LEGAL TERMINOLOGY:

Courtesy of the Northwest Entrepreneur Network (www.NWEN.org)

1933 Act - "1933 Act" means the Securities Act of 1933, as amended.

1934 Act - "1934 Act" means the Securities Exchange Act of 1934, as amended.

Accredited Investor - "Accredited Investor" means a natural person whose individual net worth, or joint net worth with that person's spouse, exceeds $1 million at the time of the purchase of the securities; or, a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 in each of those years and a reasonable expectation of the same income level in the current year ("Accredited Investor" may also mean other kinds of institutional investors. See SEC Rule 501 of the Securities Act of 1933 for the complete definition of "accredited investor.").

Angel Investors - "Angel Investors" are private investors not acting as a part of a venture capital investment fund. Generally a person is not thought of as an angel investor unless he or she meets the definition of "Accredited Investor" under SEC Rule 501, however, the term is sometimes used in a broader sense to include all potential private investors.

Anti-Dilution - "Anti-Dilution" means that a defined class of stock (usually preferred stock) will be protected from the dilution arising from sales of stock during a new round of financing at a lower price.

Blue Sky Law - "Blue Sky Law" is the popular name for the state statutes and regulations adopted in each state for the regulation and supervision of securities offerings and sales. A "Blue Sky Exemption" is an exemption from registration provided for in a particular state's laws or regulations.

Bridge or Mezzanine Financing - "Bridge or Mezzanine Financing" means the financing for a company expecting to go public usually within six months to a year (i.e. the company has secured the services of an underwriter and has a firm commitment from the underwriter to go public). Often bridge financing is structured so that it can be repaid from proceeds of a public underwriting.

C-Corporation - "C-Corporation" means a corporation that is taxed under Internal Revenue Code Section 11 and subchapter C, rather than a corporation that has elected to be taxed as a pass-through entity under subchapter S of the Code.

Conversion Right - "Conversion Right" in the context of preferred stock venture financing, means the right of preferred shareholders to convert their preferred stock to common stock under certain circumstances.

Common Stock - "Common Stock" means the class of corporate stock that represents the ownership of the corporation. It normally has voting rights, and is the last to share in property of the corporation on dissolution.

Co-Sale Rights - "Co-Sale Rights" means that the defined class of shareholders must allow the participation of another defined class of shareholders in certain sales of stock.

Exchange Act - "Exchange Act" means the federal Securities Exchange Act of 1934, as amended.

First Round Financing - "First Round Financing" means financing provided to companies that have expended their initial capital and require funds, often to initiate commercial manufacturing and sales.

Follow-on or Later Stage Financing - "Follow-on" or "Later Stage Financing" means a subsequent investment made by an investor who has made a previous investment in the company -- generally a later stage investment in comparison to the initial investment.

Founders Stock - "Founders Stock" generally means the common stock issued to the founders of the corporation when the corporation is formed.

Friends and Family Round of Financing - "Friends and Family Round of Financing" means the financing provided to companies by the founders' close friends, relatives and acquaintances to get the company started, often before there is a developed business model or key management in place. So-called because at this stage only investors who are friends and family of the founders would invest, because all there is to invest in at this stage is the "bright idea." Friends and family financing is the most common financing method for early stage companies prior to approaching private investors in "Seed" or "First Round Financing".

GAAP - "GAAP" means generally accepted accounting principles.

Information Rights - "Information Rights" means the rights granted to a certain class of shareholders to inspect financial and other records of the company and to be offered financial reports and other information of the company on a regular basis.

IPO or Initial Public Offering - "IPO" or "Initial Public Offering" means a company's first offering of stock to the public.

ISO or Incentive Stock Options - "ISO" or "Incentive Stock Options" means an incentive stock option, as defined in Internal Revenue Code Section 422.

Liquidation Preference - "Liquidation Preference" means that upon the occurrence of certain events, holders of preferred stock of the issuer will receive distributions before common shareholders.

NQSO or Non-Qualified Stock Options - "NQSO" or "Non-Qualified Stock Options" means a stock option which does not meet the Internal Revenue Code Section 422 requirements for ISO status.

Preferred Stock - "Preferred Stock" means the capital stock of a corporation with a claim to income or assets of the corporation after debt holders but before common stock.

Private Placement - "Private Placement" means the sale of securities to a small group of investors (generally 35 or fewer, but lower in some states) which is exempt from SEC registration requirements. The investors execute an investment letter stating that the securities are being purchased for investment without a view towards distribution.

Pro-Rata - "Pro-Rata" means 'proportionately' according to a certain rate, percentage or proportion. For example, if a corporation has ten shareholders each of whom own 10% of the stock, if the shareholders have a pro-rata right of first offer they could each purchase 10% of any new shares issued by the corporation.

Redemption Rights - "Redemption Rights" means that a defined class of shareholders (usually preferred stock) may sell their shares back to the company under certain circumstances.

Reg D - "Reg D" means the SEC regulation providing for an exemption from registration filing requirements of the 1933 Act.

Registration Rights - "Registration Rights" means that a defined class of shareholders (usually preferred stock) can force the company to register the shares under the 1933 Act.

Rights of First Offer - "Rights of First Offer" means that a defined class of shareholders (usually preferred stock) has a right, for a defined period of time from the date of the corporation's notice of its intention to offer new shares, to exercise a pro rata right to participate in the sale of new shares of the corporation.

Rights of First Refusal - "Rights of First Refusal" means that if a defined class of shareholders (usually common stock) wants to sell their stock, other shareholders (usually preferred stockholders) have the right to buy the shares before non-shareholders.

Secondary Public Offering - "Secondary Public Offering" refers to a public offering subsequent to an initial public offering. A secondary public offering can be either an issuer offering or an offering by a group that has purchased the issuer's securities in the public markets.

Secondary Purchase - "Secondary Purchase" means the purchase of stock in a company from a shareholder, rather than purchasing stock directly from the company.

Second Stage Financing - "Second Stage Financing" means the working capital for the initial expansion of a company that is producing and shipping and has growing accounts receivable and inventories. Although the company has clearly made progress, it may not yet be showing a profit.

Seed Round Financing - "Seed Round Financing" means a relatively small amount of capital provided to an investor or entrepreneur, usually to prove a concept. It may involve product development, but rarely involves initial marketing.

Series A - "Series A" means the first series of preferred stock issued by the corporation. The rights and preferences of the Series A preferred stock are described in the articles of incorporation and amendments to the articles of incorporation adopted by the board of directors of the corporation.

S-Corporation - "S-Corporation" means a corporation that has elected to be taxed as a pass-through entity under subchapter S of the Internal Revenue Code.

Stock Option - "Stock Option" means the right, acquired for a price, to buy or sell a certain specified stock at an agreed price, within a specified period of time or at a specific moment. Stock Options are securities.

Strike Price - "Strike Price" means the price at which the underlying security of an option can be purchased (call) or sold (put).

Third Stage Financing - "Third Stage Financing" means the funds provided for the major growth of a company whose sales volume is increasing and that is beginning to break even or turn profitable. These funds are typically for plant expansion, marketing and working capital development of an improved product.

Warrants - "Warrants" means the right to buy a specified amount of stock at a specified time(s) for a specified strike price. Differs from a stock option only in that options are granted to employees and warrants are sold to the public. Warrants are securities.