Equity Glossary

Learn about equity, vesting, and startup compensation terms.

22 terms

All terms

409A ValuationA 409A valuation is an independent appraisal of a private company's common stock fair market value, required by the IRS whenever stock options are issued. Startups must refresh it every 12 months or after material events like fundraising rounds. The resulting per-share price sets the minimum strike price for new employee option grants.
Anti-DilutionAnti-dilution provisions protect preferred shareholders in down rounds by adjusting their conversion price so they receive more common shares for the same invested dollars. Full ratchet is the most aggressive form, while weighted average is more common and less punitive. The dilution effectively comes out of common stockholders' ownership.
Cap TableA cap table is the master record of who owns how much of a company, listing every class of stock and who holds it. The fully diluted version includes outstanding shares plus options, warrants, and convertible securities — it's the only denominator that gives you your true ownership percentage. Always ask for the fully diluted cap table before accepting an equity offer.
Cliff VestingCliff vesting means none of your equity vests until a set date, the cliff, usually 12 months after you start. On that date a block vests at once, typically 25% of a four-year grant, and the rest vests monthly or quarterly afterwards. Leave before the cliff and you usually keep none of it.
Common StockCommon stock is the basic ownership unit held by founders and employees, representing residual value after all debts and preferred obligations are paid. It's last in line in a liquidation, which means if the company exits below the total liquidation preference stack, common stockholders get nothing.
Convertible NoteA convertible note is a short-term loan that converts into equity at a future priced round. It includes principal, interest, a conversion discount, and often a valuation cap. It's faster and cheaper than a priced round, but uncapped notes can create major dilution surprises.
DilutionDilution is the reduction of your ownership percentage when a company issues new shares. It happens in every funding round, but your economic value can still increase if the company's valuation grows faster than the dilution.
Double-Trigger AccelerationDouble-trigger acceleration vests your remaining unvested shares only if two events occur: the company is acquired AND you are terminated without cause. It's the most employee-friendly and deal-friendly form of acceleration.
Drag-Along RightsDrag-along rights force minority shareholders to sell their shares when a majority approves an acquisition. They protect majority investors but can override your individual preferences about when and how to sell.
Founders SharesFounders shares are the equity granted to company founders, usually subject to vesting restrictions even though founders started the company. They often come with special voting rights and control provisions.
Founding EquityFounding equity is the total ownership package offered to founding-team members. It includes grant size, vesting terms, acceleration provisions, and the class of shares — usually the most generous equity terms in the company.
Liquidation PreferenceLiquidation preference determines who gets paid first and how much when a company exits. Investors with preferred shares typically get their investment back before common shareholders see a dime, which can dramatically reduce employee payouts.
Option PoolThe option pool is the set of shares reserved for current and future employees. When the pool is expanded, everyone's ownership gets diluted — but it's necessary to attract and retain talent.
Preferred SharesPreferred shares are a special class of stock that gives investors priority over common shareholders in dividends, liquidation, and sometimes voting rights. They're the standard instrument for venture capital investments.
Pro-Rata RightsPro-rata rights give existing investors the option to participate in future funding rounds to maintain their ownership percentage. As an employee, you're usually not offered these rights.
Right of First RefusalRight of first refusal gives the company or existing investors the option to buy your shares before you sell them to an outside party. It limits your liquidity but protects the cap table from unwanted outsiders.
SAFE NoteA SAFE (Simple Agreement for Future Equity) is a convertible instrument that gives investors the right to receive shares in a future priced round. It's simpler than a convertible note but still creates dilution when it converts.
Secondary SaleA secondary sale is when you sell your existing shares to another party — often an investor or through a company-organized tender offer — before the company has an official exit. It's a way to get liquidity without waiting for an IPO or acquisition.
Single-Trigger AccelerationSingle-trigger acceleration vests all your remaining unvested shares when the company is acquired, regardless of whether you keep your job. It sounds employee-friendly but can make acquisitions harder to close.
Strike PriceYour strike price is the fixed cost per share to exercise your stock options. Set at grant based on the 409A valuation, it's what you pay out of pocket to turn options into actual shares.
Vesting AccelerationVesting acceleration is any provision that speeds up your normal vesting schedule. The two main forms are single-trigger (acquisition only) and double-trigger (acquisition + termination), each with different trade-offs.
Vesting ScheduleA vesting schedule is the timeline that determines when your equity becomes yours. The standard is 4 years with a 1-year cliff: nothing for 12 months, then gradual vesting until fully owned at 48 months.