Glossary

Common stock is the basic ownership unit of a company. Founders and employees typically hold common stock. It sits behind preferred stock (what most investors hold) in the payout order, so in a sale, preferred holders are often paid first. When an accelerator takes common stock, it holds the same class as the founders.

Dilution is the reduction in your ownership percentage that happens when a company issues new shares, for example in a funding round or when a SAFE converts. Owning a smaller slice is not automatically bad: the goal is for the whole pie to grow enough that your smaller slice is worth more.

A discount lets a SAFE convert at a reduced share price compared to new investors in the priced round. A 20 percent discount means the SAFE holder pays 80 percent of the round price per share. When a SAFE has both a cap and a discount, it usually converts at whichever gives the investor more shares.

A Most Favored Nation (MFN) clause lets an early investor adopt the most favorable terms you grant to any later investor on a similar instrument. If you issue a SAFE with no cap under an MFN, and later issue another SAFE with a low cap, the MFN holder can take that lower cap. It protects early backers from being undercut by better deals offered afterward.

Non-dilutive funding is capital that does not require giving up ownership. Common forms include government grants, competition prizes, tax credits, and cloud or service credits. Because no shares change hands, your cap table stays the same. The tradeoff is that it often comes with reporting requirements, milestones, or a narrower use of funds.

Post-money valuation is the value of a company immediately after new money comes in. It equals the pre-money valuation plus the amount invested. Your ownership percentage sold is roughly the investment divided by the post-money valuation. Post-money SAFEs fix the investor's ownership percentage, which makes dilution easier to predict.

A pro rata right lets an investor put more money into a future round to maintain their ownership percentage. Without exercising it, an investor's stake shrinks as new shares are issued. Accelerators and early investors often negotiate pro rata rights so they can keep pace with later rounds.

A SAFE (Simple Agreement for Future Equity) is a contract where an investor gives you money now in exchange for the right to shares later, usually when you raise a priced round. It is not debt, so there is no interest and no maturity date. The number of shares it converts into depends on its valuation cap and discount.

SBIR (Small Business Innovation Research) and STTR (Small Business Technology Transfer) are US federal programs that fund early research and development at small companies with non-dilutive awards. They run in phases: a small feasibility award, a larger development award, and a commercialization phase that uses non-program funding. STTR additionally requires partnering with a research institution.

A valuation cap is the maximum company valuation at which a SAFE converts into equity. If your next priced round values the company above the cap, the SAFE investor converts as if the value were the cap, so they get more shares for their money. A lower cap is better for the investor and more dilutive for founders.

A warrant is a contract that gives the holder the right to buy shares at a fixed price within a set time. Investors or partners sometimes receive warrants in addition to, or instead of, direct equity. When exercised, warrants create new shares, which dilutes existing holders.