Same same but different – some different terms used in fundraising in Southeast Asia

The startup and fundraising scene in Southeast Asia has been burgeoning in the last century, with venture capital firms raising a total of close to US$4 billion in the region as of 2019. While a number of “best practices” and structures are similar to that as found other countries who have had a longer history in the fundraising scene, SEA has started to develop its own flavor of terms, structure, nomenclature and style.

A number of terms sometimes cause confusion. Is it a stock or a share? Preferred or preference? Restricted stock units or phantom shares? While there may be slight nuances in the exact term being used, a number of terms often relate to the same thing, or pertain to the subject matter. Below is a quick laundry list of some of the more common terms which are sometimes used interchangeably.

Stocks and Shares

Generally refers to: a unit of representation of ownership in a company

Stocks and shares generally mean the same thing, which is a unit of representation of ownership in a company. As a general guideline, commonwealth countries use shares and shareholders, while countries with US influence use stocks and stockholders.

I’ll be using the term “shares” throughout the whole of this article for simplicity.

Preferred/Preference, Common/Ordinary (stocks or shares)

Generally refers to: the class of share

Preferred and Preference shares mean the same thing, which are basically shares with special rights. Any other shares in the company are referred to as common or ordinary shares. As a general guideline, we use Preferred/Common to describe stock, and Preference/Ordinary to describe shares – that said, because they effectively mean the same thing, sometimes these terms are used interchangeably.

SAFE, KISS, Convertible Note/Loan/Debt

Generally refers to: a convertible investment sum

SAFE is an abbreviation for “simple agreement for future equity” and KISS is an abbreviation for “keep it simple security”. Broadly speaking, these are all forms of a convertible investment, where an investor can invest a sum of money in a company which can either return an interest for the investor or be converted to shares of a company upon certain conditions being met. Fundamentally speaking, SAFE and KISS documents are model legal documents proposed by certain organisations, so as a starting point, the “original” version of a SAFE or KISS document would contain certain differences. Notwithstanding, if you take a SAFE, KISS, Convertible Note/Loan/Debt and customize it to suit your own needs, you generally end up with a convertible investment. 

Share Options, Phantom Shares, Restricted Stock Units, Deferred Shares

Generally refers to: a type of employee incentive whereby employees receives shares of the company

Basically, all these are different structures where an employee of the company can receive an award of shares in the company, usually to incentivise an employee to work hard and increase the value of the company. There are some slight differences in the way these awards are done, and usually, the preferred structure is chosen based on a combination of commercial considerations, tax efficiencies, and ownership restrictions.

Co-sale, Tag-along rights

Generally refers to: if you sell, I can sell too

They generally mean the same thing, and grant the party with the right to “co-sell” his shares with another seller or “tag-along” the sale when certain conditions are met. The number of shares entitled to this co-sell or tag-along right is in most cases determined on a pro rata basis.

Veto-rights, Reserved Matters, Protective Provisions

Generally refers to: you can’t pass these decisions unless I say you can

These terms mean the same thing most of the time, and refer to a list of matters which will require the positive vote of a certain group before they can be passed. For example, a company shall not [pay a dividend] without the approval of [at least three directors]. I’m on a journey to try to make knowledge and education more accessible and affordable, and to sieve out the noise in an age saturated with information. Practicing lawyer by day (I specialize in working with clients in the technology industry), and aspiring technology educator by night. I’ve advised both companies and venture capital funds in their investment rounds with a combined total transaction value of more than US$500m. I am also an active limited partner in a venture capital fund, and sit as an advisor to various startups.