Startup Equity Glossary
37+ terms every founder, employee, and investor should know. Each definition links to the relevant calculator or guide on this site.
4
409A Valuation
An independent appraisal of a private company's common stock fair market value, used to set exercise prices for stock options. Required by IRS Section 409A. Typically updated annually or after material events.
Employee equity calculator8
83(b) Election
A tax election filed within 30 days of receiving restricted stock that lets you pay tax on the current (low) fair market value rather than when shares vest at a potentially higher value. Critical for founders and early employees exercising options.
Co-founder equity guideA
Anti-Dilution
A provision in preferred stock that adjusts the conversion price downward if the company later raises money at a lower valuation. Protects investors in down rounds at the expense of common shareholders.
Anti-dilution calculatorB
Broad-Based Weighted Average
The market-standard anti-dilution formula that adjusts conversion prices based on the weighted average of old and new share prices, using all outstanding shares (including options and convertibles) in the denominator. Less punitive for founders than full ratchet.
Compare anti-dilution typesC
Cap Table
Short for capitalization table. A record of all equity ownership in a company: common stock, preferred stock, options, convertible securities, and warrants. Shows who owns what percentage on both basic and fully diluted bases.
Cap table builderCliff
The initial period (usually 12 months) during which no equity vests. After the cliff, a large chunk (usually 25%) vests immediately, with the remainder vesting monthly or quarterly over the remaining vesting period.
Common Stock
The basic class of shares held by founders and employees. Has the lowest priority in liquidation (after debt, preferred stock, and other obligations). Does not carry the special rights of preferred stock.
Conversion Price
The price at which preferred stock or convertible securities convert to common stock. For preferred stock, this is typically the original issue price. Anti-dilution provisions adjust this price downward in down rounds.
Convertible Note
A debt instrument that converts to equity at a future financing event. Accrues interest (typically 4-8%) and has a maturity date. Includes a valuation cap and/or discount rate for conversion.
SAFE vs convertible noteD
Dilution
The reduction in an existing shareholder's percentage ownership when new shares are issued. Occurs during funding rounds, option grants, and SAFE/note conversions. Can be calculated as (ownership before - ownership after) / ownership before.
Dilution calculatorDiscount Rate
A percentage discount on the share price that SAFE or convertible note holders receive when converting to equity. A 20% discount on a $5 share price means conversion at $4 per share.
Down Round
A funding round at a lower valuation than the previous round. Triggers anti-dilution provisions for protected investors and can significantly increase founder dilution.
Down round guideDrag-Along Rights
A provision that allows majority shareholders to force minority shareholders to participate in a sale of the company. Prevents a small stakeholder from blocking an acquisition.
E
Exercise Price
The price at which an option holder can purchase shares. Set at the 409A fair market value on the date of the option grant. Also called the strike price.
What your options are worthF
Fair Market Value (FMV)
The price at which a willing buyer and willing seller would transact. For private companies, determined by 409A valuations. For public companies, the market price.
Full Ratchet
The most aggressive form of anti-dilution protection. Adjusts the investor's conversion price to the lowest price at which new shares are issued, regardless of how few shares are sold at that price.
Full ratchet calculatorFully Diluted
A share count that includes all outstanding shares plus all shares that would be outstanding if every option, warrant, SAFE, and convertible note were exercised or converted. Investors use this for ownership calculations.
Basic vs fully dilutedI
ISOs (Incentive Stock Options)
Stock options with preferential tax treatment. No ordinary income tax at exercise (AMT may apply). If held for 1 year after exercise and 2 years after grant, gains are taxed as long-term capital gains. Only available to employees.
L
Liquidation Preference
The right of preferred stockholders to receive their investment back before common stockholders in a liquidation event (sale, IPO, or wind-down). A 1x non-participating preference is standard; higher multiples or participating preferences are more investor-friendly.
M
MFN (Most Favored Nation)
A clause in SAFEs or convertible notes that lets the holder adopt better terms offered to later investors. If a later SAFE has a lower cap, MFN holders get that cap too.
N
NSOs (Non-Qualified Stock Options)
Stock options taxed as ordinary income at exercise on the spread between exercise price and fair market value. No special holding period requirements. Available to employees, contractors, and advisors.
Narrow-Based Weighted Average
An anti-dilution formula similar to broad-based weighted average but using only preferred shares (not all shares) in the denominator. Slightly more investor-friendly than broad-based.
O
Option Pool
Shares reserved for future employee stock option grants. Typically 10-20% of fully diluted shares. When placed in the pre-money valuation, founders bear the dilution cost (the option pool shuffle).
Option pool calculatorP
Participating Preferred
Preferred stock that receives its liquidation preference AND participates in remaining proceeds alongside common shareholders. Double-dips on returns. Less founder-friendly than non-participating preferred.
Pay-to-Play
A provision requiring investors to participate in future funding rounds to maintain their preferred stock rights. Non-participating investors' preferred shares convert to common, losing liquidation preference and anti-dilution.
Post-Money Valuation
The company's value immediately after an investment. Equals pre-money valuation plus the amount invested. A $5M pre-money plus $1M investment gives a $6M post-money valuation.
Pre vs post-money calculatorPre-Money Valuation
The company's value immediately before an investment. Used with the investment amount to calculate investor ownership: Investment / (Pre-Money + Investment) = Investor Ownership %.
Valuation calculatorPreferred Stock
A class of shares with special rights issued to investors in priced rounds. Includes liquidation preference, anti-dilution protection, board seats, information rights, and protective provisions.
Pro-Rata Rights
The right to invest in future rounds to maintain your ownership percentage. If you own 10% and the company raises again, pro-rata rights let you invest enough to keep 10%.
S
SAFE
Simple Agreement for Future Equity. Created by Y Combinator. An investment instrument that converts to equity at a future priced round. Has a valuation cap and optionally a discount. No interest, no maturity date.
SAFE calculatorShare Price
The value of one share. Calculated as the company valuation divided by the total number of outstanding shares. Different share classes may have different effective prices based on their conversion ratios.
Strike Price
Another term for exercise price. The price at which an option holder can purchase the underlying shares.
T
Tag-Along Rights
A provision allowing minority shareholders to join in a sale initiated by majority shareholders, on the same terms. Protects minority holders from being left behind in a partial sale.
V
Valuation Cap
The maximum valuation at which a SAFE or convertible note converts to equity. A $5M cap on a $500K SAFE means the investor gets at least 10% ownership at conversion, regardless of the round valuation.
Model SAFE conversionVesting
The process by which stock or options become owned over time. Standard schedule is 4 years with a 1-year cliff. Vesting protects the company if a team member leaves early.
W
Warrant
A right to purchase shares at a specified price before an expiration date. Similar to options but typically issued to investors, lenders, or strategic partners rather than employees.
Weighted Average
An anti-dilution formula that adjusts the conversion price based on a weighted average of the old price and new (lower) price, considering the number of shares at each price. See broad-based and narrow-based variants.
Weighted average calculator