Startup fundraising and term sheet glossary

These are the terms that come up when a startup raises its first outside money, from a pre-seed SAFE to a Series A priced round. Definitions are short on purpose; where the site has a full page on a term, the definition links to it. Terms are grouped by topic rather than alphabetically, because most of them only make sense next to their neighbors.

Unless a definition says otherwise, legal terms describe common practice for U.S. (usually Delaware) corporations and the National Venture Capital Association (NVCA) model documents. Other countries use different instruments and vocabulary for many of the same ideas.

Valuation and ownership

Pre-money valuation: The value the company and its investors agree the company has immediately before new money comes in. In a priced round, the pre-money valuation divided by the pre-money fully diluted share count gives the price per share. What counts in that share count (in particular any new or enlarged option pool, and converting SAFEs and notes) changes the real price, so the headline number alone tells you little. See priced rounds.
Post-money valuation: The pre-money valuation plus the new money invested in the round. A new investor's ownership is their investment divided by the post-money valuation: $2 million into a $10 million post-money buys 20%. The post-money SAFE uses the same idea for its valuation cap, which is why it makes each holder's ownership easy to compute.
Price per share: What new investors pay for each share in a priced round, normally the pre-money valuation divided by the pre-money fully diluted capitalization. Because the denominator is negotiated (option pool, converting instruments), two term sheets with the same pre-money valuation can produce different prices. The price per share, not the valuation, is what actually determines how much the existing holders are diluted.
Fully diluted: A share count that includes not just issued shares but everything that could become shares: outstanding options, the unissued option pool, warrants, and preferred stock on an as-converted basis. Term sheets usually state ownership and price on a fully diluted basis, but the exact definition (for example, whether unconverted SAFEs or a new pool are included) is set in the documents and is worth reading line by line.
Cap table: The capitalization table: a record of every security the company has issued or promised, who holds it, and on what terms, usually shown both as issued and on a fully diluted basis. Investors check it closely during diligence, and errors in it can delay a round. Try the cap-table tool to model a round.
Dilution: The reduction in an existing holder's percentage ownership when the company issues new shares. Dilution is normal and not by itself a loss: owning a smaller share of a more valuable company can be worth more. What matters is the price at which the new shares are issued and who bears the extra shares created by option pools and conversion discounts.
Down round: A financing in which the price per share is lower than in the previous round. Down rounds can trigger anti-dilution adjustments for earlier preferred stock and often come with tougher terms. A round at the same price is called a flat round.
Up round: A financing priced above the previous round's price per share. Existing holders are diluted in percentage terms but the value of their shares, measured at the new price, goes up.

