights than common stockholders. 

Pre-Money Valuation: A company’s valuation before an investment or financing. 

Pre-Seed Stage: A very early stage in a company’s funding journey (typically depending on the founders’ friends and family), which aims to support the development of a minimum viable product (MVP) and a core team that will increase its chances of getting more significant funding in the future.  


Priced Round:
A funding round where investors purchase company shares at a fixed share price, or invest through convertible notes. 

Public Offering Price: The price at which a company’s stock is sold on the stock market.

R

Refresher Grant: A rare type of forward-dated grant offered to exceptionally performing employees, on top of their initial grant. Vesting schedules for refresher grants vary, but often their terms allow for a part of the grant to begin vesting parallel to the employee’s initial grant, and the remaining part after the initial grant has vested fully.

Restricted Stock Units (RSUs): Common stock is issued to the holder, at no cost to that person, at a certain point in the future. There is no exercise process, as the shares are issued automatically upon vesting.

Return on Equity (RoE): A measure of a company’s financial performance, based on how effectively it is utilising its assets to generate profit. ROE is calculated by dividing a company’s net income by its shareholders’ equity.  

Right of First Refusal: A company’s right to decide whether it would like to purchase an employee’s shares before a third party is given the option to. Most venture-backed companies will reserve this right when it comes to their common stock. If the company decides to purchase the employee shares, it will do so on the same terms as a third party would. Often, if the company is not interested in buying the employee shares, its investors will be given the option to do so before any third party. 

Run Rate: A projection of a company’s future financial performance using current financial data as a predictor. Alternatively, run rate is a term that can also be used to describe a company’s average annual stock dilution from issued option grants over the latest 3 year period documented in its annual reports.  



S

 

Secondary Public Offering (SPO): The public sale of stock belonging to a company that has already listed on the stock market - i.e. made its  initial public offering. 

Secondary Market: A market where investors can buy shares, not directly from the company who issued them, but from other investors holding shares at that time. 

 

Secondary Transactions:  The purchasing of stock not directly from the issuing company (primary transaction), but from a party that has been issued stock by that company (eg. shareholding employees). 


Security:  Any type of shares or capital stock a shareholder may hold, which represents his/her ownership interest in the company. 

 

Seed Enterprise Investment Scheme (SEIS): A UK tax-optimisation scheme, designed to incentivise investors to fund Seed stage startups. Read more about it here

 

Seed Round/Stage: The stage in a company’s development where a value proposition, a viable product, and consistent monthly revenue and growth have been established. Companies at this stage have established some funding, but are seeking further investment to help them scale enough to become a competitor in their field. 

 

Share Capital: The part of the capital of a company that comes from the issuance of shares.

Share Class: Different types of company stock, which are distinguished by one another using alphabetic markers (Class A, Class B, etc.). Each share class grants different rights and privileges to its holders, such as voting rights. 

 

Share Price: The price of a company’s shares, determined by its current valuations divided by its total number of shares.



Shareholder Agreement: A document detailing the rights and obligations of a company’s shareholders. 

 

Shareholder Equity: A shareholder’s stakes in the company. Can take the form of a number of different security types - such as ordinary shares, options, convertible notes, etc.



Shares: Also referred to as ‘stock’’. A type of security representing ownership in a company and granting its holders to certain rights, such as dividends from the company. 

 

Shareholder Register: A list outlining a company’s current shareholders, including their names, address, and number of shares held. The list may also include shareholders’ occupation and the amount they paid for their securities. The shareholder must be updated on an ongoing basis as ownership evolves within the company.

 

Stage: A company’s current state of development, typically defined by its size and amount of funding raised. 

 

Stockholder: An individual or entity entitled to a certain amount of stock within the company.

Stock Appreciation Rights (SAR’s): A right granted to employees which enables them to buy company stock at an amount equal to the excess of the fair market value of the company’s equity, for an exercise price normally equal to the company equity’s fair value at the time of the grant issuance. 

 

Strike/Exercise Price: The predetermined price at which employees can purchase the shares corresponding to their options. 

 

Sweat Equity: The non-monetary investment that founders and/or employees put into a business, typically during the early stages. Especially when companies are still cash poor, management will often repay employee’s sweat equity with stock.  



Sophisticated Investor: An investor who meets certain criteria laid out in the UK Financial Services and Markets Act 2000, such as having been part of an angels network for the last six months at least, or having invested in at least one unlisted company in the last two years minimum.  

 

Subscription Agreement: A contract between a company and investors purchasing shares in it, which outlines the terms of the purchase, as well as each party’s rights and obligations towards one another. 



T

 

Tag-Along Rights: A contractual right enabling minority shareholders to participate in a transaction, if they wish, where majority shareholders sell shares, on the same terms and at the same valuation as majority shareholders. 

 

Trigger Events: Certain events that will automatically signify the conversion of a convertible into equity. Most commonly, these will be either an IPO, a significant funding round, or a change of control in the company. 

 

Term Sheet: A nonbinding agreement between a company and a potential investor, serving as a starting point for their negotiation of an actual contract.  

The term sheet will lay out the basic terms that must be met for the investment to be made, and once all parties agree on those, they will use the term sheet as the foundation for a more detailed, legally binding agreement. 

 

Trust Fund: A legal arrangement whereby a grantor assigns to a trustee the responsibility of administering certain assets for a beneficiary for a fixed period of time. Following the expiration of that period, the fund is handed over to the beneficiary. 

 

Trustee: A person or entity assigned the responsibility to administer assets on behalf of and in the best interest of the beneficial owner. The concept of the trustee is very similar to that of a nominee, although a trustee is granted broader power and is required to administer the beneficial owner’s assets for specified purposes. 




U

 

Unvested Stock: An amount of equity held by a stakeholder (typically an employee), which has not yet met its vesting criteria and can therefore not be exercised. 



V

 

Valuation: A company’s estimated monetary value, taking into consideration both quantitative (eg. raised capital) and qualitative (eg. perceived market fit) parameters. 

 

Valuation Cap: A cap on the price at which an investor’s convertible note will translate into equity in the future. This functions as a type of reward to investors who take the risk of investing their money in a company at an early stage of its development. 

Venture Capital (VC): A type of funding, typically coming from wealthy investors or entities, given to startups that appear to have significant growth potential. This funding can translate into cash, but also technical and/or business development related guidance. 

 

Vesting: Certain types of securities (eg. options) do not allow their holders to buy or sell shares immediately. Holders’ equity become exercisable (gradually or all at once) over a specified period of time, during which they are said to be vesting. 

 

Vesting Schedule: An outline of how many options an employee is allowed to exercise at which points in time. At the end of the vesting schedule the employee should be able to exercise all of his/her granted options. Read more here

 

Voting Rights: A shareholder’s right to vote on company decisions relating to corporate policy (eg. electing a board of directors, issuing grants to employees, making significant changes to the company’s operations). The number of votes a shareholder is entitled to corresponds to his/her number of shares.  



W

 

Warrants: A type of option, but issued directly by the company. Therefore, when exercised, the shares corresponding to the warrants are received by the company rather than another investor. Read more here. 



Y

 

Yield: The earnings returned on an investment over a certain period of time, including interest or dividends. Yield is normally measured as a percentage of either the amount invested, or the current market value or face value of a security. A yield can be classified as known or anticipated, depending on whether the company’s valuation is fixed or fluctuating, respectively. 

 

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Anastasia Valti
Anastasia Valti

Anastasia holds an MSc in International Marketing, and is currently our Marketing Associate at Capdesk's London office.