As an new entrepreneur, learning business and industry terms is vital to improving your startup intellect. Every founder should have a basic understanding of startup terminology in order to fully comprehend how to launch and fund a successful business.
In this issue of the Flash, we are defining five key terms every entrepreneur should know. For more key terms, please check out our Deal Dictionary which is designed to help entrepreneurs understand the jargon that comes up in discussions with investors and legal counsel.
#1 Double Trigger Vesting Acceleration
This is a type of accelerated Vesting that causes all or a portion of the shares to be deemed Vested upon the occurrence of a combination of two events, which are typically (1) a Change of Control and (2) an involuntary termination (customarily defined as termination without cause or a resignation caused by events/circumstances that essentially forced the person to resign) within some period after that Change of Control. Full acceleration pursuant to this version of vesting acceleration is generally acceptable to investors.
#2 Key Person Insurance
Life insurance on one or more "key person(s)" to a company's future success (usually a founder, current CEO or lead technical employee). This is sometimes required by investors as a condition to an investment in the Company. The proceeds of the life insurance are typically payable to the company.
#3 Piggy-Back Registration Rights
This is a right typically given to investors alongside Demand Registration and S-3 Registration Rights. Piggy-Back Registration Rights entitle investors to have their shares included with any shares the company itself wants to sell and register for public sale (hence, the investors can sell their shares to the public by "piggy-backing" on top of the company's public offering).
#4 Post-Money Valuation
The valuation of the Company after the investors have made their investment. Typically, this is just the Pre-Money Valuation plus the total amount of investment in the round.
#5 Qualified Financing (Next Equity Financing)
This is a term that is in Promissory Notes that are convertible into equity. It is often the trigger for the automatic conversion of the outstanding amount in the Promissory Note into equity, and this term will typically specify a minimum round size. For example, if a Qualified Financing is defined as one resulting in $1,000,000 of new cash proceeds to the company, if the company raises a new equity round of $2,000,000, the Promissory Notes would automatically convert, but not if the size of the raise in the new round was less than $1,000,000.
Also in this week’s Flash: