The Urban Startup Law Dictionary
A Round Financing:
AKA Series A Financing, the name given to a business’s first significant round of financing usually given to them by private equity / venture capital firms. Prepare to give up some shares in exchange for cash! Earlier stage funding is referred to as ‘Angel’ or ‘Seed’ round.
This is a form of vesting which takes place at a much faster rate – think of it as the Lamborghini of vesting. This allows the option holder to receive the monetary benefit from the option much sooner than usual.
An accelerator is a program that mentors and accelerates the growth and success of a startup. Prepare to give away single-digit chunks of equity to develop your business. Accelerators include: Y Combinator, TechStars, 500 Startups.
When a business buys at least half of another business. Think Facebook buying Instagram.
Someone whose job it is to control the operation and affairs of a business or institution.
A group of people who have been chosen to help a business. They form a board and help manage, but they do not have the authority to vote on corporate matters.
An investor who puts their own money into startups or entrepreneurs. Often angel investors will be family or friends, or someone you may meet on your startup journey. They tend to give you a one-time injection of money to support and carry your business. There are small angels that do 1-2 deals a year and larger ones who can do 20 deals a year. Thank God for them!
This is the process of distributing to give an amount or share of your business to someone or something.
App Developers Agreement:
Though not required by law, this agreement will protect your intellectual property (IP), prevent an app developer from stealing your idea or sharing it and also limit your liability if the developer is later sued for patent infringement. They tend to include: application scope of work and deliverables, ongoing communication and reporting requirements, intellectual property rights and dispute resolution processes.
This provision is a clause in an option, security, or merger agreement that gives the investor the right to maintain his or her percentage ownership of a company by buying a proportionate number of shares of any future share issue OR by not having to sell a portion of their equity to future investors.
Articles of Association:
This document is required for a company formed in the UK under the Companies Act 2006 and previous Companies Acts. The articles of association set out how the company is run, governed, and owned.
Authorised Share Capital:
The authorised capital of a company is the maximum amount of share capital that the company is authorised by its constitutional documents to issue to shareholders.
Bankruptcy is a legal proceeding involving a person or business that is unable to repay outstanding debts. All of the debtor’s assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt.
This is of the quality of a business’s policies, products, or strategies. They tend to be used as a comparison to weigh your business against peers.
Board of Directors:
This group governs a company. It is a group of people who are elected by a business’s shareholders. They meet periodically to oversee the businesses management and ultimately represent the interests of the shareholders. The board has the authority to make decisions but usually confines itself to the issuance of shares, dividends, naming members to various committees, adopting bylaws, hiring or firing senior management, and setting the businesses overall direction.
Ever heard the phrase ‘pulling yourself up by your bootstraps’, this phrase defines what bootstrapping is. It basically means, starting a business with no money — or, at least, very little money.
This is a short-term loan used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow.
A business plan is a written document that describes your business’s objectives, strategies, sales, marketing, and financial forecasts. A business plan helps you: clarify your business idea, spot potential problems (and find potential solutions), set out your goals and measure your progress
This is the rate at which the business is spending its investment before generating a positive cash flow.
Buy-Sell Agreement / Buyout Agreement:
This legally binding agreement is drawn up between co-owners of a business. It governs the situation if a co-owner experiences a specific event outlined in the agreement. The surviving partners are bound to buy out the other partner’s interest in the business should a specific event occur. Specific events which may trigger a buy/sell agreement include death, divorce, long-term disability, retirement, or bankruptcy.
The rules and regulations enacted by an association or a corporation to provide a framework for its operation and management. Bylaws may specify the qualifications, rights, and liabilities of membership, and the powers, duties, and grounds for the dissolution of an organization.
Right for an investor to buy an asset (such as a share) at a specified price and time.
In a startup you usually acquire your shares on a vesting schedule. A cliff is the period during which you cannot acquire your shares. You have to wait until the end of the cliff period. For example, you tend to receive it shares a four year period, plus a cliff. At the end of the first year, you receive the first one-fourth, called the “cliff”, because if you leave before one year, you get nothing.
Law that protects your work if it is original and tangible for 70 years following the artist’s death. This protection starts as soon as you create your work. To benefit from this protection, your work doesn’t need to be registered. The duration of the protection depends of the type of your work.
Event or condition that must occur if you want your contract to come into force.
Right for a shareholder to convert preferred shares into ordinary shares. This right can be mandatory or optional.
