The legal and intellectual property (IP) stage is a critically important element of creating a startup, where business matters are put onto paper and agreements become binding. Successful startups enter this stage with a well-developed plan along with knowledgeable legal counsel.
Hungry for more startup terms? Take a look at all ten sections of our Startup Glossary.
Startup Legal and IP
Acquisition - The action of taking a controlling interest (50% or more) in a company.
Advisor Agreement - A document that outlines an advisor’s commitment to a company and sometimes grants him/her a small amount of equity. (see Founder Institute Releases Standard Advisor Agreement for more info)
B Corporation - A for-profit business dedicated to addressing social and environmental issues.
Buy-and-Sell Agreement - A document specifying what will happen if one of the co-owners of a company leaves for any reason.
C Corporation - The most basic form of corporations, any newly incorporated entity is automatically assumed to be a C Corporation unless otherwise specified. The key characteristic of a C Corporation is that it is legally viewed as an individual entity, separate from its shareholding owners.
Cliff - A term describing the length of time before a founder or stock recipient becomes partially vested in their restricted stock or stock options.
Co-founder Agreement - An agreement detailing the nature, function, and equity split of a company. (see How to Create the Perfect Cofounder Agreement with Your Business Partner to learn more)
Dilution - The process by which founders of a company slowly lose their equity/ownership.
Disclosure Documents - A series of documents prepared by prospective investors and acquirers. These documents include compliance requirements and the details of a given investment or acquisition.
Equity - A broad word used to describe the ownership of a company. It can be measured in stock or other units based on a company’s structure. (see A Guide to Startup Employee Equity)
Exit - The point at which an investor sells their stake in a business to fully realize gains or losses. Generally, exit details are planned at the time of the original investment.
Finder's Fee - The amount paid to a third-party for introducing a company to investors or acquirers. Oftentimes, a finder’s fee is dependent upon an investment or acquisition being made.
Going Private - When a company transitions from public to private through a series of transactions in which either the company itself or a private investor (re)purchases its stock from the public.
Holding Company - An entity created for the sole purpose of holding assets with few other functions.
Incorporation - The act of legally forming a company.
Initial Public Offering (IPO) - A corporation’s first sale of securities, often in stock form, under the regulations of a public company.
Investor Rights Agreement (IRA) - A legal document which is often introduced by venture capital firms or prospective investors while a company is seeking investment. These agreements are often designed to protect the interests of investors.
Intellectual Property (IP) - The legal ownership of ideas or concepts. These are intangible assets, which have the potential to be far more important than any tangible assets. (see Inside FI: IP May be Your Savior for more info)
Joint Venture - An arrangement, partnership or investment among a group of individuals or entities spanning a limited time period with the purpose of achieving a specific objective.
Key Employee - A co-founder or early employee who is a key to a company’s success. These employees are often rewarded with equity.
Liability - The state of being legally responsible for something. (see How to Win Friends and Influence Bankers)
Limited Liability Partnership (LLP) - A partnership structure allowing partners to carry limited liability in order to mitigate risks.
Limited Liability Company (LLC) - A company structure preventing individual members of the company from being held personally responsible for the company’s debts or liabilities.
Mergers and Acquisitions (M&A) - The corporate finance and strategy regarding the sale or purchase of other companies.
Non-Disclosure Agreement (NDA) - An agreement wherein an individual or third party consents to protect confidential information from being exposed or shared with other parties.
Overhang - Term describing the event when an investor’s liquidation preferences exceed the company’s current value.
Private Equity - Investments in private companies whose equity is not publicly traded.
Quorum - The minimum acceptable amount of stockholders or directors needed to hold a corporate meeting or vote.
Risk Tolerance - The amount of risk that an investor is willing to accept.
S Corporation - A special type of corporation allowing the protection of limited liability, but also enabling direct flow-through of profits and losses.
Stakeholder - A person or group of people who have an interest or concern with a company.
Stockholder - Individuals or entities who own stock in a corporation.
Sweat Equity - Shares in a company given in exchange for completed work.
Trade Secret - Protected information within a company that derives independent economic value from its exclusivity. (see Paying It Forward: How to Help New Startups Rise to the Top)
Uniform Commercial Code (UCC) - The basic set of business laws regulating financial contracts.
Valuation - The process of determining a company’s value. (see Financial Tips For Avoiding Startup Failure to learn more)
White Label - A product or service produced by a single company that another company chooses to rebrand for their own use or distribution.
Zone of Insolvency - The state in which a company is very close to being insolvent with insufficient money or assets to pay off its liabilities.
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