Cap Table 101 glossary

An assessment of the fair market value of a private company’s common stock. A 409A must be performed by a qualified, independent valuation provider.

This type of valuation is how companies know what the price of one share of common stock will be. If you’re an employee, you’re most likely to have been granted common stock, so you should keep an eye on the FMV. A 409A valuation should be done at least every 12 months, or whenever the company has a material event (like a fundraise).

A record of who has equity in a company, how many shares they hold, what type of equity they have, and how they will eventually get paid out.

A disorganized cap table can spell trouble for a company—and its employees.

The date when the first part of your equity grant vests and you’ve earned your shares or the right to buy stock options.

Many companies have a one-year cliff, meaning you’ll earn your first set of shares after a year. And if you leave before the cliff, you won’t vest any shares. (That’s how they motivate you to stick around.)

Just like you’d think from the title, it’s the most common and simplest form of stock. This is the type of stock that’s typically issued to employees and founders.

Shareholders of common stock are typically paid after holders of preferred stock in liquidity events like a M&A transaction—and sometimes not at all, depending on the deal.

A way private companies raise money from investors. The investor gives the company a sum of cash. In exchange, the company will either pay the investor back with interest or convert that money into shares later on. The two most common types of convertible instruments are convertible notes and SAFEs.

An investor takes more risk and has less control over the company in those earlier stages, but may receive a friendlier amount of equity from the company later on, sort of as a “thank you” for being patient.

A convertible note is a type of convertible instrument that some early-stage startups use to raise funds. It is a form of debt that can convert into shares in the company upon an agreed-upon event in the future.

A convertible note has a maturity date—if the event doesn’t occur by that date, the company either has to pay the investor back in cash (with interest) or renegotiate to extend the note.

A way companies can allow employees to exercise options before they actually vest. Not every company offers this. If it’s available (and you decide you want to do it) you’ll need to work with your company to file an 83(b) election with the IRS.

Early exercise can potentially save you a lot of money on taxes, but it is risky, since if your company goes out of business, you may not be able to recoup those losses.

An ownership interest in a company, as with shares of stock. In Equity 101, we talk about equity in privately held companies.

The act of purchasing stock from your company.

If you were issued stock options, you don’t own shares until you actually exercise them. That’s important to know so you can plan to pay for them, and to pay any applicable taxes.

The FMV is the agreed-upon value of what one share of common stock is worth as of a specific date. It’s typically determined by a 409A valuation (see below).

The FMV is how you know how much your shares are worth in the eyes of the IRS.

A legal structure that pools other people’s money together to invest.

Typically, VC firms are structured into three parts: The general partner, the management company, and the fund.

A type of stock option that’s typically taxed only when you sell your shares.

With ISOs, you’re likely to be off the hook for taxes when you exercise, but you’ll still need to pay them when you sell the resulting shares. But that’s not always the case, and it’s always a good idea to consult a tax advisor before you lock in a plan to exercise your options.

Liquidity is the ability to sell your shares for cash. While public company shares are bought and sold fairly easily on the stock market, opportunities to sell your private company shares are more limited.

You won’t be able to get liquidity in a privately held company unless your company decides to IPO, joins with another company in an M&A, or offers a liquidity event (like a tender offer) to its employees.

A calculation of the amount of money the company will be worth after an investment comes in. It’s based on the price of preferred shares, which are granted to investors.

This type of valuation is a way for founders to keep track of the equity they control in a company.

A set period of time your company gives you to exercise your vested options after you leave. Often, this window is 90 days.

If you don’t exercise before this window closes, they expire. It can be hard to exercise your options within that (often-short) period of time without planning ahead.

A calculation of the amount of money the company is worth before an investment comes in.

Investors often require an employee stock option pool to be created on a pre-money basis, meaning that the pool will only affect the people who owned shares before the investment came in.

A type of stock that is mainly issued to investors, who usually pay a higher price per share than for common stock.

Shareholders of preferred stock get paid out first if the company has an exit event (like an IPO or M&A) or in case of bankruptcy.

A way private companies can raise funds from investors by taking money in exchange for shares in the company. In these agreements, the investor pays a clear, defined price for a certain percentage (or number of shares).

Priced rounds are typically used by VC firms once a company gets some traction and really starts growing. Those rounds tend to be “lettered,” like Series A, B, and C.

Shares that meet the holding requirements to receive preferential tax treatment from the IRS.

To have a qualifying disposition, you need to hold onto your shares (and not sell them) for at least a year after you exercise them and two years after the option grant date.

SAFEs are a way startups raise money from investors, especially in the early stages. A SAFE is an agreement that states an investor will give a company money now, and the agreement will convert into equity later on—typically during the company’s next priced round.

SAFEs really live up to their name: The paperwork is usually much simpler than any other type of fundraising.