Type of shares that can be converted into another type of shares. Usually preferred shares are converted into a fixed number of ordinary shares.
Also known as a convertible debt, it is a loan that the investor can convert, in whole or in part into shares issued by the borrowing company on agreed terms.
This is a way of raising money that involves a large number of people, usually by utilising online platforms. It is a form of alternative financing and crowdsourcing and has been used to fund a wide range for-profit entrepreneurial ventures such as artistic and creative projects, medical expenses, travel, and community-oriented social entrepreneurship projects
Date of Issue:
The date when a share is issued.
Way of financing by selling bonds or loans to investors. In return, the investors receive the assurance that their loan will be repaid. The debtor offers some guarantees, usually a surety that a third party will repay on behalf of the individual that took the loan.
The company issues new shares that cause a reduction in the ownership percentage shares of the current shareholders.
Drag Along Right:
Right of the majority shareholder to force the minority shareholder to join in the deal of the company.
An investigation of a potential business or contractor before entering into a contract.
Short pitch that summarises an idea or business concept.
This is a contingency plan that is typically executed by an investor, trader, venture capitalist or business owner to liquidate or dispose of business assets. Usually an exit strategy is executed for the purpose of exiting a non-performing investment or closing a business that is not generating profits or experiencing a dispute.
Fair Market Value:
Fair market value is the price that a person reasonably interested in buying a given asset would pay to a person who is selling it. It is the price that the asset would fetch at the market.
This describes the highest potential amount of common stock a startup will have outstanding, regardless of vesting provisions, and assuming all options to assume the highest share count possible.
In a startup, it is the second stage of the funding life cycle. The startup is more established and the entrepreneurs are looking for higher investments especially from angel investors.
This is a financial incentive to encourage key employees to stay with a company. They help increase employee retention rates and are common in industries where highly-compensated employees are likely to move from company to company.
This is a company which is almost the parent of another to hold or own another company’s shares or assets. These type of companies tend to exist to own real estate, patents, trademarks, stocks and other assets. If a business is 100% owned by a holding company, it is called a wholly owned subsidiary.
A company acquires another company while the targeted company management has rejected the takeover.
Training program provided by a company that helps startups to develop their project by supplying services, management training, office space, mentorship. However to be part of programs like this startups must give away equity of their startup.
Compensation in case of a breach of contract.
Intellectual Property (IP):
This gives ownership of its creator to the creations which are not physical objects but have value. Examples of IP include: designs, concepts, software, inventions, trade secrets, formulas, brand names, and art. IP can be protected by copyright, trademark, or patents.
Initial Public Offering (IPO):
A company offers its shares to the public for the first time. As soon as a company
Issued Share Capital:
Refers to the total number of shares in a company held by shareholders.
Association between two or more parties that accept to pursue together a specified goal in a specified period of time.
Employee who has major ownership and/or decision-making role in the business. Key employees are usually highly compensated and may receive special benefits as an incentive both to join the company and to stay with the company.
Key Person Clause:
This clause ensures that a key individual in a business devotes enough time to the partnership. If a key person doesn’t devote this specified amount of time to the partnership, the management of the funds is not allowed to make any further investment.
Key Person Insurance:
Life insurance on a key person in the company such as the founder. The founder death can cause financial losses. This insurance compensates these losses.
Letter of Intent:
Legal document that outlines the intention of parties who plan to enter into a contract. Usually, an investment agreement.
Permission for a person to use the property or intellectual property of someone else.
Legal contract in which a licensor authorises a licensee to use his property such as a patent or a software.
When a startup is liquidated, a liquidation preference determines which parties get paid first and how much they get.
Shareholder who owns more than 50 % of the capital shares issued.
Management rights include various rights typically given to the management of the company that the other individuals may be allowed to have. For instance, a non-manager could benefit from the right to attend board meeting.
An investor has the right to require the company to repurchase in part or in whole an investor’s shares at a specified price and time.
Memorandum of Association:
This document is required for a company to be formed in the UK under the Companies Act 2006 and previous Companies Acts. The Memorandum of Association is the document that sets up the company.
Non-Disclosure Agreement (NDA):
Legal contract in which parties involved share confidential information. The parties agree not to disclose these information to a third party.
Prohibition for an employee to solicit the company’s clients or employees for his own benefit or the benefit of a competitor once he leaves the company. This prohibition is embodied in a non-solicitation agreement or in an employment contract.
