Since I started working in this space (2016! I was still in school!) the biggest hurdle for clients, prospective clients, and even colleagues has been ensuring everyone is speaking the same language. This is particularly difficult when you are working in a space where things are constantly changing. What was crypto became web3 because crypto and back and forth we have gone. What is cutting edge today may be blasé, cringe, or even illegal tomorrow. Opaque terminology, regulation through enforcement, and breakneck speed combined to bolster barriers to entry for creators and entrepreneurs alike. So, my job more often than not has been to provide some kind of baseline, allowing interested parties to have productive conversations. Along the way, something of a guide was pulled together, and now I am publishing it here for the collective good. Hopefully, the guide successfully breaks down some of these barriers and serves as a community good.
NOTE THAT (OF COURSE) this guide does not take the place of engaging competent counsel. It is important for all businesses, but particularly for those working in emerging technology, to consult legal counsel early and often. The easiest way to solve a problem is to avoid it in the first place. Nothing contained in this guide should be construed as legal advice, and there is no attorney-client relationship between author and reader.
The following is a non-exhaustive glossary of common terms in the startup universe (particularly in web3/crypto/whateverwearecallingittoday). This list is subdivided into the following sections: Web3 Terms, Incorporation and Governance Terms, Capital Formation Terms, and Regulatory Agencies. The goal will be to update this from time to time, so that we stay (somewhat) ahead of new developments, but I do not commit to doing so on any kind of regular cadence.
Web3 (Crypto) Terms
Airdrop. A strategy for token issuance whereby firms directly send their native token to user wallets. Often, these are part of a broader promotional campaign to increase engagement.
Altcoin. Small cap cryptocurrencies that are relatively new, illiquid, or a variant of established coins like Ether and Bitcoin.
Bitcoin. The original peer-to-peer digital currency inspired by the white paper published by alias Satoshi Nakamoto.
Block. A collection of records and transactions that are bundled together in a linked blockchain.
Blockchain. A digital ledger that is immutable, peer-to-peer, and publicly-accessible. Without blockchains, crypto-currencies are not possible.
Block Explorer. A program that allows users to find information efficiently on a blockchain.
Bridge Protocol. Allows separate blockchains, i.e., Bitcoin and Ether, to exchange information and transactions.
Cold Wallet. Any device that stores digital assets offline. This could be a hard drive, USB drive, or other device that is not connected to the Internet.
Consensus Mechanism. How nodes reach agreement regarding the validity of a proposed transaction.
Decentralized Autonomous Organization (“DAOs”). Organizations of people or entities formed completely on a blockchain. Governance of a DAO is controlled by open-source code that is overseen by users in the DAO. DAOs have been especially useful for those who wish to reduce transaction costs, collectivize, and work towards a common goal, such as funding a particular cause.
Decentralized Application (“DAPP”). The general term for applications that run on a blockchain.
Decentralized Finance (“DeFi”). Parlance for the crypto / Web3 ecosystem that is disrupting traditional financial institutions.
Decentralized Exchange (“DEX”). Exchanges on a blockchain for cryptocurrency and other digital assets. Exchange transactions are governed by smart contracts.
Difficulty Adjustment. The amount of output needed from miners / nodes to verify the status of the network. This output is measured as the amount of computing power required from nodes to verify blockchain records.
Ethereum. The most popular platform for blockchain projects and smart contracts. Ethereum is a public blockchain that permits users to build a myriad of applications on its blockchain.
ERC-20. The native fungible token standard of Ethereum.
ERC-721. The Ethereum token that permits users to create unique, non-fungible tokens such as NFTs.
Fiat. The currency standard deployed by most governments of the world. Fiat currencies derive their value by their status as legal tender for government debts.
Fork. When there is a change to the protocol that runs a blockchain, a fork occurs. Forks can vary in their severity. Hard forks occur when the change is so substantial that a new chain forms. The Ethereum merge—when Ethereum transitioned from a PoW to PoS consensus mechanism—is an example of a Hard Fork. A soft fork occurs where there is a change in software protocol, but the blockchain remains backwards-compatible.
Fungible Assets. Assets whose properties allow them to be interchangeable.
Gas Fee. Fees paid by users on a blockchain. The fees are the cost of executing transactions, which can vary in speed and complexity. Fees are paid to network validators to incentivize their work on the blockchain.
Genesis Block. The original block on a blockchain. Without a genesis block, blockchains cannot begin recording transactions.
Hashing. The technological process of taking inputs and generating an original, unique output. Hashing is useful for storing and referencing multiple transaction records as a single character string. Hashing also ensures record validity, as any change to the underlying inputs results in a different hash.
