Glossary

Section 102 of the Israel Tax Ordinance outlines the various taxation routes for equity-based compensation awards to employees and company officers (including directors). It delineates three distinct tax routes, and companies must specify under which route they grant company options.

A provision typically used in a promissory note (e.g., an option grant notice) provides that upon the occurrence of a specified event (e.g., a sale of the company or an initial public offering), the entire underlying amount of the agreement becomes exercisable and/or due and payable.

This clause is commonly used in agreements with installment payments (e.g., option grant agreements with vesting periods) in order to reward a party for involvement in a “fruitful” outcome for the company (e.g., a sale of the company)."

The Articles of Association, also known as the company's constitution, is the foundation legal document that defines a company's purpose, powers, and internal governance structure. The document outlines, for example, the amount and types of shares which may be issued by the company, duties and liabilities of directors, distribution of dividends, etc.

Authorized share capital refers to the number of shares a company can issue, as stated in its Articles of Association. The authorized share capital is often not fully used, and the remaining unissued shares serve as a buffer for future allocations and issuances of shares.

Board Member Appointment Process refers to the process by which a member of the company’s board of directors (or managers, etc.) is either appointed or elected to their seat on the board. This process is usually outlined in the company’s Articles of Association or a similar agreement.

A bring-along right (also known as a "drag-along" right) is a provision in a company's Articles of Association or similar document that allows majority shareholders to force minority shareholders to sell their shares to a potential buyer during a merger or acquisition. This provision is crucial for buyers who typically aim to acquire 100% ownership of the company.

Burn rate refers to the rate at which a company spends its cash. It is commonly calculated by summing up the company's operational expenses and is typically measured on a monthly basis. The burn rate provides the company and potential investors with a metric to determine whether a company's finances are self-sustaining.

A Capitalization Table (commonly referred to as a "cap table") is a document that provides a comprehensive breakdown of all of a company’s securities, including equity dilution, convertible notes, warrants, and equity grants. The cap table keeps track of the company’s authorized shares, outstanding shares, unissued shares, allocated and unallocated shares in the company’s pool of options, and a complete list of the shareholders with an indication of the type of shares they own, the total number of shares, and their percentage ownership stake in the company. The cap table needs to be maintained on a routine basis and must be updated after each successive financial round, showing how ownership becomes diluted and spread across new owners as it grows.

Co-sale rights, also known as Tag-Along Rights, are contractual obligations used to protect a minority shareholder, usually in a venture capital deal. If a majority shareholder sells their equity in the company, the co-sale right is triggered, allowing the minority shareholder the right to join the same transaction under the same terms offered to the majority shareholder. These rights effectively oblige the majority shareholder to include the holdings of the minority holder in the negotiations so that the tag-along right is exercised.

Share Dilution is a reduction in the proportional ownership value of shares that commonly occurs due to the issuance of additional shares or the exercise of options or convertible securities by their holders. When the number of outstanding shares in the company’s capital increases due to new share issuance, each existing shareholder prior to the issuance will then own a reduced (diluted) percentage of ownership.

An anti-dilution protection clause acts as a buffer to protect preferred shareholders against equity dilution upon the issuance of new shares, ensuring that such shareholders maintain their original ownership percentage intact. Anti-dilution clauses are commonly triggered when the conversion price of a financial round is less than the conversion price from the prior round. An anti-dilution provision typically increases the number of ordinary shares each preferred share converts to in a new capital raise upon a new issuance of shares.

Due diligence is a process undertaken by a buyer, lender, or other party involving a potential transaction. Parties conduct due diligence to confirm the facts or details of a matter under consideration, understand the target company's assets and liabilities, assess any potential commercial or legal risks, and identify mitigation strategies. A buyer's due diligence process during an M&A transaction can be vigorous, time-consuming, and complex.

Certain securities, such as options and convertible notes, feature an exercise price - typically a fixed price at which the owner of the underlying security can "exercise" the option to buy a given number of shares. For example, when an employee is granted an option, they are given the right to purchase an underlying share of the company at a future time and at a predetermined price.

Options become more valuable as the value of the underlying share exceeds the exercise price because exercising the option allows the shareholder to acquire the security at a discounted price.