Instruments

Equity financing: Raising money by selling shares (in venture, usually a new series of preferred stock) rather than by borrowing. In SAFE and convertible-note documents, "Equity Financing" or a similar defined term names the priced round that triggers conversion, and its precise definition decides whether a given round converts the instruments.
Priced round: A round in which investors buy shares at an agreed price per share, as opposed to a SAFE or note whose price is set later. Priced rounds at seed and Series A typically involve a full set of definitive documents. See priced rounds.
SAFE: Simple Agreement for Future Equity, a contract introduced by Y Combinator in late 2013 under which an investor pays now and receives shares later, usually when the company raises a priced round. A SAFE is not debt: it carries no interest and has no maturity date. Most SAFEs set the conversion price with a valuation cap, a discount, or both. Compare SAFE vs convertible note.
Post-money SAFE: The version of the SAFE that Y Combinator standardized on in 2018, whose valuation cap is measured after all the SAFE money (but before the new money and any new option pool in the priced round). Each holder's ownership at the cap is therefore fixed: their purchase amount divided by the post-money cap. The trade-off is that additional SAFEs dilute the existing stockholders, not earlier SAFE holders. See post-money SAFE.
Pre-money SAFE: The original 2013 form of the SAFE, whose valuation cap is measured before the SAFE money. Because several pre-money SAFEs dilute one another, no holder can tell exactly what percentage they will own until the priced round. See pre-money SAFE.
Convertible note: A loan, usually unsecured, that is intended to convert into shares in a future priced round instead of being repaid. Unlike a SAFE it accrues interest and has a maturity date, and the interest normally converts along with the principal. See convertible notes.
Valuation cap: The maximum valuation at which a SAFE or note converts. If the priced round values the company above the cap, the holder converts at the lower, capped price and receives more shares than a new investor would for the same money. Whether the cap is a pre-money or post-money figure, and which shares are counted when turning it into a price, is set by the document and changes the result.
Discount rate: A percentage reduction from the priced-round share price at which a SAFE or note converts; a 20% discount means converting at 80% of the new investors' price. Where an instrument has both a cap and a discount, the holder normally gets whichever gives the lower price. (In valuation work, "discount rate" also means the rate used to discount future cash flows; that is a different concept.)
Maturity date: The date on which a convertible note becomes due if it has not already converted. At maturity the note may be repayable, may convert at a stated valuation, or may be extended by agreement with the holders, depending on its terms. Early-stage companies rarely have the cash to repay, so maturity is often a negotiation point. SAFEs have no maturity date.
Qualified financing: The defined term in many convertible notes for the priced round that triggers automatic conversion, typically a sale of preferred stock raising at least a stated minimum amount. Rounds below that threshold may convert only if the holders agree. The SAFE uses the broader term "Equity Financing" and has no minimum size.
Conversion price: For a SAFE or note: the price per share at which the investment converts, set by the cap, the discount or the round price. For preferred stock: the price used to work out how many common shares each preferred share converts into (original purchase price divided by conversion price). The preferred conversion price starts equal to the purchase price and is lowered by anti-dilution adjustments.
MFN (most favored nation): A clause that lets an investor adopt better terms the company later gives to other investors in similar instruments. Y Combinator publishes an "uncapped MFN" SAFE with no cap or discount whose holder can take the terms of a later SAFE. MFN clauses differ in scope; some exclude side letters or allow only one election.
SAFE preferred stock: The shares a SAFE holder receives in the priced round under Y Combinator's SAFE: a separate series (for example Series A-2 alongside the new investors' Series A-1) with the same rights as the new preferred, but with the per-share liquidation amount, conversion price and dividend amount based on the SAFE's lower conversion price. The effect is that a SAFE holder's liquidation preference equals the amount they invested rather than the value of their shares at the new price.
Side letter: A separate agreement giving one investor rights not in the main documents, such as pro rata rights, information rights or a board observer seat. Y Combinator publishes a standard pro rata side letter to accompany the post-money SAFE. Side letters can interact with MFN clauses, so keep a list of every one you sign.
Bridge round: Interim financing, often from existing investors and often on SAFEs or notes, meant to carry the company to its next priced round or another milestone. A bridge can buy time to hit targets; it can also signal that a planned round did not come together, so investors will ask what it bridges to.
Warrant: A right to buy a set number of shares at a fixed exercise price for a set period. Warrants are commonly issued to lenders in venture debt deals and sometimes as a sweetener alongside notes. They belong in the fully diluted count.
Venture debt: Loans to venture-backed companies, usually from specialist lenders or banks, typically alongside or soon after an equity round and often with warrants attached. It costs less dilution than equity but has to be repaid, carries covenants, and can let the lender take control of assets on default. It is generally a complement to equity, not a substitute for it.

