Legal frameworks, regulatory requirements, and compliance concepts in venture capital.
90 terms
The baseline maximum amount of capital gains—$10 million per issuer—that a single taxpayer can exclude under Section 1202 QSBS rules.
An independent appraisal of a private company's common stock fair market value, required by the IRS to set compliant exercise prices for employee stock options.
The minimum duration an investor must hold qualified small business stock before being eligible to exclude capital gains under Section 1202.
A provision that triggers immediate repayment of outstanding debt upon certain events like default or change of control.
An individual or entity that meets the SEC's financial thresholds to invest in private securities — typically a net worth over $1M or annual income over $200K.
The process of confirming that an investor meets SEC criteria for accredited status, required under Rule 506(c) through documentation review and optional under Rule 506(b) via self-certification.
The QSBS rule requiring that at least 80% of a company's assets be used in the active conduct of a qualified trade or business during substantially all of the holding period.
A contractual obligation requiring a company to take specific actions, such as maintaining insurance, filing taxes, or providing regular financial reports.
The Section 1202 requirement that a corporation's total gross assets must not exceed $50 million at the time it issues stock for that stock to qualify as QSBS.
A parallel tax system that limits certain deductions and preferences, potentially affecting the tax treatment of carried interest and fund distributions.
A parallel tax system that can create unexpected tax liability when exercising incentive stock options.
Employment that either party can terminate at any time for any lawful reason without prior notice.
A for-profit company certified by B Lab for meeting rigorous social and environmental standards — relevant for impact-focused VC investments.
State-level securities notice filings required alongside federal Regulation D exemptions, varying by state and typically involving fees and basic disclosure.
The structure and makeup of a company's board of directors, including the balance between founder, investor, and independent seats.
A non-voting participant in board meetings, typically a smaller investor, who can attend and speak but has no voting rights.
The governing body of a corporation, responsible for major strategic decisions, hiring/firing the CEO, and representing shareholders.
A loan structure where the entire principal is repaid in a single lump sum at maturity rather than through periodic payments.
A legal doctrine that protects board members from liability for good-faith business decisions, even if those decisions turn out poorly.
The requirement that a company be organized as a domestic C-corporation to issue stock eligible for QSBS tax benefits under Section 1202.
A thorough review of a company's capitalization table during due diligence to verify ownership percentages, outstanding securities, option pools, and any irregularities.
The process of maintaining accurate records of company ownership, including all shares, options, warrants, and convertible securities.
The maximum amount of gain an investor can exclude from taxes under Section 1202 QSBS rules—the greater of $10 million or 10x the adjusted basis.
The ongoing process of maintaining accurate records of a company's ownership structure, including all equity holders and instruments.
A company that meets rigorous standards of social and environmental performance, accountability, and transparency, certified by B Lab.
An information barrier within a firm that prevents conflicts of interest by restricting the flow of material non-public information between departments.
A legal agreement between co-founders establishing equity splits, roles, vesting, IP ownership, and departure terms.
The cumulative cost and effort required for a fund to meet regulatory, reporting, and governance requirements.
The set of policies, procedures, and controls that a fund or company implements to ensure adherence to legal, regulatory, and ethical requirements.
Shorthand for drag-along rights — allowing majority shareholders to compel minority shareholders to vote in favor of a sale.
A clause that allows majority shareholders to force minority shareholders to join in a sale of the company on the same terms.
A provision allowing majority shareholders to force minority shareholders to vote in favor of an acquisition or other liquidity event.
A share structure with two classes of common stock carrying different voting rights, typically giving founders disproportionate control relative to their economic ownership.
Funds held by a neutral third party in an acquisition to cover potential post-closing liabilities — sellers receive escrowed funds after a holdback period.
A clause that automatically renews or extends an agreement unless one party takes active steps to terminate it.
A category of investment adviser exempt from full SEC registration but required to file reports, available to managers of venture capital funds and smaller private funds.
The legal obligation to act in the best interest of another party, such as a GP's duty to their LPs or a board member's duty to shareholders.
A clause allowing a board to withdraw from a previously agreed deal if doing so is required by their fiduciary duties to shareholders.
The highest legal standard of care requiring a person to act in the best interest of another party.
An SEC filing required within 15 days of the first sale of securities in a Regulation D private placement, disclosing basic information about the offering and the issuer.
Generally Accepted Accounting Principles — the standard accounting framework required for audited financial statements in the US.
Publicly advertising a fundraise to non-preexisting relationships — allowed under Rule 506(c) for funds raising from accredited investors only.
The regulatory prohibition on publicly advertising private investment offerings, with exemptions under certain SEC rules.
A comprehensive mapping of which shareholders hold which governance rights, including voting, consent, information, and board appointment rights.
A provision that exempts existing arrangements from new rules or terms, allowing prior agreements to continue under their original conditions.
A corporate structure where one parent company owns controlling stakes in multiple subsidiaries.
