Acceleration in the vesting of securities of a company held by a founder or employee (usually an officer) upon the occurrence of a certain event, usually the sale of the company or the initial public offering of its shares on a publicly traded stock exchange, however sometimes the situation is of termination of the founder or employee by the Company.
A "Double-Trigger" acceleration requires the fulfillment of two conditions in order to trigger the acceleration of vesting of the securities – usually the sale of the company and the termination of the employment of the founder or employee by the successor company within a predefined period thereafter.
- Angel Investors
An angel investor is a private investor that provides financing to a start-up company, either as an equity investment in consideration for shares in the company or by way of convertible debt or similar instruments. Angels tend to invest in companies in their early stages and prior to the investment by larger investors such as venture capital funds or strategic investors. Angel investors tend to be experienced entrepreneurs and/or investors with strong networks of contacts with which they are able to assist in the promotion of the company.
In Israel, there is a tax track which provides incentives for Angel investors to invest in Israeli based companies by providing for a tax benefit to Angels investing in companies that comply with the provisions of Section 20 of the Economic Policy Law for 2011 and 2012 (Legislative Amendments), 5771-2011.
- Anti-Dilution Protection
This protection provides an existing investor (which invested in a previous investment round and received anti-dilution protection) a protection of his/her holdings in the company in the event of a later investment round at a price per share lower than paid by such investor (this is referred to as a "Down Round"), by the issuance of additional shares or the entitlement to the issuance of additional shares of the company.
There are two common types of anti-dilution protection:
"Full Ratchet" – under this protection the total number of shares to which the existing investor will be entitled is equal to the number of shares it would have received had it invested the amount it invested in the previous round but at the new lower price per share. Please note that this protection does not take into account the amount of investment raised in the new round, but only the price per share in the new round;
"Broad-Based Weighted Average" – in principle this protection uses a weighted average formula which takes into account the amount of investment raised in the new round as well as the price per share in the new round in order to determine the existing investor's entitlement to the issuance of additional shares. This protection is more common today than Full Ratchet protection.
- Articles of Association
The company’s Articles of Association or Articles (in short) is a quasi-constitutional document regulating the internal affairs of the company including, for example, the issue and transfer of shares, board of directors and shareholder meetings, powers and duties of directors, distribution of dividends, and any other topic the shareholders deem fit. The articles must contain the name of the company, the purpose of the company, the company’s share capital and details regarding the shareholders’ limitation of liability. The Articles of Association create a contract between the company and each of its shareholders and between the shareholders themselves.
- Assignment of Intellectual Property
Assignment of intellectual property is the transfer of ownership over work products, inventions and other intellectual property rights (such as patents, trademarks, trade secrets, etc.). The assignment is usually made by signing an agreement which includes an explicit assignment of all the intellectual property created by the founder/consultant/employee for the company or in connection with the engagement with the company such that the company will be the sole and exclusive owner of the intellectual property created.
- Bridge Financing
Start-up companies are often in shortage of the cash required to operate the company until its next equity financing round. In this situation one of the options of the company is to raise bridge financing which is very often provided by way of a convertible loan which can be converted into company's share capital in the next equity financing round (usually at a discount over the price per share at the financing round).
- Bring Along (Drag-Along) Right / Compulsory Sale
In the event that the holders of a certain majority of the company’s issued shares (as may be agreed in the company’s Articles) approve an acquisition of the Company, then the other shareholders of the company shall be required to vote for the approval of such acquisition and to take any such other action required by the company to support such acquisition.
The purpose of the Bring-Along right (often also referred to as "Drag-Along" right) is to enable the full sale of a company without obtaining the consent of all of the company's shareholders by the ability to them to force the other shareholders to sell their holdings in the company under the same terms.
The common scenario for applying the Bring-Along right is a case in which a potential purchaser of the company conditions the acquisition by purchasing 100% of the company's shares. In such case the minority shareholders will have the ability to sabotage the acquisition by refusing to sell their shares and extorting the majority shareholders by demanding to receive a higher amount. Therefore, this right is often negotiated by investors, such that they will be able sell the company even when the minority shareholders do not want to sell their shares.
Section 341 of the Israeli Companies Law applies the right to force the joining to the sale in the event that at least 80% of the shareholders of the company resolve to sell the company, however this percentage may be amended in the company's Articles.
- Burn Rate
The aggregate amount of the company's monthly expenses. This amount is examined every month as an absolute figure.
In fast-growing companies, the burn rate also increases rapidly.