Preferred-stock terms

Common stock: The basic class of shares, normally held by founders and employees (including on exercise of options). Common stock is paid after preferred stock in a sale or liquidation and carries no special investor protections. Its fair market value for option pricing is usually set by a 409A valuation and is typically below the preferred price.
Preferred stock: A class of shares, sold to investors in priced rounds, with rights common stock does not have: usually a liquidation preference, anti-dilution protection, protective provisions and the right to convert into common. Each round typically creates a new series (Series Seed, Series A and so on). The rights are written into the company's certificate of incorporation.
Liquidation preference: The right of preferred holders to be paid a set amount, usually 1x their investment, before common holders receive anything when the company is sold or wound up. It mainly matters in modest exits; in a large exit, non-participating preferred converts to common instead. See liquidation preference and the exit waterfall tool.
Non-participating preferred: Preferred stock that, in a sale, gets the greater of its liquidation preference or what it would receive by converting to common, but not both. This is the usual structure in early-stage rounds. Above a certain exit value the holders do better by converting, and from that point they share like common stockholders.
Participating preferred: Preferred stock that first takes its liquidation preference and then also shares in what remains alongside common, as if converted. It is sometimes called "double dipping." A cap may limit total participation to a multiple of the original investment, after which the holder would convert if that pays more. See liquidation preference.
Seniority (pari passu vs stacked): The order in which different series of preferred are paid in a sale. "Stacked" or senior seniority pays later series first; "pari passu" means series share pro rata to their preference amounts. It only matters when the exit does not cover every series' preference in full.
Anti-dilution protection: A charter provision that lowers the conversion price of preferred stock if the company later sells shares at a lower price, so the preferred converts into more common shares. The common forms are broad-based weighted average (moderate) and full ratchet (severe). It does not protect against ordinary dilution from up rounds. See anti-dilution.
Broad-based weighted average: The most common anti-dilution formula: new conversion price = old conversion price × (A + B) ÷ (A + C), where A is the shares outstanding before the new issue (broadly defined, including options and as-converted preferred), B is the shares the new money would have bought at the old price, and C is the shares actually issued. The adjustment scales with how much cheap stock is sold, so a small down round moves the price only a little. A narrow-based version counts fewer shares in A and gives a larger adjustment.
Full ratchet: An anti-dilution formula that resets the earlier investors' conversion price all the way down to the new, lower price, however few shares are sold at it. It shifts the whole cost of a down round to the common and other unprotected holders, which is why it is uncommon in early-stage deals.
Pay-to-play: A provision requiring existing preferred holders to invest their pro rata share in a future round to keep some or all of their preferred rights; those who do not may have their shares converted to common. It is more often seen in difficult financings than in routine seed rounds.
Dividends (on preferred): Venture preferred usually carries non-cumulative dividends, payable only if the board declares them, which in practice it rarely does. Cumulative dividends, which accrue each year and add to the liquidation preference, are a materially more investor-favorable term.
Redemption rights: A right for preferred holders to require the company to buy back their shares after a set period. Uncommon in early-stage rounds; where present it is often limited by law to funds legally available for the purpose.