A founders' agreement is a legally binding contract signed by the company's founders, governing their business relationships. The agreement outlines the rights, responsibilities, liabilities, and obligations of each founder toward the others and the company, such as the purpose of the company, the roles of each founder, working commitments, and the allocation of equity (shares).

Given the critical importance of this document, it should be detailed, and parties should seek to minimize any potential loopholes that could be exploited later on.

The free ESOP pool represents the number of available shares that a company can allocate to its employees or consultants in the form of options.

On a “fully diluted basis” refers to a method of calculating the total number of currently issued or outstanding shares, including all shares that could be claimed through the conversion of convertible securities, such as the exercise of outstanding employee options, bonds, and warrants.

Indemnification agreements are comprehensive business contracts between two parties that protect the parties in a transaction from the negligence, breach, risks, or liabilities created by the other party to the transaction. Indemnification provisions can also be found in commercial, employee, transaction, and other agreements. Depending on the agreement, indemnification can be reciprocal (both parties protect each other) or one-directional.

Indemnification obligations may be limited to a specific period of time or be perpetual, and a party's total liability can be capped at a certain amount.

An Initial Public Offering (commonly referred to as an IPO) refers to the process by which a private corporation "goes public" by selling its stock to the general public. IPOs provide companies with an opportunity to raise equity and expand their operations. To complete an IPO, companies must comply with applicable regulations in the country where they are listing on a stock exchange. These regulations commonly require companies to disclose financial, accounting, tax, and other business information to the public.

There are various types of IPOs, including direct listings (where a company sells directly to the public), underwriting (where a company sells to an underwriter, such as a bank, and the bank sells to the public), and SPACs (special purpose acquisition vehicles through which a company goes public via a merger).

An assignment of intellectual property refers to the transfer of an owner's rights in copyrights, trademarks, patents, work product, trade secrets, or any other intangible creations. These transfers commonly occur to address the ownership of work product created for an entity by an employee or consultant. Typically, this is achieved by having the individual sign an agreement that includes a clear assignment of such intellectual property.

An interested-party transaction refers to a transaction or arrangement made between two parties that already have a business relationship. The most common types of interested-party transactions are made between business affiliates, shareholder groups, a parent company, and its subsidiaries, and commonly include sales, leases, services, and loan agreements. For instance, a company's shareholder or director may own a distribution company, and the company uses the distributor for its products.

In some cases, interested-party transactions shall be disclosed and pre-approved by the company's board of directors. Oftentimes, a company sets a minimum threshold for what counts as a related-party transaction (e.g., a director owning a few shares in a public company that the company uses for distribution usually does not qualify).

An Investor Rights Agreement (commonly known as an IRA) is a contractual agreement that outlines the rights and responsibilities of a company's investors. It guarantees investors certain rights, including information rights, registration rights, contractual "rights of first offer" or "preemptive" rights (i.e., the right to purchase securities in subsequent equity financings conducted by the company), and various post-closing covenants of the company.

Typically, all investors in a particular round of financing sign the same investor rights agreement. Some preferred investors may be granted additional rights in a "side letter", depending on the circumstances.

Issued shares, often referred to as "outstanding shares", represent the portion of a company's authorized shares that have been issued, sold to and are currently held by shareholders. Issued shares differ from authorized shares in that authorized shares are only approved for potential issuance by the board, whereas issued shares have been allocated to specific shareholders. Therefore, the number of issued shares cannot exceed the number of authorized shares.

KPI is an acronym that stands for Key Performance Indicator. It's a metric used to track and measure a company's operational performance and success. KPIs often include specific milestones, such as reaching 1 million users or securing a certain amount of funding. These milestones indicate significant achievements in a project or company's lifecycle. Agreements that include KPIs may outline consequences for both achieving and missing these targets.

A lead investor is the first (or primary) investor to commit capital in a financing round. Typically, the lead investor assumes additional responsibilities compared to other investors in the same round. These responsibilities may include conducting due diligence, leading negotiations for the transaction agreement, and fostering a cordial relationship between the group of investors and the fundraising company.

The lead investor often holds the largest share of the capital and may receive senior rights specific to that financial round.

