Private Market Glossary: 30 Terms Every Shareholder Should Know

Private equity has its own language. Here are 30 terms you'll encounter in shareholder documents, cap tables, and secondary transactions.

409A valuation

A valuation of your company's common stock for tax purposes. Used to set the exercise price for stock options. It's intentionally conservative and usually lower than the actual market value of your shares.

Acceleration clause

A provision that speeds up vesting in specific situations, typically when the company is acquired or goes public. Usually double-trigger (two things must happen) rather than single-trigger.

Acquisition

When another company buys your company. The purchase price is divided among shareholders according to the liquidation preference waterfall. Usually includes cash, though sometimes stock or earnouts.

Anti-dilution protection

A right held by preferred shareholders that protects them from dilution if the company raises money at a lower valuation. There are two types: weighted average (most common) and full ratchet (rare and harsh).

Cap table (capitalization table)

A spreadsheet showing all shareholders, how many shares they own, what class of shares, and their liquidation preferences. The master document of a company's ownership.

Cap stack

The preference stack - the order in which shareholders get paid in a liquidation event. Who gets paid first, second, third, etc.

Carry / carried interest

The profit that venture investors keep from successful investments. Usually 20% of profits (the other 80% goes to the investors who funded the fund).

Cliff

The minimum time before any equity vests. Standard is 1 year - you don't get any shares until 1 year in. After that, remaining shares vest monthly.

Common stock

The basic class of ownership. Most employees hold common stock. Common shareholders are paid last after preferred shareholders take their liquidation preferences.

Dilution

When new shares are issued, everyone's percentage ownership goes down proportionally (dilutes). Happens with each funding round or when options are exercised.

Drag-along rights

A right that allows majority shareholders to force minority shareholders to sell their shares in an exit. If the board votes to sell the company, drag-along forces everyone to sell at the same price.

Down round

When a company raises money at a lower valuation than the previous round. Bad for common shareholders because it signals declining value and can make preferred shareholders more valuable relative to common.

Earnout

Variable compensation in an acquisition where part of the purchase price is withheld and paid only if the company hits certain milestones post-acquisition.

Exercise price (strike price)

The price at which you can buy shares if you hold stock options. Fixed at the time of grant, usually equal to the fair market value (409A valuation) on that date.

Fully diluted shares

The total number of shares that would exist if all options, warrants, and convertible instruments were exercised. Used to calculate true ownership percentage.

IPO (Initial Public Offering)

When a company goes public and shares begin trading on public exchanges. All shares become liquid. Less than 1% of startups reach this stage.

ISO (Incentive Stock Option)

A type of stock option available only to employees with favorable tax treatment. If held for 2+ years after grant and 1+ year after exercise, gains are long-term capital gains.

Lead investor

The primary investor (usually a venture firm) taking the largest stake in a funding round. Usually gets the most board seats and control.

Liquidation preference

A right held by preferred shareholders entitling them to be paid before common shareholders in a liquidation (sale or acquisition). Usually stated as a multiple (1x, 2x, 3x) of the investment amount.

Lock-up period

A period after an IPO when certain shareholders (usually insiders) cannot sell their shares. Usually 6 months. Selling before the end of lock-up requires permission.

NSO (Non-Qualified Stock Option)

A type of stock option with ordinary income tax treatment. When you exercise, the gain is taxed as ordinary income immediately, then capital gains when you sell.

Participating preference

A special right held by some preferred shareholders to participate in profits after getting their liquidation preference paid. Worse for common shareholders.

Post-money valuation

The company's valuation after a funding round is completed. Used to calculate how much of the company investors own with their investment.

Pre-money valuation

The company's valuation before a funding round. The new investors' stake = investment amount / post-money valuation.

Preferred stock

A special class of shares with preferential rights, including liquidation preferences and usually board seats. Venture investors always get preferred stock.

Pro rata rights

The right of certain shareholders to buy additional shares in future funding rounds to maintain their ownership percentage (not dilute).

ROFR (Right of First Refusal)

The company's right to buy back shares before you can sell them to someone else. Standard in most private companies - if you want to sell, the company gets first opportunity to match the offer.

RSU (Restricted Stock Unit)

A promise to give you shares when they vest. No exercise price. You don't pay anything - the shares are granted for free as they vest.

Secondary discount

The discount at which secondary shares typically sell relative to the last primary round valuation. Usually 20-40% below the headline valuation.

Secondary market / secondary transaction

When existing shareholders sell their shares to outside investors before a company exit. Allows employees to get liquidity without waiting for IPO or acquisition.

Tag-along rights

The right of minority shareholders to sell their shares when majority shareholders do. If the founder sells in an acquisition, minority shareholders can tag along and sell at the same price.

Tender offer

When a company or external party offers to buy shares from shareholders, usually at a set price. Different from a secondary transaction with outside buyers.

Vesting

The process by which you earn equity over time. You don't own shares until they vest. Standard is 4 years with 1-year cliff.

Waterfall analysis

Modeling what happens to cash proceeds in a liquidation event when distributed among all shareholders according to their preferences. Shows what common shareholders actually get at different exit values.