Control and governance

Board seat: A right for an investor (or a series of preferred) to elect a director. Board composition after a round is set out in the term sheet and usually enforced through a voting agreement. Directors owe fiduciary duties to the company and its stockholders as a whole, not just to the fund that appointed them. See board and control.
Board observer: A person allowed to attend board meetings and receive board materials but with no vote and, usually, no fiduciary duties. Observer rights are typically granted by side letter or in the investors' rights agreement and normally come with confidentiality obligations and carve-outs for privileged or conflicted matters.
Protective provisions: Veto rights giving preferred holders (as a class, by a stated majority) approval over specified actions, such as changing their rights, creating senior stock, selling the company, or increasing the board. They are written into the certificate of incorporation. See board and control.
Drag-along: An agreement, usually in the voting agreement, under which stockholders agree to vote for and join a sale approved by specified holders (for example the board plus a majority of preferred). It stops a small holder from blocking a sale. Founders should check whose approval triggers it and the protections for dragged holders.
Right of first refusal (ROFR): A right for the company, and often then for major investors, to buy shares a holder (usually a founder or other common holder) proposes to sell to a third party, on the same terms. In the NVCA set it sits in the right of first refusal and co-sale agreement, often alongside a ROFR in the bylaws.
Co-sale (tag-along): A right for investors to sell a proportional part of their shares alongside a founder who sells to a third party, so a founder cannot cash out alone. It is usually in the same agreement as the right of first refusal.
Information rights: A right for investors (often only "major investors" above a holding threshold) to receive financial statements, budgets and other information on a set schedule. Usually set out in the investors' rights agreement. Know what you have promised and when, because late reporting erodes trust quickly.
Pro rata rights: A right, not an obligation, for an investor to buy enough of a future round to keep their percentage ownership. In priced rounds it is usually in the investors' rights agreement; for post-money SAFEs it is granted by a separate side letter. Generous pro rata rights can crowd out room for new investors later. See pro rata rights.
Change of control: An event such as a merger, sale of most assets, or transfer of a majority of voting power that results in a new party controlling the company. Charters typically treat it as a "deemed liquidation event", so the liquidation preference applies. SAFEs, notes, option plans and commercial contracts each have their own definition and consequences.
Voting agreement: One of the main NVCA documents: stockholders agree how they will vote on board elections and, usually, on approved sales (the drag-along). It is how the board composition agreed in the term sheet is kept in place over time.
Investors' rights agreement: One of the main NVCA documents, covering registration rights, information rights, pro rata rights and a list of company covenants. Many of its rights are limited to "major investors" holding above a set amount.

Equity and employees

Option pool: Shares reserved under an equity incentive plan for future grants of options or restricted stock to employees, advisers and directors. Investors in a priced round often require the pool to be created or enlarged before the round, so the cost falls on existing holders. Size it from a hiring plan. See option pool.
Option pool shuffle: The effect of counting a new or enlarged option pool in the pre-money share count: the price per share falls, and the "effective" pre-money valuation the founders get is the headline figure minus the value of the new pool. For example, with an $8 million pre-money and a pool equal to 20% of a $10 million post-money, the existing holders are really being valued at $6 million. See option pool.
Vesting: The process by which shares or options are earned over time (or on milestones). For founders, unvested shares are usually subject to a company repurchase right if they leave; for option holders, unvested options simply cannot be exercised. A common schedule is four years with a one-year cliff. See founder vesting.
Cliff: A period at the start of a vesting schedule during which nothing vests; at the end, the portion for that whole period vests at once. With the usual one-year cliff on four-year vesting, someone who leaves at 11 months keeps nothing, and someone who stays 12 months vests 25%.
Acceleration: Faster vesting on a trigger. Single-trigger acceleration vests shares on a sale of the company alone; double-trigger requires both a sale and a qualifying termination (for example, being let go without cause) within a set period. Investors and acquirers generally prefer double-trigger.
Restricted stock: Shares issued up front but subject to vesting, with the company able to buy back unvested shares, typically at cost, if the holder leaves. Founders usually hold restricted stock rather than options. In U.S. tax terms, an 83(b) election is usually made when it is issued.
83(b) election: A U.S. federal tax election under Internal Revenue Code section 83(b) to be taxed on restricted stock when it is received rather than as it vests. It must be filed with the IRS no later than 30 days after the property is transferred (IRS Form 15620 or a written statement meeting the Treasury regulation; checked on irs.gov on 2026-10-26). If the 30th day falls on a weekend or legal holiday, a filing postmarked on the next business day is timely; otherwise there is no extension. Founders who buy shares at a very low price usually file it because it fixes the taxable amount at a time when the spread is small or zero. See due diligence.
409A valuation: A valuation of a private U.S. company's common stock used to set option exercise prices at or above fair market value, named after Internal Revenue Code section 409A. Options priced below fair market value can produce adverse tax consequences for the holder. Under the Treasury regulations, a qualifying independent appraisal dated no more than 12 months before the grant is presumed reasonable; a new financing or other material event usually calls for a fresh one.
Stock option: A right to buy shares at a fixed exercise price after they vest. In the United States, options are either incentive stock options (ISOs, employees only, with possible tax advantages and statutory limits) or nonqualified stock options (NSOs). Options granted from the pool count in the fully diluted share count.
IP assignment: An agreement by which founders, employees and contractors transfer to the company the intellectual property they create for it, often combined with confidentiality terms. Missing or defective assignments, especially from founders' pre-incorporation work or from contractors, are among the most common diligence problems. See due diligence.