- Cap Table
A capitalization table (often referred to as a ‘cap table’) is a list specifying the holdings of each shareholder or other holder of securities of the company and the types of securities of the company. The cap table is updated with each round of equity financing, transfer of shares or grant of options, thereby enabling the shareholders of the company to obtain an up-to-date picture of the company and to examine theoretical scenarios deriving from the holdings in the company, such as the entry of a new investor at a certain company valuation, dividend distribution or an exit event.
- Co-Sale (Tag-Along) Right
In case a third party offers to purchase shares of the company from one of its shareholders (the "Seller"), if the other shareholders which are entitled to the Right of First Refusal did not exercise in full such right, then each of the shareholders entitled to the Co-Sale right (sometimes also referred to as "Tag-Along" right) shall have the option to participate on a pro rata basis (meaning, based on its relative shareholding percentage) in such proposed sale, under the same terms of the third party offer, and the number of Company's shares which the Seller may sell shall be correspondingly reduced.
- Convertible Loan
A convertible loan entitles or may obligate the lender to convert the loan amount into shares of the company (ordinary or preferred shares, as may be agreed between the company and the lender) at a certain conversion price which often includes a certain valuation cap or discount with respect to the price per share in the company’s next equity financing round. Usually the conversion occurs upon the company’s next equity financing round (and the parties may also agree regarding the required minimum size of such financing for the purpose of the conversion), an exit event, a certain date or following the lapse of a certain period of time. Investors often use convertible loans when they are investing in a startup and want to delay the valuation of the company until a later financing round or exit event.
Dilution is a scenario in which the relative holding of a shareholder in a company is decreased by the issuance of new shares by the company. When a new shareholder of the company gets a certain portion of the company’s holdings that portion causes the holding percentage of all other shareholders of the company to decrease proportionally. For example, if a company has 10 shareholders and each of them holds 10,000 shares then each of them holds 10% of the company. If such company will issue 100,000 shares to a new shareholder then the holdings of the existing shareholders (i.e., except the new shareholder) will be diluted such that following the issuance of the new shares each existing shareholder will hold only 5% of the company.
The holding percentage of a shareholder usually also reflects the voting power of the shareholder in the company, so upon dilution the voting power of such shareholder is decreased respectively.
A person or entity appointed by the shareholders of the company to serve as a member of the company’s Board of Directors.
An individual or legal entity which serves as a director has a duty of loyalty and duty of care only towards the company (and not towards whoever appointed the director).
The role of the director is not in the ongoing management of the company, but rather in formulating the company's policy and business strategy, as well as supervising the activity of the company’s management.
- Due Diligence
Due diligence is the process of examining a company, for example for the purpose of an investment in the company's shares or its acquisition. The due diligence process consists of economical, technological, accounting and legal examination, all in order to identify and locate possible risks and exposures in order to reduce the risk of the transaction. For example, in transactions for the investment in a technology company there are often representations of the company regarding its financial condition, its contractual relations, its ownership of intellectual property, outstanding claims against it, etc. In the event that the company’s representations are incorrect or inaccurate, the investor may demand to be compensated for the damages caused to it as a result thereof.
- Fully Diluted Basis
Shares on a "Fully Diluted Basis" are the Company's shares which consist not only of the shares issued but also options and other securities of the company (such as convertible loans or warrants) promised or granted, including the option pool reserved by the company for granting to employees or consultants, and all under the assumption that all options and other securities as aforesaid have been fully exercised or converted into shares of the company.
The calculation of the shares held by a shareholder on a Fully Diluted Basis is done by dividing the total number of shares, options and other securities of the company held by such shareholder on a Fully Diluted Basis, by the total number of shares, options and other securities of the company held by all shareholders on a Fully Diluted Basis.
An incubator is a business entity which is an entrepreneurship center for start-up companies in their early stages. The incubator acquires holdings in the company (usually significant) and in return provides the company with certain services, including work space, counseling, administrative services, legal advice, establishing business and technological relationships with persons in the relevant field, etc.
- Initial Public Offering (IPO)
An initial public offering (IPO) is the first time a private company offers its shares to the general public through a stock exchange. After the IPO, the company turns from a private company to a public company. Companies which consummate an IPO must comply with the regulations according to the law in the jurisdiction in which the IPO takes place.
In order to obtain approval from the stock exchange and the securities authority to consummate an IPO, the company must publish a prospectus and comply with extensive disclosure obligations in accordance with the provisions of the applicable law, in order to create a high level of transparency vis-à-vis the investors and to prevent the misleading of the general public.
