Venture Capital Glossary

An instrument under which an investor pays now for the right to receive equity later, usually in the company’s next priced round, at a price set by a valuation cap, a discount or both. It is not debt: there is no interest and no maturity date.

In practice. The post-money SAFE, introduced by Y Combinator in 2018, is now the common form. Founders should model conversion before raising on several SAFEs, because stacked SAFEs can convert into a larger share of the company than expected.

See also: Post-money SAFE, Valuation cap, Conversion discount, Most favored nation clause, Convertible note

Read more: SAFE Notes vs. Convertible Notes

A SAFE whose valuation cap measures the company’s value after all SAFEs convert, so each holder’s ownership immediately before the priced round is fixed when it invests. The new money in that round then dilutes SAFE holders along with everyone else.

In practice. Every additional SAFE dilutes the founders and other existing holders, not the earlier SAFE holders. That is the point to understand before a second or third SAFE round.

See also: SAFE, Valuation cap, Pre-money and post-money valuation

Read more: SAFE Notes vs. Convertible Notes

Debt that converts into equity in a later financing, usually at a discount or a valuation cap, and that carries interest and a maturity date.

In practice. Maturity is the issue to watch: if no financing happens by then, holders may be able to demand repayment, which gives them leverage. Founders should negotiate automatic conversion or an extension mechanism.

See also: SAFE, Conversion discount, Valuation cap

Read more: SAFE Notes vs. Convertible Notes

The maximum company valuation at which a SAFE or convertible note converts into equity, protecting early investors if the next round is priced high.

In practice. The cap is effectively the early investor’s price. A high cap combined with a discount and an MFN can cost founders more than a lower cap with clean terms.

See also: SAFE, Conversion discount, Most favored nation clause

A percentage reduction from the next round’s price at which a SAFE or note converts, rewarding early investors for their risk.

In practice. Where an instrument has both a cap and a discount, the investor usually converts at whichever gives the lower price, which should be modeled at realistic round sizes.

See also: Valuation cap, SAFE

A right allowing an early investor to adopt better terms the company later gives other investors in the same type of instrument.

In practice. Useful for a first check into a company that has not yet set a cap. Founders should limit it to later SAFEs or notes and end it at the priced round.

See also: SAFE, Valuation cap

Pre-money valuation is the company’s agreed value before new money comes in; post-money valuation is pre-money plus the new investment. The price per share is the pre-money valuation divided by the pre-money fully diluted capitalization.

In practice. What goes into the share count, especially the option pool and converting SAFEs, matters as much as the headline number.

See also: Fully diluted capitalization, Option pool shuffle, Post-money SAFE

The total number of a company’s shares assuming all options, warrants, convertible securities and reserved pool shares are exercised or converted.

In practice. The term sheet should say which instruments are counted, because each one included lowers the price per share.

See also: Pre-money and post-money valuation, Option pool shuffle

The effect of requiring a new or enlarged employee option pool to be counted in the pre-money valuation, so that the dilution from the pool falls on existing holders rather than the new investors.

In practice. Size the pool to a hiring plan for the period until the next round, not to a round number. An oversized pool is a hidden price reduction.

See also: Pre-money and post-money valuation, Fully diluted capitalization

The summary of the economic and control terms of a financing, signed before the definitive documents are drafted. Apart from confidentiality and exclusivity, it is usually non-binding.

In practice. Most of the negotiation happens here. Once a term sheet is signed, the definitive documents generally track the NVCA model forms with the agreed terms, so anything unusual has to be raised now.

See also: Liquidation preference, Protective provisions, Board composition, Pre-money and post-money valuation

Read more: Venture Capital Trends and Term Sheet Negotiation

The right of preferred stockholders to be paid before common stockholders in a sale or liquidation, usually equal to a multiple of their investment, with 1x the usual starting point.

In practice. Whether the preference is participating or non-participating, and whether series are stacked or rank equally, matter as much as the multiple.

See also: Participating preferred, Anti-dilution protection

Read more: Venture Capital Trends and Term Sheet Negotiation

Preferred stock that receives its liquidation preference and then also shares in the remaining proceeds with common stock. Non-participating preferred receives the greater of its preference or its as-converted share.

