Legal Briefs: Your Startup Glossary

Legal Briefs DublinGlobe.com

One of the hurdles for a start-up or early stage company looking for investment is the myriad of technical terms used by investors and advisers.

Being familiar with these terms and what they mean is vital to secure successful investment relationships that fuel your company’s growth. Below is a glossary of some of the terms which you are most likely to come across in the funding process.

Angel Investor: Individual or non-institutional investor who invests in a company at start up or early stage; often provides knowledge and support as well (also called business angel)

Bridging Finance: short term finance used to maintain operations between more substantial rounds of investment

Burn Rate: a measure of how quickly a company is consuming cash, usually calculated on a monthly basis

Call Option: the right (as distinct from an obligation) to buy shares at a specified price and time

Convertible Loan: a loan to the company where the lender has the right to convert some or all of the principal amount of the loan (and possibly any accrued interest) into shares in the company on agreed terms

Convertible Share: a share that may be converted into another class of share; e.g. convert from a preferred share with fixed participation rights into an ordinary share

Dilution: a reduction in a shareholder’s percentage shareholding on the issue of new shares in the company

Down Round: an investment round at a lower valuation than previous investment round(s)

Down Round Protection: provisions that protect an investor from full dilution on a subsequent down round; can be effected by the issue of additional shares to the investor as bonus shares or for a nominal price (often called anti-dilution protection)

Drag Along: a right that enables majority shareholder(s) to force minority shareholder(s) to join in the sale of a company

Due Diligence: the conduct of a full review and analysis of a party before entering into an agreement or a transaction with it; a venture capital fund would generally carry out commercial, financial, legal and technical due diligence in respect of a company before investing in it

ESOP: employee share option plan – where employees are granted options to subscribe for shares in the company at a specified price; designed to incentivise employees by providing them with a stake in the company

Fully Diluted: in relation to share capital, the number of shares that would be in issue if all options, warrants and conversion rights were fully exercised

Initial Public Offering (IPO): the process by which a company obtains a first listing or quotation for its securities on an investment or stock exchange and offers securities to the public for the first time

Liquidation Preference: the right of an investor to get its money back (or a multiple of it) in priority to other shareholders on a liquidation or sale of the company (an investor may have the right to participate pro-rata with other shareholders after it has received its liquidation preference – double dip)

Offer Round Rights: a right to acquire shares before they are offered to others (also called pre-emption rights)

Option Pool: the number of shares reserved for future issue to employees

Post-Money Valuation: the value of a company after new cash is invested, generally calculated by multiplying the price paid per share in the investment round by total number of shares in issue

Preference Shares:
a class of shares which have superior or preferential rights to other shares (e.g. right to receive a dividend or return of capital on a winding up in priority to other shareholders)

Pre-Money Valuation: the value of a company before new cash is invested and used by an investor to calculate the percentage shareholding it will acquire for its investment

Put Option: the right (as distinct from an obligation) to sell shares at a specified price

Redeemable Share: a share which the company may be entitled and/or obliged to buy back from a shareholder

Share Option: the right to buy or sell shares at a specified price and time (see also Put Option and Call Option); in relation to early stage companies, generally refers to a right to subscribe for shares in the company at a specified price and time

Subscription and Shareholders Agreement: an agreement providing for the terms of an investment in a company and also setting out rights and obligations of investor(s) and other shareholders on an on-going basis

Tag Along: an agreement by a shareholder that he will not sell any of his shares in the company without giving other shareholder(s) the right to sell at the same time on the same terms (also called co-sale right or piggy back right)

Term Sheet: A non-binding document setting out the key terms and conditions of a proposed investment and is the base from which more detailed legal documents are developed

Trade Sale: the sale of all or a majority of shares in a company (share sale), or all or most of its assets (asset sale) to a third party

Venture Capital: capital provided by professional firms to high potential early stage companies; usually investment for shares or securities convertible into shares

Warrant: the right (option) to subscribe for shares in a company at a specified price and time

Warranties: in context of an investment, the statements which the company and/or its founder(s) make about the company, its assets and business, the breach of which may give rise to a claim for damages

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Are you a startup with a legal query for our experts? Mail editor@dublinglobe.com and we’ll address it in a future column.

With thanks to Beauchamps Solicitors

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