- Issued Shares
Issued shares (also referred to as outstanding shares) refer to the number of shares of the company that have been issued and allocated to its shareholders. The number of issued shares cannot be higher than the number of shares in the company’s authorized share capital (sometimes referred to the company’s registered share capital).
As opposed to the company’s authorized share capital which may be amended only by a resolution of the shareholders, the Company's issued share capital is under the authority of the company’s Board of Directors which may issue shares up to the limit of the company’s authorized share capital, subject to the provisions of the company’s Articles and the Companies Law, 5759-1999, including with respect to interested party transactions.
- Limited Liability Company
A limited liability company is a form of incorporation of one or more persons and/or corporations as a separate legal entity, for a common purpose which is usually generating profits. In this form of incorporation the shareholders in principle are not personally liable to the actions of the company. The shareholders are usually liable to the company’s obligations only up to the par value of the shares held by them or up to the amount they committed to pay as consideration for the shares held by them, all as set forth in the company’s Articles.
- No Sale
Such restriction means that for a certain period of time from a certain event (e.g., 2 years as of the closing of an investment round) a founder shall be prohibited to sell, transfer or make other disposition of its shares in the Company without receiving the prior consent of the other founders or the investors, as applicable.
This restriction often includes an exception such that the founder will be entitled to sell a certain percentage of his holdings in the company in each calendar year but no more than a certain aggregate amount of its holdings (e.g., up to 10% of its holdings per each calendar year but no more than 25% of its holdings in the aggregate).
- Non-Disclosure / Confidentiality Agreement
An agreement (often referred to as an NDA) between two or more parties governing the protection over confidential information which the parties will disclose to each other. Thus, each party will be prohibited from using the other party's confidential information for any purpose other than the purpose defined in the agreement, and will also be prohibited from disclosing such confidential information to third parties, except as expressly agreed under the NDA.
- Office Holder
An Office Holder of a company is each of the following personnel: director, general manager, chief business manager, deputy general manager, vice general manager or any person who holds said position in the company even if it has a different title, and also any other manager who is directly subordinate to the general manager. In accordance with Section 254(a) of the Companies law 5759-1999, an Office Holder has a fiduciary duty towards the company and is required to act in good faith and for the benefit of the company, including (1) to refrain from any act that involves a conflict of interest between the performance of his role in the company and his performance of any other function or his personal affairs, (2) refrain from any activity that involves competition with the company's business, (3) refrain from exploiting any business opportunity of the company in order to obtain a benefit for himself or for anyone else, and (4) disclose to the company any information or documents relates to its affairs, which came into his possession by virtue of his position in the company.
- Option Pool
An option pool is a number of shares of the company reserved for allocation to employees and/or consultants of the company as consideration. This consideration method is very customary today, especially in start-up companies, and it is a way attract talented employees to these companies, which make them active partners in the success of the company, and aligns the interests of the employees and consultants with those of the shareholders – increasing the value of the company.
Options are the right to purchase shares at a pre-defined price, which is called the “Exercise Price”, at a defined period of time and under terms determined between the company and the optionee. The options can be granted contingent upon the achievement of certain targets, the continuation of engagement during a certain period (which is also called the “Vesting Period” of the options), or as a signing bonus.
The reservation of the option pool or the amendment of its size as well as the grant of options are subject to the approval of the company’s Board of Directors. In most cases the Company increases the option pool immediately prior to investment rounds, as part of the investors' requirements at the investment round, and this is in order for the grant of the options to the company’s employees or consultants will not dilute the shareholdings of the investors in the company.
If upon the issuance of new securities of the Company a shareholder exercises its Preemptive right and elects to purchase his pro-rata share (meaning, based on its relative shareholding percentage) of such new securities, then such shareholder shall also be entitled to purchase such portion of the new securities with respect to which the other shareholders entitled to the Preemptive right did not exercise their right.
- Post-Money Valuation
This term is commonly used in investment agreements. This term refers to the valuation of the company after an investment round.
This term is usually calculated as the sum of the valuation of the company prior to the investment plus the amount invested in the company.
- Pre-Money Valuation
This term is commonly used in investment agreements. This term refers to the valuation of the company prior to an investment round.
The pre-money valuation of the company constitutes one of the parameters for the attractiveness of the investment in the company. The valuation is estimated by the company and the investor, and is derived from many parameters, including company's profits, physical assets, intellectual property, valuation of future profits, etc.
