Glossary / Legal & Compliance

Legal & Compliance

Corporate legal terms: governance, IP, regulatory compliance, and risk management.

4

409A Valuation

An independent third-party appraisal of a private company's common stock fair market value, required by IRS Section 409A to set stock option exercise prices and avoid adverse tax treatment for employees.

A

Anti-Dilution

A provision in preferred stock agreements protecting investors from dilution in down rounds—adjusting the conversion price of preferred stock downward when new shares are issued at a lower price.

B

Board Observation Rights

A contractual right allowing an investor to attend board meetings as a non-voting observer—providing visibility into board deliberations without the legal duties and liabilities of board membership.

D

Drag-Along Rights

A provision allowing majority stockholders to force minority stockholders to approve and participate in a sale of the company, preventing minority shareholders from blocking an otherwise agreed acquisition.

Definitive Purchase Agreement

The binding legal agreement documenting all terms and conditions of an M&A transaction—including purchase price, representations and warranties, closing conditions, and post-closing obligations.

E

Escrow

A financial arrangement where a third party holds funds or assets on behalf of transaction parties, released upon completion of specified conditions—used in M&A to secure indemnification obligations.

Earnout

A contingent payment mechanism in M&A transactions where a portion of the purchase price is paid to the seller only if the acquired business achieves specified financial or operational milestones post-closing.

G

Governing Law

The choice of law provision in a contract specifying which jurisdiction's laws govern interpretation and enforcement of the agreement—typically Delaware for corporate governance and New York for commercial contracts.

I

Indemnification

A contractual obligation by one party to compensate another for specified losses, liabilities, or claims—shifting risk allocation between contracting parties for defined categories of harm.

Information Rights

Contractual rights granted to investors specifying what financial and operational information the company must provide, on what schedule, giving investors visibility into business performance and covenant compliance.

L

Liquidation Preference

The right of preferred stockholders to receive their invested capital (and sometimes a multiple of it) before any proceeds are distributed to common stockholders in a company sale or liquidation.

M

Material Adverse Change

A clause in transaction agreements allowing a buyer to terminate the deal if the target company experiences a significant negative development between signing and closing—defining what magnitude of deterioration excuses the buyer.

N

NDA

Non-Disclosure Agreement—a binding contract requiring parties to keep specified information confidential, used to protect proprietary information shared during business negotiations, partnerships, or employment.

P

Pro-Rata Rights

The right of existing investors to participate in future financing rounds in proportion to their current ownership—enabling investors to maintain their percentage ownership by investing in new rounds.

Preferred vs. Common Stock

Two primary classes of corporate equity: preferred stock held by investors carries priority economic and governance rights over common stock held by founders and employees.

Participating vs. Non-Participating Preferred

Two preferred stock dividend and liquidation structures: participating preferred receives both its liquidation preference AND shares in remaining proceeds as-if-common, while non-participating preferred receives only its preference (or converts to common for higher returns).

R

Representations and Warranties

Factual statements made by parties in a transaction agreement asserting the truth of specific facts as of the signing date—with breach of these statements triggering indemnification obligations.

Ratchet

A provision in PE-backed company structures that adjusts management's equity percentage upward or downward based on exit performance—rewarding exceptional returns with additional equity and penalizing underperformance.

Right of First Refusal

A contractual right giving the holder the first opportunity to purchase shares before a selling stockholder can sell them to a third party—on the same terms offered by the third-party buyer.

T

Tag-Along Rights

A provision allowing minority stockholders to participate in a sale of shares by a majority holder on the same terms—protecting minority shareholders from being left behind when controlling shareholders exit.

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