Process, planning and closing

Burn rate: How much cash the company spends per month, net of any cash coming in ("net burn"); gross burn is total monthly spending. Investors ask for it because, together with cash in the bank, it sets the runway. See the runway tool.
Runway: How many months the company can operate before cash runs out at its current net burn: cash divided by monthly net burn. Rounds are usually sized to give enough runway to reach the milestones the next round's investors will want to see, plus a buffer for a fundraise that takes longer than planned. See runway and how much to raise.
Pre-seed: The earliest outside money, often from founders' networks, angels, accelerators or specialist pre-seed funds, usually on SAFEs or notes. There is no formal definition; the label describes stage and purpose more than round size. See pre-seed.
Seed round: The first substantial institutional round, used to find product-market fit or early traction. It may be raised on SAFEs, notes or a priced "Series Seed" of preferred stock. Sizes and valuations vary widely by sector, region and year. See seed.
Series A: Usually the first priced round led by an institutional venture fund, creating Series A preferred stock and often a reconstituted board. Earlier SAFEs and notes typically convert in it. See Series A.
Lead investor: The investor who sets the terms of a round, usually takes the largest allocation, negotiates the term sheet and often takes a board seat. Other investors "follow" on the lead's terms. Finding a lead is typically the hardest step in a priced round. See building an investor list.
Term sheet: A short document setting out the main terms of an investment: price, amount, liquidation preference, board, protective provisions and so on. Most of it is non-binding, but clauses such as confidentiality, no-shop and expenses usually are binding. See the term sheet guide.
No-shop: A binding term-sheet clause in which the company agrees not to solicit or negotiate with other investors for a set period while the lead completes diligence and documents. Keep the period short and make sure it ends if the investor walks away.
Due diligence: The investigation investors carry out before committing: business, legal, financial and technical review, and reference calls. Findings can change terms or delay a close. See due diligence.
Data room: A secure online folder of company documents shared with investors during diligence, with access controls and an activity log. A well-organized data room shortens diligence and signals competence. See the data room.
Definitive documents: The binding agreements that implement a term sheet. For a U.S. priced round they typically follow the NVCA model set: stock purchase agreement, amended and restated certificate of incorporation, investors' rights agreement, voting agreement, and right of first refusal and co-sale agreement. See closing a round.
Stock purchase agreement: The agreement under which investors buy the new preferred shares. It sets the price and amount, the company's representations and warranties (qualified by a disclosure schedule), and the conditions to closing.
Closing: The moment a financing becomes effective: documents are signed, any charter amendment is filed and effective, funds are wired and shares are issued. A round may have one closing or several. See closing a round.
Rolling close: Accepting investors' money as each one signs, instead of waiting to close everyone at once. It is natural for SAFEs, which are individual contracts. Priced rounds can have additional closings, but usually only within a window and up to a cap set in the stock purchase agreement.