In practice. Participation moves meaningful value away from founders and employees in a mid-sized exit. If it cannot be avoided, a cap on total participation limits the damage.

See also: Liquidation preference

An adjustment to the conversion price of preferred stock if the company later issues shares at a lower price. Broad-based weighted average adjusts for the size and price of the down round; full ratchet resets the price to the new, lower price.

In practice. Broad-based weighted average is what founders should expect to give; full ratchet is a red flag. Carve-outs for option grants and other routine issuances belong in every version.

See also: Liquidation preference, Pay-to-play

A provision requiring investors to take up their share of future financings or lose some of their preferred rights, often by converting to common stock.

In practice. Seen more in difficult markets. It protects the company, and the investors who keep supporting it, from those who stop.

See also: Anti-dilution protection, Pro rata rights

An investor’s right to buy its proportionate share of future financings so it can maintain its ownership percentage.

In practice. Usually limited to major investors. Generous pro rata rights can crowd out new investors the company wants in the next round.

See also: Major investor, Pay-to-play

A sale of existing shares by a founder, employee or early investor to a new or existing investor, as opposed to the company issuing new shares.

In practice. Transfer restrictions, rights of first refusal, board approval and the effect on the company’s 409A valuation all need to be addressed before founders take money off the table.

See also: Right of first refusal and co-sale

Actions that require the approval of the preferred stockholders, such as selling the company, issuing senior securities, amending the charter or taking on debt.

In practice. Keep the list to the standard items and require approval of a majority of the preferred voting together, rather than a separate vote of each series, so one series cannot block the others. Delaware law still requires a series vote on charter amendments that adversely affect only that series.

See also: Board composition, Drag-along

The negotiated allocation of board seats among founders, investors and independent directors, set in the voting agreement and often in the charter.

In practice. Board control, more than ownership percentage, decides most governance questions. Founders should track how each round shifts the balance.

See also: Protective provisions

A provision allowing specified holders, usually the board and a majority of preferred and common, to require the other stockholders who are party to the agreement to vote for and join an approved sale of the company.

In practice. Holders being dragged should insist on protections: the same form and amount of consideration per share, limited representations, and liability capped at their own proceeds.

See also: Right of first refusal and co-sale, Protective provisions

Rights allowing the company, and then investors, to buy shares a founder proposes to sell to a third party, or to sell alongside the founder on the same terms.

In practice. These rights shape every secondary sale. Founders should carve out estate planning transfers and small sales.

See also: Drag-along, Secondary sale

A defined term in financing documents for investors holding above a set threshold, who receive rights such as information and pro rata rights.

In practice. The threshold decides who gets ongoing rights and how many parties the company owes information to.

See also: Information rights, Pro rata rights

An investor’s right to receive financial statements, budgets and, sometimes, to inspect the company’s books.

In practice. Limit them to major investors, include a confidentiality obligation, and exclude investors that compete with the company.

See also: Major investor

Vesting makes founder or employee equity subject to forfeiture or repurchase if the holder leaves before a schedule ends, commonly four years with a one-year cliff. Acceleration speeds up vesting on a sale (single trigger) or on a sale followed by a termination (double trigger).

In practice. Investors may ask founders to re-vest at a financing. Double trigger is the usual compromise on acceleration; single trigger can make a company harder to sell.

See also: 83(b) election, Qualified small business stock

A filing with the IRS, within 30 days after receiving restricted stock, electing to be taxed when the stock is received on its value less the price paid, rather than as it vests.

In practice. For founders the value at grant is usually nominal, so the election costs little and can save a great deal. The 30-day deadline cannot be extended.

See also: Vesting and acceleration, Qualified small business stock

Read more: Understanding 83(b) Elections

Stock of a qualifying C corporation that, if held long enough, lets eligible holders exclude some or all of their federal capital gain on a sale, up to per-company limits.

In practice. Eligibility turns on entity type, whether the holder acquired the stock at original issue, the company’s gross assets at and immediately after issuance, its line of business and the holding period. The rules changed for stock issued after July 4, 2025, so check the issue date before relying on the exclusion.

See also: 83(b) election, Vesting and acceleration