A liquidation preference provision dictates the priority sequence for the repayment of one class of shareholders before others in a liquidation event, such as the sale of the company. This hierarchy is often referred to as the company's "waterfall." Typically, investors or preferred shareholders are entitled to repayment before holders of ordinary shares and debt.

A management rights letter is an agreement provided by companies to investors, granting them specific management rights within the company. These rights may include the ability to attend and observe board meetings, inspect and audit corporate records and books, and receive financial statements.

A maturity date refers to the specific date on which a financial instrument, such as options, loans, warrants, or bonds, must be settled and paid in full. In employee stock option grants, the grant letter specifies the exercise window (the period during which employees can buy shares using their options) and the maturity date by which the options must be exercised.

A merger agreement is a contract that governs the absorption of one corporation into another. As a result of a merger, the designated surviving entity acquires all the assets and liabilities of the corporation that is absorbed with and into the surviving entity.

There are several different types of merger structures depending on the goal of the companies involved and specific circumstances, such as conglomerate mergers, horizontal mergers, and vertical mergers.

A non-competition clause (or "non-compete") restricts an employee or consultant from engaging in business activities that compete with their current or former employer. These clauses can be time-limited (applying only during the employee's current employment period), post-employment restricted (remaining in effect for a period after employment ends), or geographically limited (applicable only within a specific geographic area).

The enforceability of noncompetition clauses varies by jurisdiction. California, for example, disfavors overly broad clauses that restrict an employee's ability to find future work, and certain laws require employers to provide a portion of the employee's base salary during the non-compete period.

Non-solicitation clauses restrict a party (typically an employee, consultant, or seller in an acquisition) from soliciting another party's employees or customers. This means they cannot approach these individuals with the intention of enticing them to switch their allegiance to a new company. For example, a company's agreement with a customer might prohibit the customer from hiring the company's employees.

In essence, non-solicitation clauses aim to protect a company's competitive advantage by safeguarding its relationships with both employees and customers.

An option grant provides an employee or consultant with the right to purchase the company's shares at a predetermined price, often below the market value at the time (see “Exercise Price”), for a predetermined period. These grants are used to entice talented employees to join and remain with the company long-term.

An option grant agreement specifies the exercise price per share, the number and type of shares granted, the tax route, and the vesting schedule.

An option pool refers to a portion of the company's authorized share capital designated for issuing new options to employees and consultants. Creating or expanding an option pool typically dilutes the ownership stake of the founders and other existing shareholders in the company.

Ordinary shares, also known as common shares, are shares given out by a company that represent a fraction of ownership in the company and generally grant shareholders the right to one vote at company shareholder meetings.

Unlike preferred shares, the owners of ordinary shares are not guaranteed a dividend payout. For instance, in the event of a company liquidation, ordinary shareholders are only entitled to receive a portion of the company's remaining assets after preferred shareholders have been paid in full.

Outstanding shares refer to the total number of shares issued by a company that are currently held by shareholders. The number of outstanding shares can fluctuate over time due to factors such as share repurchases or issuances, but it will never exceed the number of issued shares.

An over-allotment right builds upon a preemptive right. Therefore, once a preemptive right is triggered, and each entitled shareholder exercises the right to purchase their pro-rata amount of new shares, those shareholders shall also be entitled to purchase any remaining shares that were not exercised by other entitled shareholders.

Post-money valuation reflects a company's estimated worth after receiving outside funding, such as through a financing round. It essentially captures the company's value including the newly injected capital. The formula to calculate a company's post-money valuation is: Pre-Money Valuation + the amount of injected new capital = the post-money valuation.

Pre-Money valuation refers to the valuation of a company before it receives a capital injection through a financing transaction, such as a round of financing.

Preemptive rights, often referred to as the "first option to buy," are rights granted to certain shareholders in a company. These rights provide shareholders with the opportunity to purchase additional shares in any future issuance of new securities by the company, either before or concurrently with the offering to other investors.

Preemptive rights are typically outlined in the company's Articles of Association. Their primary purpose is to ensure that early investors can safeguard their ownership stake from dilution in value and voting power as the company expands its number of outstanding shares.