Securities law (United States)

Accredited investor: A category defined in SEC rules for investors who may buy in many private offerings. For individuals it includes, among others, net worth over $1 million excluding the primary residence (alone or with a spouse or partner), income over $200,000 individually or $300,000 jointly in each of the prior two years with a reasonable expectation of the same this year, or holding a Series 7, 65 or 82 license (SEC accredited-investor page, last updated April 24, 2026, checked 2026-10-26). Entities have separate tests. See U.S. securities law.
Regulation D: SEC rules providing exemptions from registration for private offerings; most startup rounds rely on Rule 506(b). Under 506(b) a company may raise any amount from any number of accredited investors, may sell to no more than 35 non-accredited investors in any 90-day period (who must be financially sophisticated and receive specified disclosure), and may not use general solicitation. Rule 506(c) permits general solicitation but only sales to accredited investors whose status the company takes reasonable steps to verify. See U.S. securities law.
General solicitation: Offering securities through public advertising or to people with whom the company has no prior relationship, such as public posts announcing a raise. It is not allowed in a Rule 506(b) offering. Talking publicly about the business is different from offering securities, but the line is fact-specific; ask counsel before publicizing a round.
Form D: A short notice filed with the SEC on EDGAR for offerings under Rule 504 or 506 of Regulation D, due within 15 calendar days after the first sale (the date the first investor is irrevocably committed), moving to the next business day if that falls on a weekend or holiday. There is no SEC filing fee; Form D filings are public. (SEC "Filing a Form D notice", last updated March 17, 2026, checked 2026-10-26.) See closing a round.
State notice filings ("blue sky"): State securities filings. For Rule 506 offerings, federal law preempts state registration, but states may still require a notice filing and fee, typically based on where investors are located. Deadlines and fees vary by state.
Restricted securities: Securities bought in a private offering, which cannot be freely resold without registration or an exemption. Purchasers in a Rule 506(b) offering receive restricted securities, which is why share certificates or book entries carry restrictive legends.

Public and non-dilutive funding

Non-dilutive funding: Money that does not require giving up ownership, such as government grants and research contracts, prizes, or customer revenue. Grants usually come with restrictions on use, reporting duties and sometimes rules about who owns the resulting IP. See public funding.
SBIR: Small Business Innovation Research, a U.S. federal program in which participating agencies fund research and development by small businesses in phases, coordinated by the Small Business Administration. Awards are non-dilutive. See SBIR and STTR.
STTR: Small Business Technology Transfer, a companion U.S. program to SBIR whose distinctive requirement is that the small business formally collaborate with a research institution in Phase I and Phase II. Per SBIR.gov (checked 2026-10-26), the small business must perform at least 40% of the R&D and the partnering research institution at least 30%. See SBIR and STTR.
SEIS and EIS: United Kingdom tax-relief schemes (Seed Enterprise Investment Scheme and Enterprise Investment Scheme) that give investors income-tax and capital-gains reliefs for buying shares in qualifying early-stage companies. A company can ask HMRC for advance assurance that a proposed share issue is likely to meet the scheme conditions, which it can show to potential investors (GOV.UK, checked 2026-10-26). See SEIS and EIS.

Sources

The SAFE and the Post-Money SAFE User Guide, Y Combinator. Cited for facts; not reproduced.
Model Legal Documents, National Venture Capital Association. Cited for facts; not reproduced.
Accredited Investors (Capital-Raising Building Blocks), U.S. Securities and Exchange Commission. Public domain (U.S. federal government work).
Private Placements - Rule 506(b), U.S. Securities and Exchange Commission. Public domain (U.S. federal government work).
General solicitation — Rule 506(c), U.S. Securities and Exchange Commission. Public domain (U.S. federal government work).
Filing a Form D notice, U.S. Securities and Exchange Commission. Public domain (U.S. federal government work).
Form 15620, Section 83(b) Election (Rev. 4-2025), Internal Revenue Service. Public domain (U.S. federal government work).
26 CFR 1.409A-1 — Definitions and covered plans, Electronic Code of Federal Regulations (National Archives). Public domain (U.S. federal government work).
About SBIR and STTR, SBIR.gov (U.S. Small Business Administration). Public domain (U.S. federal government work).
Frequently Asked Questions, SBIR.gov (U.S. Small Business Administration). Public domain (U.S. federal government work).
Apply for advance assurance on a venture capital scheme, HM Revenue & Customs (GOV.UK). Open Government Licence v3.0.