Financial & Legal Glossary

A form of alternative dispute resolution (ADR) where parties agree to submit their dispute to one or more arbitrators for a binding decision, rather than going to court. Commercial arbitration is widely used in international business, B2B contracts, and employment agreements. Major arbitration institutions include JAMS, AAA, and the ICC International Court of Arbitration.

Insurance coverage that replaces lost income when a business is unable to operate due to a covered peril, such as fire, natural disaster, or equipment failure. Policies typically cover lost revenue, fixed costs (rent, payroll), and temporary relocation expenses. Business interruption became highly contested during COVID-19 as many policies excluded pandemic losses.

A tax on the profit from the sale of a capital asset such as stocks, bonds, real estate, or a business. Short-term capital gains (assets held less than one year) are taxed at ordinary income rates. Long-term capital gains (held over one year) benefit from reduced rates of 0%, 15%, or 20% depending on taxable income.

Insurance coverage designed to help businesses mitigate risk exposure from cyber events such as data breaches, ransomware attacks, and network security failures. Policies typically cover notification costs, credit monitoring, legal defense, regulatory fines, and business interruption losses. Increasingly required by enterprise clients in B2B SaaS contracts.

Directors and Officers (D&O) Insurance is liability coverage that protects corporate directors and officers from personal financial losses if they are sued for alleged wrongful acts while managing a company. D&O policies typically cover legal fees, settlements, and other costs. Nearly all public companies and investor-backed startups carry D&O insurance.

An LLC formed in the state of Delaware, widely considered the gold standard for business formation in the United States. Delaware's Court of Chancery (a specialized business court), flexible LLC Act, strong legal precedent, and pro-business statutes make it the preferred jurisdiction for startups, holding companies, and venture-backed entities. Over 60% of Fortune 500 companies are incorporated in Delaware.

An accounting method that allocates the cost of a tangible asset over its useful life. Common depreciation methods include straight-line, declining balance, and MACRS (Modified Accelerated Cost Recovery System) used for US tax purposes. Section 179 allows businesses to deduct the full purchase price of qualifying equipment in the year of purchase.

A taxation principle where corporate income is taxed at both the corporate level and again at the individual level when distributed as dividends to shareholders. C-Corporations are subject to double taxation — the corporation pays corporate income tax on profits, and shareholders pay personal income tax on dividends received. S-Corps and LLCs can avoid double taxation through pass-through taxation.

A comprehensive investigation or audit of a potential investment, business acquisition, or partnership to confirm all material facts and assess risks. Due diligence typically covers financial statements, legal compliance, IP ownership, contracts, litigation history, tax status, and employee matters. In M&A, the due diligence period typically lasts 30-90 days after LOI execution.

Earnings Before Interest, Taxes, Depreciation, and Amortization — a measure of a company's overall financial performance and profitability. EBITDA is widely used as a proxy for cash flow and is the most common valuation metric in M&A transactions. The EBITDA multiple varies by industry, typically ranging from 4x to 15x for mid-market companies.

A legal obligation requiring one party to act in the best financial interest of another party. Directors and officers of a corporation owe fiduciary duties to the company's shareholders, including the duty of care (making informed decisions) and the duty of loyalty (avoiding conflicts of interest). Breach of fiduciary duty can result in personal liability for corporate officers.

A contractual clause that frees both parties from liability when an extraordinary event or circumstance beyond their control prevents one or both parties from fulfilling their obligations. Common force majeure events include natural disasters, wars, pandemics, and government actions. The clause became critical during the COVID-19 pandemic for contract disputes globally.

Commercial General Liability (CGL) insurance covers a business against claims of bodily injury, property damage, and advertising injury caused to third parties. CGL is the most fundamental business insurance policy and is often required for commercial leases, government contracts, and B2B partnerships. Standard coverage limits are $1M per occurrence and $2M aggregate.

A contractual obligation where one party agrees to compensate another for losses, damages, or liabilities incurred. In corporate contexts, indemnification clauses are commonly found in M&A agreements, service contracts, and employment agreements. Companies typically indemnify their directors and officers from lawsuits arising from their corporate duties.

Legal rights that result from intellectual activity in the industrial, scientific, literary, and artistic fields. IP includes patents (inventions), trademarks (branding), copyrights (creative works), and trade secrets (confidential business information). IP valuation is critical in M&A transactions and startup fundraising.

A life or disability insurance policy taken out by a business on the life of a key employee, partner, or executive whose death or disability would cause significant financial hardship. The company pays the premiums and is the beneficiary. Key person insurance is often required by venture capital firms and lenders as a condition of investment or loan agreements.

A legal document that outlines the ownership structure, member responsibilities, and operating procedures of a Limited Liability Company. While not required in all states, an Operating Agreement is critical for multi-member LLCs to define profit distribution, voting rights, management structure, and member exit procedures. Without one, default state laws govern the LLC.

M&A refers to the consolidation of companies or assets through various types of financial transactions, including mergers, acquisitions, tender offers, purchase of assets, and management acquisitions. The M&A process typically involves due diligence, valuation, LOI (Letter of Intent), definitive agreement, and closing. Common valuation methods include DCF, comparable companies, and precedent transactions.

A contract clause restricting an employee or business seller from competing with their former employer or buyer for a specified period and within a certain geographic area. The FTC proposed a nationwide ban on non-compete agreements in 2024, though this remains subject to litigation. Enforceability varies significantly by state.

A business structure where the entity itself is not taxed; instead, profits and losses "pass through" to the owners' personal tax returns. LLCs, S-Corporations, sole proprietorships, and partnerships are typical pass-through entities. This avoids double taxation but subjects income to self-employment tax in some cases.

Also known as Errors and Omissions (E&O) insurance, this policy protects professionals and businesses against negligence claims and lawsuits arising from professional services rendered. Essential for consultants, accountants, lawyers, technology companies, and financial advisors. Covers defense costs, settlements, and judgments related to professional mistakes.

Section 1202 of the Internal Revenue Code allows shareholders of Qualified Small Business Stock (QSBS) to exclude up to 100% of capital gains from federal income tax on the sale of stock held for more than 5 years in a C-Corporation with gross assets under $50M. This exclusion can result in millions of dollars in tax savings for startup founders and early investors.

A Software-as-a-Service agreement governing the terms of access to cloud-based software. Key provisions include service level agreements (SLAs), data ownership and portability, security obligations, acceptable use policies, limitation of liability, and termination rights. Enterprise SaaS agreements often include custom data processing addenda (DPA) for GDPR/CCPA compliance.

An investment strategy where you sell securities at a loss to offset capital gains tax liability. Harvested losses can offset capital gains dollar-for-dollar, and up to $3,000 in excess losses can be deducted against ordinary income annually. Remaining losses can be carried forward indefinitely. The IRS wash-sale rule prevents repurchasing substantially identical securities within 30 days.

A form of private equity financing provided to early-stage, high-growth companies in exchange for equity ownership. VC firms typically invest in companies with strong growth potential and seek returns through an IPO or acquisition. Key terms include pre-money valuation, liquidation preference, anti-dilution provisions, and board representation rights.