Preferred shares are a type of securities that represent ownership in a company. Generally, there are two types of company shareholder equity: ordinary shares and preferred shares. While ordinary Shares commonly give their owners the right to one vote at a company's shareholder meeting, preferred shares provide owners with a seniority claim over the company's assets and earnings, which occurs in the form of dividend distribution and other liquidation preferences events.

In some cases, owners of preferred shares may carry specific rights, such as voting rights, veto rights, and the ability to elect members of the company's Board of Directors. There are four common types of preferred shares: cumulative, non-cumulative, participating, and convertible preferred shares.

Pro rata is a Latin term meaning "in proportion." Many shareholders are entitled to various equity protection rights, such as preemptive rights and liquidation preferences.

For example, when a company issues a new type of shares and a preemptive right is triggered, each entitled shareholder has the right to purchase their pro-rata amount of the new shares. Thus, the preemptive right assigns a fixed number of new shares to each shareholder based on their proportion of the whole.

A legal proxy is an authorized agent who can act on behalf of another person or party. A corporate proxy designates a person, usually an executive in a company, authorized by certain shareholders to attend a shareholder meeting and vote on their behalf.

A repurchase agreement (also known as a "share buyback") is a transaction whereby a company reserves the right, under specific circumstances and a predetermined vesting schedule, to repurchase its own shares from its shareholders. Repurchase agreements are commonly used between companies and founders to prevent early departure and potential unfair profits at the expense of other stakeholders. To address this potential issue, the company and founders establish a repurchase agreement that includes a vesting schedule. This schedule outlines a specific timeframe over which founders gradually acquire ownership of their shares. Consequently, if a founder leaves the company before the vesting period is complete, the agreement grants the company the right to repurchase a certain amount of the founder's unvested shares at a predetermined price.

Reverse vesting occurs when a company's shareholder receives their shares and ownership interest upfront. Under this arrangement, the company retains a repurchase right for shares not yet vested, typically for a nominal fee, although in many cases, this fee may be a fixed price or even free.

A right of first refusal (commonly known as a ROFR) refers to a contractual right granted to specific shareholders, enabling them to engage in a business transaction with an individual or entity in precedence over others. Consequently, if a shareholder intends to sell their shares, they must first offer the opportunity to purchase those shares to designated existing shareholders before involving any third party.

A Simple Agreement for Future Equity (commonly known as a SAFE) is typically established between a startup and an investor. This agreement grants the investor the right to receive future equity in the company upon specific triggering events, such as the sale or merger of the company, an IPO, or any future round of financing (referred to as "qualified financing").

When a triggering event occurs, the investment made under the SAFE converts into company shares based on specific factors outlined in the agreement, including a discounted rate, valuation cap, maturity date, investment amount, and whether it is based on Pre-money or Post-Money Valuation. SAFEs were designed to simplify and streamline the investment process, providing a quicker way for young startups and investors to align on investment terms without the need to determine the company's valuation. Consequently, they can play a significant role in facilitating the growth of startups.

The SAFE Discount Rate refers to a specific discount, typically ranging between 10% and 25%, offered to SAFE (Simple Agreement for Future Equity) investors. This discount enables them to purchase shares at a reduced rate in the company's future financing rounds.

The SAFE Valuation Cap clause establishes the upper limit imposed on the conversion price, determining the price at which the SAFE will convert into the company's shares.

A secondary sale refers to the transaction wherein an existing shareholder sells shares to a third-party purchaser. This type of sale often occurs as part of a financing round, or alternatively, in instances where employees seek to monetize part of their capital holdings acquired through exercised options. A secondary sale may be subject to various protective measures, including anti-dilution protection and rights of first refusal.

A Seed Round signifies the first external capital infusion a company receives. As the name implies, it represents a very early-stage investment aimed at supporting the company's development, with the ultimate goal of establishing a profitable business and laying stronger business foundations.

Typically, Seed Rounds are facilitated by investors commonly referred to as "angel investors", who are inclined toward riskier ventures. This funding stage proves highly advantageous for the company, offering greater flexibility to pivot and adapt to market demands. Moreover, it provides lower dilution and ample capital for subsequent series rounds.

