shadow equity

Definition

Informal promises of future equity that aren't documented in legal agreements, often made to early advisors or contributors. A lawsuit waiting to happen, wrapped in a handshake.

Example Usage

Our CTO claimed he had shadow equity from a verbal agreement in 2019, which became a problem when we tried to sell the company.

Origin

Informal startup terminology for undocumented equity promises

Fun Fact

Shadow equity claims have torpedoed numerous acquisitions when mysterious people emerge from the woodwork during due diligence claiming they were promised stock.

Source: Startup equity and legal risk terminology

Related Terms

Advanced

ghost equity

Phantom stock or profit interests that mimic real equity without actually granting ownership, often used to incentivize employees without diluting founders. All the motivation, none of the control.

🚀 Startup / VC

Beginner

proactive investor

A VC who claims they'll actively help your company through connections, advice, and support, as opposed to just wiring money. Reality: they'll make three intros, attend two board meetings, then ghost you unless you're a unicorn.

🚀 Startup / VC

Intermediate

option pool

A reserve of shares set aside to recruit employees with stock options, typically carved out before valuation to dilute founders rather than investors. A necessary evil that feels like robbery when you're calculating founder ownership.

🚀 Startup / VC

Intermediate

memo culture

The internal practice at VC firms of writing detailed investment memos that analyze potential deals. Where partners commit their hottest takes to writing so they can be mocked later when wrong.

🚀 Startup / VC

Intermediate

venture debt

Loans provided to venture-backed startups, typically secured by assets or future funding rounds. It's called 'non-dilutive capital,' which really means 'you'll dilute yourself later when you can't pay it back.'

🚀 Startup / VC

Intermediate

spray-and-pray

An investment strategy of making many small bets across a wide portfolio, hoping a few massive winners will compensate for numerous failures—essentially portfolio construction as gambling. The scatter-shot approach favored by funds who believe they can't predict winners.

🚀 Startup / VC

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nmhm

nothing much here, man...