Key Terms and Concepts
Before diving into transactions, it helps to establish a shared vocabulary. The private markets have their own language, and understanding it is the first step toward making informed decisions.
Stock: A broad term referring to the ownership you have in a company. When you own stock, you own an equity interest in that company, and your stock’s value can go up or down based on how well the company performs.
Share: A single unit of ownership in a company. If you own stock in a company, you own a certain number of shares.
Equity: Also refers to ownership. It represents either a number of shares or a percentage of your ownership.
Security: A financial asset representing an investment or ownership interest in a company.
Valuation: An estimate of how much a company is worth. For private companies, it’s not always clear, though various methods and data points exist to inform it.
409A: Refers to a section of the U.S. tax code that governs how deferred compensation (like stock options) is valued and taxed. Companies obtain a “409A valuation” to determine the fair market value of their common stock for U.S. tax purposes.
Cap table (capitalization table): A detailed record showing who owns what percentage of a company. It typically lists founders, investors, existing shareholders, and employees with options, as well as the types of shares they hold.
Liquidity: Refers to how easily you can sell your shares and turn them into cash. Private company shares are generally less liquid than those sold on the public market.
Types of Stock
Common stock: The most common type of ownership in a company. Common stockholders may have the potential to receive a share of the company’s profits, called dividends (if the company chooses to pay them).
Preferred stock: A type of ownership in a company that comes with certain rights and privileges not usually available to common stockholders. These privileges typically include receiving dividends before common stockholders, and having a higher claim on the company’s assets if it’s sold or goes out of business.
Options / stock options: Agreements giving you the right — but not the obligation — to buy a company’s shares at a certain price, during a specified period.
ISO (incentive stock option): A type of stock option often available to employees, which can offer favorable tax treatment when you exercise your options and sell the shares, as long as certain requirements are met.
NSO (non-qualified stock option): A type of stock option that can be granted to employees, consultants, and others. The tax treatment differs from ISOs.
RSU (restricted stock unit): A promise from a company to give you shares in the future, usually tied to your performance or tenure at the company.
Selling Your Stock
Vesting: The process by which you earn ownership of your equity over time, often tied to how long you’ve been employed by a company, or whether you’ve met certain performance or business targets.
Exercising stock options: The process where you use your right to buy shares of a company’s stock at the predetermined “strike price” or “exercise price.”
Strike price: Also called the “exercise price,” this is the amount you’ll pay to purchase one share of a company when you exercise a stock option.
Cashless exercise: A way to exercise your stock options without paying the full exercise cost upfront. In a typical cashless exercise, the shares are sold as part of the same transaction, and the proceeds from the sale are used to cover the exercise cost.
Transfer restrictions: Private companies can have rules in place that limit when and how you can sell or transfer your shares.
Share transfer notice (STN): A formal document that informs a company that a shareholder wants to transfer shares from one person or entity to another.
Right of first refusal (ROFR): Many private companies have this provision as part of their shareholder agreements. It means that if you find a buyer for your shares, the company (or sometimes its existing shareholders) has the right to purchase your shares at the same price before they can be sold to a proposed buyer.
Share transfer agreement (STA): This legal contract between a seller and a buyer outlines the terms of the sale and transfer of shares from the seller to the buyer.
Tender offer: An offer made by a company or an investor to buy shares directly from existing shareholders, usually at a set price and for a limited time.
Capital gains tax: When you sell a capital asset (like a stock) for more than you paid to acquire it, you may have a capital gain.
Transfer type: A direct transfer means the securities are transferred directly from you to the buyer. An indirect transfer means the economic interest is transferred through a fund or other investment vehicle.