A service agreement is a written contract between a service provider and a company that details the services to be provided, the timeline for delivery, compensation terms, and the obligations of both parties.

A service provider, whether an individual or an entity, is responsible for delivering services to a company. The specific terms of the services and the business relationship between the service provider and the company are typically detailed in a service agreement negotiated between the parties. Common types of service providers include marketing agencies, software services, advisors, and contractors.

A Share Purchase Agreement (commonly known as a SPA) is a contract between the seller of the outstanding shares of a target company and the buyer of the offered shares. The SPA specifies whether the buyer intends to purchase all or only a portion of the outstanding shares (i.e. a total takeover or a minority or majority investment). In detail, the SPA outlines the type of shares being purchased, their price, the total number of shares, the timing of the share transfer to the buyer, and the agreed-upon terms.

It's important to note that in a share purchase agreement, the buyer acquires shares of a company, whereas in a merger agreement, the buyer merges or absorbs the target company.

A shareholder register is a record that lists both current and former owners of a company's shares. This registry typically contains limited information about shareholders, including their name, ID number, address, the amount and type of shares they hold, the par value per share, and the date they became shareholders.

A side letter, often referred to as a "letter agreement", serves as a supplementary document to a primary contract. It is commonly utilized to formalize negotiated arrangements between a company and an investor, typically in conjunction with a financing round.

A statement of work (commonly known as a SOW) is a legally binding document that defines and outlines the work management features of a project, including the specific services to be provided and the deliverables expected. Most of the SOWs are issued pursuant to a master agreement which initiate and governs the relationship between the parties.

Strategic investors are individual investors or investment firms that invest in a company primarily for strategic, rather than financial reasons. Consequently, an investment from a strategic investor not only injects capital but also serves the purpose of fostering future cooperation between the investor and the company. This collaboration often includes guidance on the corporate roadmap, allocation of resources, and overall development strategies.

A strategic partnership is an arrangement between two companies that have agreed to share finances, skills, information, and/or other resources in pursuit of common goals. A company may enter into a strategic partnership for various reasons, including penetrating a new market sector, improving performance and technology, and expediting business growth.

For example, a startup company may form a strategic partnership with a larger, successful player in the sector to enter the market. Strategic partnerships encompass various legal contracts, such as commercial agreements and joint-venture agreements.

A term sheet is a written, nonbinding agreement that outlines key terms of a potential transaction agreed upon in principle between parties. It serves as a foundational document for drafting more detailed, legally binding agreements, such as a share purchase agreement.

Term sheets are utilized across a variety of transactions and typically include several critical items, such as company valuation, investment amount, payment terms, voting rights, liquidation preference, and anti-dilution protection.

Vesting schedule delineates the timeline for earning an asset, such as shares in a company. For instance, each option grant typically contains a vesting schedule, outlining the timeframe within which an employee gains full ownership rights over the option to purchase company shares. Vesting schedules serve a dual purpose: they incentivize employees to remain with the company longer by offering ownership incentives, while also imposing penalties on those who terminate their contracts prematurely.

Many vesting schedules feature a "vesting cliff'', where a specified portion of the option grant (often 25%) vests on a particular date, with the remaining options gradually vesting over subsequent quarters.

Veto rights are granted to shareholders or groups owning a specific percentage and type of shares in a company, enabling them to reject major resolutions or prevent decisions that could affect certain shareholder groups. A voting agreement outlines the terms and conditions under which a group of shareholders commits to voting in favor of a particular proposal and against any opposing proposals. Voting agreements are commonly used in investment transactions to ensure that relevant shareholders support the share purchase transaction.

A voting agreement establishes the terms and conditions by which a group of shareholders commits to voting in favor of a specific proposal and against any opposing proposals. This agreement is frequently utilized in investment transactions to ensure that relevant shareholders support the share purchase transaction.

Warrants are financial instruments that grant their holders the right, but not the obligation, to purchase or sell a certain number of a company's shares at a predetermined price by a specific date. Often employed as incentives, warrants grant investors the right to potentially increase their ownership stake in the company if its performance improves.

Upon exercise, the warrant holder is entitled to receive a certain number of shares from the company, which can result in the dilution of existing shareholders' holdings.