Business Terms Guide for Entrepreneurs

Entrepreneurs regularly run into terms from four areas: business structure, financing, contracts and employment, plus the financial statements that tie them together. Knowing what terms like “vesting,” “pre-money valuation,” “indemnification” and “independent contractor” actually mean helps founders negotiate better, avoid costly mistakes and know when to ask for advice. This guide defines the terms that come up most often for California startups and small businesses.

Picture a founder reading a first term sheet or customer contract. Many of the words look familiar, but their legal meaning can be narrower or broader than everyday usage. The definitions below are short by design; each links to areas where a closer look is often worthwhile.

Business Structure Terms

Sole proprietorship. A business owned by one person with no separate legal entity. The owner is personally liable for business debts.
Limited liability company (LLC). An entity owned by members that generally shields owners from personal liability for business debts. In California, LLCs pay an annual franchise tax and, above certain revenue levels, an additional fee.
C corporation. A corporation taxed separately from its shareholders. It is the standard structure for companies planning to raise venture capital or grant stock options. See our business formation page.
S corporation. A corporation (or LLC) that elects pass-through tax treatment under Subchapter S. It is limited to 100 shareholders, generally U.S. individuals, and one class of stock. Our post on S corporations explains the trade-offs.
Bylaws and operating agreement. The internal rules for a corporation (bylaws) or an LLC (operating agreement), covering governance, voting and ownership transfers.
Fiduciary duty. The legal duty of directors, officers and, in some cases, managers or controlling owners to act with care and loyalty toward the company and its owners.

Equity and Financing Terms

Equity vs. debt. Equity is ownership in the company; debt is money borrowed that must be repaid, usually with interest. Some instruments, like convertible notes, start as debt and convert to equity.
Capitalization table (cap table). A record of who owns what securities in the company, including options and convertible instruments. See our guide to capitalization tables.
Vesting. A schedule under which founders or employees earn their equity over time, commonly four years with a one-year cliff. Unvested founder shares are typically subject to company repurchase if the founder leaves.
83(b) election. A filing with the IRS, due within 30 days of receiving restricted stock, that lets the holder be taxed on the stock’s value at grant rather than as it vests.
Stock options. The right to buy shares at a fixed exercise price. Incentive stock options (ISOs) can receive favorable tax treatment; nonqualified options (NSOs) do not.
SAFE. A simple agreement for future equity: an investor pays now and receives shares in a future priced round, often at a discount or subject to a valuation cap. A SAFE is not debt and has no interest or maturity date.
Convertible note. A loan that typically converts into equity at a later financing, with interest and a maturity date.
Pre-money and post-money valuation. The company’s agreed value immediately before and after a new investment.
Dilution. The reduction in an owner’s percentage when the company issues new shares.
Liquidation preference. The right of preferred stockholders to be paid back, often 1x their investment, before common stockholders when the company is sold or wound down.
Accredited investor. An investor who meets SEC income, net worth or professional criteria. Most private startup offerings rely on exemptions that are easiest to use with accredited investors.

Contract Terms

Term sheet or letter of intent (LOI). A summary of key deal terms, usually mostly non-binding, that precedes definitive agreements.
Representations and warranties. Statements of fact a party makes in a contract. If they prove false, the other party may have remedies.
Indemnification. A promise by one party to cover certain losses or claims suffered by the other.
Limitation of liability. A clause capping or excluding certain damages, often tied to fees paid under the contract.
Non-disclosure agreement (NDA). A contract that restricts how confidential information may be used and disclosed. NDAs can be one-way or mutual.
Force majeure. A clause excusing performance when events outside a party’s control prevent it.
Governing law and venue. Which state’s law applies and where disputes are resolved. California law limits some choices of law and forum in employment agreements.

Our post on contract review covers how these clauses interact in practice.

Employment and Intellectual Property Terms

Employee vs. independent contractor. California generally uses the ABC test to decide whether a worker is an employee. Misclassification can be expensive.
At-will employment. Either party can end employment at any time, for any lawful reason, absent an agreement otherwise.
Exempt vs. non-exempt. Whether an employee is exempt from overtime rules, which in California depends on both salary level and actual job duties.
Non-compete. In California, agreements restricting employees from working for competitors after leaving are generally void, with narrow exceptions such as certain sales of a business.
Intellectual property (IP). Patents, copyrights, trademarks and trade secrets. Companies typically secure IP from employees and contractors through invention assignment agreements.

Financial Statement Terms

Balance sheet. A snapshot of assets, liabilities and equity at a point in time.
Income statement. Revenue, expenses and net income over a period, also called a profit and loss statement.
Cash flow statement. How cash moved through operating, investing and financing activities. A company can be profitable and still run out of cash.
Burn rate and runway. How fast a startup spends cash each month, and how many months it can operate before needing more funding.
Accounts receivable and payable. Money customers owe the business, and money the business owes its vendors.

The Takeaway

Business vocabulary matters because many of these terms carry specific legal and tax consequences. A founder who understands vesting, dilution, indemnification and worker classification is better prepared to read documents carefully, ask the right questions and recognize when a term needs a closer look before signing.

Frequently Asked Questions

What is the difference between a C corporation and an LLC?

A C corporation is owned by shareholders, managed by a board of directors and taxed at the entity level, with shareholders taxed again on dividends. An LLC is owned by members and is taxed as a partnership or disregarded entity by default, so profits pass through to the owners. Venture-backed startups usually choose a C corporation because investors and stock option plans are built around that structure.

What does pre-money valuation mean?

Pre-money valuation is the agreed value of a company immediately before a new investment. Adding the new investment produces the post-money valuation, and the investor’s ownership percentage is generally the investment divided by the post-money valuation.

Is a letter of intent or term sheet legally binding?

Usually only in part. Most term sheets and letters of intent state that the business terms are non-binding until definitive agreements are signed, while specific provisions such as confidentiality, exclusivity and governing law are binding. The document’s own language controls, so read it carefully before signing.

What is the difference between an employee and an independent contractor in California?

California generally applies the ABC test, under which a worker is presumed to be an employee unless the business shows the worker is free from its control, performs work outside the usual course of its business, and is independently established in that trade. Misclassification can lead to back wages, penalties and tax liability.

How Sutter Law Can Help

We advise founders and growing companies on entity formation, financings, contracts and employment matters, and we can walk you through the terms in your own documents. Learn more about our startup law practice, or contact us for a free consultation.

This article is general information, not legal advice. Reading it does not create an attorney-client relationship.