An incubator is an organization that provides mentorship, early funding, working space, and connections to help entrepreneurs grow their businesses and develop a minimum-viable product. Well-known incubators include Idealab, The Batchery, Upward, SteelBridge Laboratories, and Invenshure.
Stock Purchasing Agreement
Stock purchase agreement (SPA) refers to a contract between two parties, where a buyer purchases shares (or equity) directly from a shareholder. The contract is considered binding only if it aligns with all federal, state, and local laws, outlines the benefits received by both parties, and if both parties have capacity to enter into the agreement.
The term “strategic investor” refers to an individual or group that offers more than just money to a startup, which can include: industry expertise, connections with other industry operators or investors, or support on marketing, sales, design…etc.. Typically startups should have one or two strategic investors each round to make sure they’re maximizing the value of their cap table.
A word of caution—if you are going to take on a strategic investor, make sure they didn’t include any unique controls or rights in their term sheet outside of those granted to your other investors such as a Right of First Refusal.
Strike price refers to the dollar amount that an individual or organization needs to pay to exercise their stock option, and is calculated based on the 409(a) valuation of the company. The strike price an employee pays is outlined in their stock option grant, which outlines the number of shares they are entitled to purchase, the vesting schedule, and the price they need to pay to purchase the shares (strike price). The strike price paid for a single option grant remains the same regardless of its exercise date, even if the company’s value increases significantly.
Success fee refers to the compensation that is paid to an investment bank (ibank) for successfully closing a transaction, in a merger or acquisition it is calculated based on a company’s enterprise value, and is contingent on the completion of the deal. Success fees align the interests of the company and the investment bank processing the transaction, and incentivize the ibank to get the best deal possible. They also typically have a simple fee structure that makes it easy to understand.
Sweat equity refers to the exchange of expertise, labor and time, for discounted equity in the business. Founders and early employees often earn sweat equity when bootstrapping their business, due to the lack of available financial resources.