- Preemptive Rights
When the company offers to issue new securities (for example, shares or other securities convertible to shares), each of the shareholders entitled to the Preemptive right shall have the right to participate in the issuance and to purchase its pro rata share (meaning, based on its relative shareholding percentage) of the new securities, under the same terms under which the company is offering to issue the new securities.
This right enables existing shareholders to participate in investment rounds in the company according to their relative holdings in the company, thereby maintaining their percentage of holdings in the company.
- Repurchase / Reverse Vesting
Under a repurchase (buyback) right, the company is entitled to "take back" certain shares of a founder, under specific circumstances, as may be agreed under a Founders Agreement or a Repurchase Agreement with the founder.
The purpose of the repurchase mechanism is to enable the Company to decrease the holdings of a founder in case such founder terminates its services to the company prior to the end of the period that was agreed.
For example, if the founders agreed under the Founders Agreement that the shares of each of them will be subject to a repurchase term (i.e., a vesting period which in this case is referred to as a “Reverse Vesting” period since we are dealing with shares that are already issued to the founder, as opposed to options for example) of 2 years and a founder terminates his/her services to the Company after only 1 year, then half of such founder’s shares may be repurchased by the Company in consideration for only their par value, thus decreasing respectively such founder’s shareholding in the company.
- Right of First Refusal
In the event of a third party offer to purchase Company's shares from one of its shareholders, the other shareholders who are entitled to the right of first refusal shall have the right to purchase such shares proposed to be sold, under the same terms of the third party offer.
If the holders of the right notify the seller of their intention to acquire, in the aggregate, all (but not less than all) of the shares offered for sale, the seller shall be obligated to sell the offered shares to those shareholders. In any other case, meaning, even in case the holders of the right notify their intention to purchase 99% of the shares offered for sale, the seller may sell all of the offered shares to the third party under the same terms.
- Seed Round
A Seed Round financing will usually be the company's first round of financing when the venture is still at an initial stage. Such a round will usually take place after a business plan has been formulated and the feasibility of its profitability can be demonstrated to potential investors. Investment in the Seed stage is considered an investment with a very high economic risk, and accordingly provides a high return to the investors in such round in case of the company’s success.
- Strategic Investor
The strategic investor considers itself as an active and dominant partner in the management and determination of the business policy of the company in which it invests. The strategic investor has a business interest in the investment and makes it not only for the purpose of financial yield but also, among other things, for the purpose of future cooperation between the investor and the company in which it has invested, whether by means of a commercial agreement, the possibility of acquiring the company, the possibility of exclusivity to market the product, etc.
In examining the attractiveness of the transaction, the outlook of the strategic investor is broader than that of a financial investor, and in addition to the profitability and yield tests, the strategic investor has additional factors and considerations that affect the price level it is willing to pay for the investment. For example, it is possible that a strategic investor will invest in the company knowing that the yield it will receive is not the highest, but rather in order to leverage the investment for other strategic purposes such as acquiring competing companies, entering into a certain market, partnership with other players in the field, etc.
- Term Sheet
A term sheet is an initial agreement, usually between an investor and the company, which specifies the main terms and conditions under which the investor will invest in the company, and in fact sets forth the key points for the investment.
Generally this is not a binding agreement, but it indicates a serious intention by the investor to make the investment. After signing a term sheet the parties will sign the definitive investment agreement that will be based on the term sheet and will usually include all of the terms specified therein.
Until the investment agreement is completed and signed the investor has an additional opportunity to examine the company in depth, usually in the framework of a due diligence process, taking into account economic and business considerations, and to determine definitively whether to invest in it.
Very often as part of the signing of the term sheet the company will undertake not to seek other investments during an agreed limited period (which is also referred to as a “No Shop” period), which is intended to enable the investor to perform a due diligence on the company (and invest time and resources in such) without the fear that the company will close in the meantime investments from other investors.
- Veto Rights / Protective Provisions
Any action or resolution of the company's shareholders or of its Board of Directors or any committee thereof, as applicable, regarding certain major decisions of the Company (for example, a material change in the business of the Company), shall require the consent of a certain majority of (as may be agreed under a Founders Agreement or under the company's Articles) of the holders of issued shares of the company or of its directors.
An equity instrument, substantially similar to options, which enables its holder (usually an investor) to invest additional funds in the company in consideration for the purchasing additional shares. The purpose of the Warrant is to enable the investor to invest additional funds in the company.
Warrants are often provided to an investor in the framework of an investment round as a "kicker" for its investment and they also often include a certain discount to the investor on the price per share (compared to the price per share at the investment round) upon the exercise of the Warrants.