Clause in an agreement or a letter of intent between a seller and a buyer that prevents the seller from negotiating or discussing the purchase with other potential buyers.
Refers to common stocks reserved for employees. Employees can receive common stock of the company instead of a cash bonus in reward for their great job. This process allows a company to attract a talented workforce.
Also known as common shares, they refer to shares issued by a company that entitle their holders to receive a part of the company profits through a dividend distribution and a right of vote at shareholder meetings. Usually it is one vote per share. Concerning the payment of dividend, ordinary stock dividends will be paid only after preferred share dividends are paid.
Privilege that allows the right holder to purchase in priority an asset . For instance, a shareholder with a pre-emptive right can buy shares newly issued before these shares are offered to the public.
Type of stock that provides some advantages compared to common stock. For instance a company has to pay dividends to a preferred shareholder before paying any dividends to a common shareholder.
Type of investment in companies which are not publicly traded on a stock exchange. Usually this investment is made by private funds and investors.
The holder of this option has the right to sell their shares/ assets at a specified price and specified time.
Minimum number of members of a company required to be present at any meeting to transact the business legally.
Fundraising for your company. Most of the time this money comes from your friends, family, investors, or crowdfunding at the beginning.
These are shares issued on the terms that the company will, or may, buy them back in the future. The date may be fixed or at the director’s’ discretion. The redemption price is often the same as the issue price, but need not be.
In a startup, co-founders receive shares usually according to a vesting schedule. When a founder, fully vested, asks for VC funding, the investor can ask him to repurchase his shares. If the founder leaves the company before the end of the reverse-vesting period, other shareholders can buy back the founder shares not yet vested.
Right of First offer
Commitment made by the owner of an asset to offer to sell this asset to the business owner / asset holder before offering to sell it to third parties.
Right of First Refusal
This right gives the holder the opportunity to enter purchase shares or enter into a business transaction before a third party.
SAAS AKA Software As A Service:
This is a software licensing and distribution model in which software is licensed for a third-party provider to host applications and makes them available to customers over the Internet.
The Scaleup is the evolved form of a startup. Contrary to a startup, a scaleup is an established entity. Its main challenge is growth, especially in market access, partnerships, investors’ money number of employees etc.
Initial capital you may need to start your company. Usually it may come from your friends and family or investors such as angel investors.
This is an investment fund that focuses on investing in startups at the seed round stage.
When you create a startup you need to find funds to develop the project. The seed stage is the first stage of fundraising.
Legal private agreement between the shareholders of a company. This agreement regulates the relationship between the shareholders and how the company will be run. This agreement protects also the minority shareholders against the majority when they use their voting right. A shareholder is considered as a minority shareholder when he has less than 50 % of the issued shares of the company.
Also known as an employee handbook, a staff handbook is a book given to employees that provides all the general information about the company. The staff handbook varies from company to company but usually it contains the company policy or procedure about the daily breaks, the employee pay or the disciplinary policy. This book has to be signed by the employees and can be revised annually.
This refers to equity given to someone on the basis of the work they put into the business.
This right is designed to make the sale of a business easier. Minority shareholders are not able to block the deal, if the majority shareholder wishes to sell.
A trade secret consists of any confidential business information such as a design, pattern, process, practice, etc. This secret gives economic advantages to a company over its competitors. It can be commercial, manufacturing, or industrial secrets.
This is an aspect of your brand which you must register as a trademark to protect it. Trademarks tend to be names, logos, or taglines and are protected within the territory you register them in.
It is usually a non-binding document that outlines the terms and conditions of a business agreement. The Term Sheet is a tool to prepare the final agreement. In this template, you will develop all the details of this agreement such as the amount of the transaction or the price of share.
A portion, a piece of something such as a loan or share issue.
It is an estimation of the value of an asset or a company.
A vesting schedule is set up by a company to determine when you’ll be fully vested, or acquire full ownership, of certain assets.
Investment funds that invest in startup or small companies.
Garanties made by a party which protect the other party from unexpected events. For instance if a manufacturer is late in the delivery of the product, the purchaser can ask for compensation or even terminate the contract. Usually you include warranties in the contract.
A White Label product is a product produced by one company (the producer) and sold and rebranded by others companies (the resellers or marketers). The origin of the product is not usually known by the customer.
If you need to prepare any of the above contracts or have further questions, please don’t hesitate to contact us.