Hash Rate. How quickly a computer can hash data. In general, the higher the hash rate in a network, the higher the energy output.
Hot Wallet. Any device used for the custody of digital assets that is connected to the Internet.
Initial Exchange Offering (IEOs). An ICO that is conducted on a registered cryptocurrency exchange.
Layer 1 (“L1”). The bottom layer of a blockchain protocol (also known as the Mainnet).
Layer 2 (“L2”). Protocols that are constructed on top of the L1 protocol.
Light Nodes. Nodes that only process and verify transactions for the network.
Liquidity Pool. User-provided funds on a blockchain that facilitate trading on an exchange.
Master Node. A powerful node that can verify, record, store and govern a blockchain.
Metaverse. Jargon for a future Internet that will use blockchains, avatars, augmented or virtual reality, and digital assets to increase value among users and further promote online connectivity.
Native Token. The token protocol that a platform issues. For Ethereum, this is Eth.
Non-Fungible Token (“NFTs”). Certificates (in token form) that verify original value and cannot be exchanged with others for equivalent price.
Node. The individual computers spread across a peer-to-peer network that work together (or compete) to verify transactions proposed on a blockchain.
Non-Fungible Assets. Assets whose properties make them impossible to interchange.
Private Key. A cryptographic address that only the holder knows. If you lose a private key, you will be unable to access any digital assets stored in locations protected by the private key. Proof of Stake (“PoS”). A consensus mechanism that demands nodes to contribute cryptocurrency to be eligible to verify proposed transactions. The thinking is that having a stake in the network incentivizes the authorization of true transactions – if a fraudulent transaction is approved, the nodes that approved the transaction may have their stake penalized.
Proof of Work (“PoW”). A consensus mechanism that, in order to verify transactions, relies on committed computing power to resolve complex mathematical problems. Often, the problems are programmed to increase in difficulty the longer the blockchain is running. In the case of Bitcoin, this makes the coin harder and harder to mine.
Public Key. Public keys direct transactions to a blockchain user’s wallet. If a user knows your public key, that user can send funds to your wallet pending approval from the network.
Satoshis (“Sats”). Individual units of Bitcoin (think of the dollar bill for US Dollars).
Scalability. The ability for an undertaking to grow quickly and economically. In the case of blockchain, scalability is determined for how successfully the chain can handle a higher transaction load.
Sidechain. A chain that peels off from a main chain for the purpose of scale and efficiency. *Could roll into L2 definition.
Stablecoin. Cryptocurrencies that are pegged to underlying assets, such as fiat currencies.
Transactions per Second (“TPS”). The amount of transactions that a blockchain can verify and record within a second. Low TPS means low computing power, and vice versa.
Transaction (“Txn”) Hash. A transaction identifier that can help users locate where a transaction has been recorded on a blockchain.
Web1. The first version of the Internet. Websites were static and often .html pages that allowed for no user generated content.
Web2. The intermediate version of the Internet that has prioritized user experience and interoperability. Web2 ushered in social media companies, blogs, and streaming services.
Web3. The latest version of the Internet being built on blockchains and decentralized applications. Web3 is designed to restore data ownership and privacy to users of the Internet.
Incorporation and Governance Terms
Board of Directors. The Board of Directors are individuals that, a collective, decide governance matters for the company. These matters include when to issue stock, merger agreements, article amendments, and any other action requiring Board approval according to the organizational documents. The Board is appointed by shareholders.
Bylaws. The Board of your company may need to adopt Bylaws. The Bylaws outline your company’s rules and procedures, as well as ensure your company’s operations are compliant with relevant state law.
Certificate of Incorporation. The legal document that requests the Secretary of State to incorporate your company. The certificate will need to include the company name, registered agent’s name, registered agent’s address, authorized stock, and the name of the incorporator. Templates for Delaware are located at the Delaware Division of Corporation Website.
Incorporator. The signatory responsible for representing the company and its documentation during the incorporation process.
Minute Book. A minute book must contain your company’s organizational documents, as well as all minutes or written consents that cover actions taken by the Board or stockholders. Minute books must be kept current.
Officers. Officers are the individuals hired by the company responsible for managing operations. You need to select a President and a Secretary.
Organizational Resolutions. Organizational resolutions are simply agreements and terms the Board of Directors agree to in writing. The ratification of Bylaws, amendments, or other decisions is typically handled through resolution. Your founding Bylaws will need to be approved through an organizational resolution.
