Equity Term Explainer

A contract that gives you the right to buy shares in a company at a fixed price (the strike price) within a certain time frame. Stock options are not ...

A type of stock option that qualifies for favorable tax treatment under IRS rules. ISOs are only available to employees (not contractors or advisors)....

Stock options that do not qualify for the special tax treatment of ISOs. NSOs can be granted to employees, contractors, advisors, and board members. T...

A promise from your employer to give you shares of company stock on a future date once certain conditions (typically a vesting schedule and/or a liqui...

Actual shares of company stock that are granted to you immediately but come with restrictions — typically a vesting schedule. If you leave before vest...

The process by which you earn ownership of your equity over time. A vesting schedule determines when your options or shares become fully yours. The mo...

A mandatory waiting period before any equity vests. The standard cliff is 1 year. During the cliff period, zero shares vest. Once you pass the cliff d...

A provision that speeds up your vesting schedule when certain events occur. Single-trigger acceleration means your vesting accelerates upon one event ...

The fixed price at which you can buy shares when you exercise your stock options. The strike price is set at the Fair Market Value (FMV) on the date y...

The current estimated value of one share of company stock, determined by an independent appraisal. For private companies, this is established through ...

An independent appraisal of a private company's common stock fair market value, required by Section 409A of the IRS tax code. Companies must get a 409...

A parallel tax system designed to ensure high-income individuals pay a minimum level of tax. For equity compensation, AMT is triggered when you exerci...

Tax on the profit from selling an asset. Short-term capital gains (held less than 1 year) are taxed at your ordinary income rate (22-37%). Long-term c...

A tax election filed with the IRS within 30 days of receiving restricted stock (not RSUs, not options) that lets you pay taxes on the current value in...

The reduction in your ownership percentage when the company issues new shares. Every fundraising round, option pool expansion, or warrant conversion c...

A protection clause (almost always for investors, not employees) that adjusts the investor's share price downward if the company raises a future round...

Short for "capitalization table" — a spreadsheet showing every shareholder, every share class, every option grant, and every warrant in the company. I...

A right held by preferred stockholders (investors) to get paid back before common stockholders (employees, founders) in a liquidation event (acquisiti...

A class of stock with special rights that common stock does not have — typically including liquidation preference, anti-dilution protection, dividend ...

The most basic class of stock in a company. Common stock is what founders, employees, and option holders receive. It has voting rights but sits below ...

The time period during which you can exercise your vested stock options. While employed, this is typically the full option term (10 years from grant)....

A method of exercising stock options without paying the strike price out of pocket. In a cashless exercise at a public company, a broker simultaneousl...

The ability to exercise stock options before they vest. With early exercise, you buy shares immediately at the current strike price, and those shares ...

A company-organized event allowing employees (and sometimes former employees) to sell some of their vested shares to an outside buyer — typically a se...

Selling shares of private company stock to a third-party buyer outside of a formal tender offer. Secondary sales must typically be approved by the com...

The process of a private company listing its shares on a public stock exchange (NYSE, NASDAQ) for the first time. After an IPO, shares become freely t...

A shell company that raises money through its own IPO, then merges with a private company to take it public. For the private company's employees, a SP...

A provision that allows the company to reclaim equity or proceeds in certain circumstances, such as termination for cause, violation of non-compete ag...

The company's right to buy back your shares (vested or unvested) under specific conditions, usually when you leave the company. For unvested shares (a...

An acceleration provision requiring two events to trigger accelerated vesting: (1) a change of control (acquisition) AND (2) an involuntary terminatio...

An acceleration provision that requires only one event — typically a change of control (acquisition) — to trigger immediate vesting of all unvested eq...

An event that transfers ownership or control of the company — most commonly an acquisition, merger, or sale of substantially all company assets. Chang...

A provision that allows majority shareholders (usually investors) to force minority shareholders (including employees) to sell their shares in a trans...

A provision that gives minority shareholders (sometimes including employees) the right to join a sale initiated by majority shareholders, selling thei...

An investment instrument created by Y Combinator that gives investors the right to receive equity at a future priced round. SAFEs are not debt — they ...

A short-term debt instrument that converts into equity (usually preferred stock) at a future financing round. Unlike SAFEs, convertible notes have an ...

The value of a company immediately before receiving new investment. If a company has a pre-money valuation of $10M and raises $5M, the investor owns $...

The value of a company immediately after receiving new investment. Post-money valuation = pre-money valuation + new investment. This is the number typ...

The total number of shares that would be outstanding if every convertible instrument (options, warrants, SAFEs, convertible notes) were converted into...

A block of shares reserved for future employee stock option grants. The option pool is created from authorized but unissued shares and typically repre...

A cash bonus plan that mirrors the value of company equity without granting actual shares. Phantom equity holders receive cash payments based on the c...

A grant that gives you the right to receive cash (or sometimes shares) equal to the appreciation in stock value over a set period, from a base price t...

A company benefit that lets employees buy company stock at a discount (typically 15%) through payroll deductions. Qualified ESPPs have favorable tax t...

A contractual restriction (typically 90-180 days) after an IPO during which insiders (employees, executives, and early investors) cannot sell their sh...

A recurring period (typically 2-4 weeks before each quarterly earnings announcement) during which employees and insiders are prohibited from trading c...

A pre-established trading plan that allows insiders to sell company stock on a predetermined schedule, even during blackout periods or when in possess...

A section of the IRS tax code that governs deferred compensation, including stock options. Section 409A requires that stock options be granted at or a...

A contractual agreement guaranteeing executives substantial compensation if they are terminated following a change of control (acquisition or merger)....

An additional equity grant given to existing employees, typically on an annual basis, on top of their initial hire grant. Refresh grants are designed ...

Any contractual mechanism that shields an investor or shareholder from the negative effects of new share issuance. For investors, this includes anti-d...

The date from which your vesting schedule begins counting. This is usually your hire date but can be different — sometimes it is the board approval da...

A contractual clause that restricts you from working for competitors or starting a competing business for a specified period (usually 1-2 years) after...

The right to invest additional money in future funding rounds to maintain your ownership percentage. Pro-rata rights are standard for institutional in...

The company's right to match any outside offer to buy your shares before you can sell to a third party. When you find a buyer for your private company...

A calculation showing how exit proceeds flow to different shareholders in order of priority. In a liquidation or acquisition, proceeds flow first to d...

When RSUs vest, the value is treated as ordinary income and the company must withhold taxes — typically by automatically selling a portion of your sha...

A flat withholding rate applied to supplemental income (bonuses, equity compensation, commissions). The federal supplemental rate is 22% for amounts u...