Interest income the IRS assumes exists on below-market loans, even if no interest is actually charged.
A board member who is not affiliated with the company's investors or management, providing neutral perspective on governance decisions.
Contractual obligations requiring a startup to share financial statements and other operational data with investors on a regular basis.
Legally protected creations of the mind — patents, trade secrets, copyrights, and trademarks — that create competitive advantages.
Legal transfer of all IP rights from founders and employees to the company.
The contractual remedies available to a fund when a limited partner fails to meet a capital call, including interest penalties, forfeiture of fund interest, and forced sale of the LP's position.
The governing legal document of a venture fund that defines the rights, obligations, and economic relationship between the general partner and limited partners.
A contractual restriction that prohibits a company from taking certain actions without investor consent, such as issuing new equity or taking on debt.
A contract restricting someone from working for competitors or starting a competing business for a specified period.
A legal contract preventing the sharing of confidential information between parties.
A legal agreement preventing parties from sharing confidential information shared during discussions — less common in early-stage VC, more common in later-stage and M&A.
The governing document for an LLC-structured fund entity (typically the management company or GP entity), defining member rights, profit sharing, and operational procedures.
QSBS benefits that flow through partnerships and LLCs taxed as partnerships to their individual partners, allowing each partner to claim their own exclusion.
The comprehensive legal disclosure document provided to potential investors in a private offering, detailing the fund's strategy, terms, risks, fees, and conflicts of interest.
Qualified Small Business Stock — a tax exclusion allowing founders and investors to exclude up to $10M (or 10x basis) of capital gains on qualifying startup investments.
A federal tax benefit allowing investors to exclude up to 100% of capital gains from the sale of qualified small business stock held for at least five years.
A tax planning strategy that multiplies the QSBS exclusion by distributing stock across multiple taxpayers such as trusts, family members, and entities.
An investor with $5 million+ in net investments, a higher threshold than accredited investor, required for participation in funds exempt from Investment Company Act registration.
Stock in a domestic C-corporation that meets IRS criteria under Section 1202, making gains potentially excludable from federal capital gains tax.
A tax provision allowing investors to exclude up to $10M or 10x their investment in capital gains from federal taxes.
The SEC safe harbor allowing companies to raise capital from accredited investors without registering the securities offering — the legal basis for most private financings.
A set of SEC rules exempting private securities offerings from full registration requirements, enabling startups and funds to raise capital from accredited investors.
The practice of structuring investments or operations to take advantage of differences in regulatory frameworks between jurisdictions, commonly seen in fund structuring and crypto ventures.
Statements of fact made by a seller in an M&A transaction that the buyer relies on — breaches can result in indemnification obligations.
A contractual right allowing a company (or existing investors) to purchase shares before a shareholder sells them to an outside party.
The most commonly used securities exemption for venture fundraising, allowing unlimited capital raises from accredited investors without general solicitation.
A securities exemption allowing general solicitation and public advertising of private offerings, but requiring verification that all investors are accredited.
Legal provisions that protect parties from liability if they meet specific conditions, commonly referenced in 409A valuations.
A tax provision allowing investors to defer capital gains from selling QSBS by reinvesting proceeds into new qualified small business stock within 60 days.
The IRS code section that provides the legal basis for excluding capital gains on qualified small business stock, enabling tax-free returns for eligible venture investors.
A partnership tax election that adjusts the tax basis of fund assets when LP interests are transferred, preventing new LPs from being taxed on gains that accrued before they joined.
A tax election allowing founders and employees to pay income tax on the fair market value of restricted stock at the time of grant rather than at vesting, potentially saving substantial taxes.
A contract among shareholders governing their rights, obligations, and the company's governance structure.
A supplemental agreement between a GP and specific LP granting customized terms beyond the standard LPA, such as fee discounts, enhanced reporting, or co-investment rights.
A tax provision that resets the cost basis of inherited assets to their fair market value at the time of the owner's death.
The legal document through which an LP formally commits capital to a fund, including representations about accredited investor status, commitment amount, and acceptance of fund terms.
Rights allowing minority shareholders to join a sale when majority shareholders sell their shares, ensuring equal treatment in a transaction.
An increase in the tax basis of an asset, often occurring at death or through certain transactions, which reduces the taxable capital gain upon future sale.
Contractual limitations on an investor's ability to sell, transfer, or assign their fund interest or shares.
An SEC exemption from investment adviser registration for managers who solely advise venture capital funds meeting specific criteria around investment type, leverage, and redemption rights.
Financial or operational conditions that a startup must maintain to remain in compliance with its venture debt agreement.
The rights of shareholders to vote on major company decisions — common shareholders typically vote on general matters, while preferred shareholders have special protective votes.
A voting structure where different shareholders have different numbers of votes per share, altering the balance of control relative to economic ownership.
The financial state where a company's liabilities approach or exceed its assets, triggering expanded fiduciary duties to creditors alongside shareholders.