Registered Agent and Office. A Registered Agent is a third party who is responsible for receiving and collecting court papers from the courts of the state of incorporation. The registered agent must reside in the state in which you incorporate. Note that all companies incorporated in Delaware must have a registered agent. A registered office is a physical office in the state of incorporation that receives notices and correspondence from the courts and Secretary of State.
Capital Formation Terms
Common Stock. The standard unit of equity ownership in a company.
Convertible Shares. Debt owned by investors that can later be converted to equity (typically at a discount).
Initial Public Offering (“IPO”). An IPO refers to the process of entering a company into the public market, where its shares will be listed on a national stock exchange (such as the NYSE or NASDAQ).
Initial Coin Offering (“ICO”). An ICO is akin to the IPO, but for crypto. A company conducting an ICO offers shares on a blockchain where investors receive a Native Token in return for a stake in the business.
Initial Exchange Offering (“IEO”). A token offering conducted through a listed cryptocurrency exchange.
Lock-Up Provisions. Lock ups prevent large shareholders and company executives from selling their shares after an IPO.
Par Value. The minimum issue share price for a stock.
Preferred Stock. Generally, a class of securities designed to not have the characteristics of common stock. Preferred shareholders typically enjoy larger and more regular dividend schedules in addition to liquidation preference.
Private Placement. A securities offering that is exempt from registration with the SEC.
Regulation A+ (“Reg A+”). A type of Private Placement that allows firms to raise either $20 million or $50 million through a tightly regulated process. Think of Reg A+ as mini-IPOs.
Regulation Crowdfunding (“Reg CF”). A type of Private Placement that allows firms to raise up to $5,000,000 in a 12 month period through a registered crowdfunding portal, so long as the investors meet a certain risk profile.
Regulation D (“Reg D”). A type of Private Placement that allows firms flexibility in the amount of investors and amount of funds they can raise. There are three types of issuances under Reg D:
- 504: Allows firms to raise up to $10 million with an unlimited number of investors.
- 506(b): Allows firms to raise an unlimited amount of funds with 35 non-accredited investors (and an unlimited amount of accredited investors). There is a ban on general solicitation under this offering.
- 506(c): Allows firms to raise an unlimited amount of funds with general solicitation so long as all investors are accredited and the company takes reasonable steps to verify the accredited investors are in fact accredited.
Regulation S (“Reg S”). Exempts companies from SEC registration when the issuance will be considered “outside the United States.” The offer must be an offshore transaction with no directed selling efforts.
Right of First Refusal (“ROFR”). A ROFR prevents you from reselling your shares to any third party before first offering them to other shareholders or the company.
Stock Plans. Stock plans allow employees to purchase company shares at a discount from the current market price.
Stock Option Agreements. Stock Option Agreements are contracts between the company and an employee that provides the employee an option to purchase company shares at a specified price for a period of time.
Vesting Shares. Shares that are not disbursed to those entitled to receive them until a certain event or milestone is hit.
Regulatory Agencies – Names and Purviews
Commodities Futures Trading Commission (the “CFTC”). The CFTC oversees the markets for derivatives, futures, swaps, and certain options trading. Through its work, the CFTC seeks to promote price discovery, liquidity, and the offset of risk. The CFTC has divisions for Enforcement, Market Oversight, Participants, and Clearing and Risk.
Federal Reserve Board (the “FRB”). The Federal Reserve is the Central Bank of the United States. Through its operations, the Fed controls monetary policy for the United States, as well issue rules, regulations, and policy for chartered bank institutions.
Financial Crimes Enforcement Network (“FinCEN”). FinCEN is a bureau of the United States Department of the Treasury tasked with policing financial crime and regulating money-transmitter businesses.
Financial Industry Regulatory Authority (“FINRA”). FINRA is a Self-Regulatory-Organization (“SRO”) that sets the rules, requirements, and standards for broker dealers in the US capital markets.
Internal Revenue Service (“IRS”). Not much introduction needed here. The IRS is the federal tax agency that is mandated to collect the taxes the United States federal government levies.
Office of Comptroller Currency (“OCC”). The OCC is an independent wing of the UST that charters and regulates all national banks and Federal Savings Associations.
Securities and Exchange Commission (“SEC”). The SEC oversees the primary issuance and secondary trading of securities instruments in US capital markets. This is a broad mandate that covers stocks, bonds, notes, investment contracts, and more. The SEC has five major divisions: Corporate Finance, Investment Management, Economic and Risk Analysis, Trading and Markets, and Enforcement.
United States Treasury (“UST”). The UST oversees the printing and minting of currency, the maintenance of US debt instruments, as well as licensing and supervising banks.
Written by David Lopez Kurtz