Investing in startups can quickly become confusing with all the unfamiliar terms and legal jargon involved in the process. If you've ever felt lost or frustrated by the complicated language that seems to make investing harder to understand, you're not alone. That's why we've put together this guide. We want to make it easier for you to understand and use these important terms like a pro. Whether you're new to investing or an entrepreneur looking for funding, this guide will help you clear up the confusion and get a better grasp of the key terms in the startup world. 

Board Seat: A position on a company's governing body that comes with significant responsibilities and decision-making power. Board members, also known as directors, are typically elected by shareholders or appointed by other board members. They are responsible for setting company strategy and goals, representing shareholder interests, and making major business decisions.  

Convertible Loan: This type of loan is a form of short-term debt that can be converted into equity at a future date. The conversion is typically triggered by an agreed upon date or the close of a qualifying funding round and can accrue interest which may be converted into equity along with the original loan amount. The valuation of a convertible loan is typically determined based on factors like the valuation cap, discount rate, and conversion triggers specified in the loan terms. 

Drag-Along Rights: These are crucial provisions in shareholder agreements that empower majority shareholders to compel minority shareholders to participate in the sale of a company. The primary purpose of these rights is to eliminate potential holdouts from minority shareholders, which could otherwise hinder or block a beneficial sale opportunity. 

Equity: An ownership stake in a company, typically in the form of shares or stock. In the startup world, equity is a crucial concept for both founders and investors. Equity investors bare in both the potential profits and loses of the company, as the value of their equity can increase or decrease depending on the company’s performance and market conditions.  

Intellectual Property Rights: These are legal protections for intangible assets that are a result of the owner’s or creator’s human intellect and creativity. This may include patents granted for new inventions, copyrights on original works of art, music, literature, etc., trademarks on distinct signs or symbols for a company, and trade secrets.  

Pro Rata Rights:  These allow investors to participate in future funding rounds of a company in proportion to their existing ownership stake. The primary purpose of pro-rata rights is to give investors the opportunity to maintain their percentage ownership as the company raises additional capital, protecting them from dilution. 

Tag-Along Rights: These are essential provisions in shareholder agreements designed to protect minority shareholders during the sale of a company. They ensure that if majority shareholders decide to sell their shares, minority shareholders have the option to join the sale on the same terms and conditions. This provides minority shareholders with an opportunity to exit the company alongside the majority, ensuring they receive equitable treatment and are not left behind in potentially unfavorable situations. 

Vesting Schedule: This refers to the gradual process by which an investor or founder earns the right to own shares or stock options in a company. Vesting schedules are often used to incentivize long-term commitment and performance.  

Now it's time to test your skills! See if you can use your newly acquired knowledge to correctly answer all of these true or false questions regarding start-up legal terms: 

1. True or False: Pro rata rights allow investors to maintain their ownership percentage in future funding rounds. 

2. True or False: Drag-along rights protect minority shareholders by allowing them to join in a company sale. 

3. True or False: Tag-along rights allow majority shareholders to force minority shareholders to sell their shares. 

4. True or False: Vesting is a process where investors or founders gradually earn full ownership of their shares over time. 

5. True or False: Convertible loans always convert into equity at a fixed valuation. 

6. True or False: Intellectual property rights only cover patents and trademarks, not copyrights or trade secrets. 

7. True or False: Equity represents ownership in a company, typically in the form of shares or stock. 

8. True or False: A board seat gives an individual the right to make unilateral decisions for the company. 

Answers: 

1. True. 

2. False. Drag-along rights protect majority shareholders by allowing them to compel minority shareholders into joining a company sale.  

3.  False. Tag-along rights protect minority shareholders by allowing them to enter into a deal under the same favorable terms and conditions as a majority shareholder.  

4. True. 

5. False. Convertible loans do not always convert into equity at a fixed valuation. The valuation may be impacted by factors such as discount rates and accrued interest.  

6. False. Intellectual property rights protect a wide range of types of intellectual property, including both copyrights and trade secrets.  

7. True. 

8. False. Board members typically have voting rights on board resolutions and decisions, but these decisions are made collectively by the board as a whole, not unilaterally by individual directors.  

Hopefully, this guide has made it a little easier to navigate the world of startup legal terms. Understanding concepts from vesting schedules and convertible loans to intellectual property rights and board governance is vital in shaping the structure, operations, and future of a startup. 

Remember, while this guide provides a solid foundation, startup law is complex and ever-evolving. It's always advisable to consult with legal professionals when dealing with specific situations or drafting agreements. By familiarising yourself with these terms, you'll be better equipped to make informed decisions, protect your interests, and contribute to your startup's success. 

Written by Cassandra Dalton, Legal Analyst at Angels Den, Europe and UK’s largest angel-led finance platform helping early stage companies and SMEs get easy access to growth capital.