The Operator's Dictionary.

Asset sale

A deal structure where the buyer purchases specific assets and liabilities of the business rather than the company itself. Buyers often prefer asset sales because they get a step-up in tax basis and leave behind unknown liabilities; sellers usually prefer stock sales because the tax treatment is cleaner.

Basket

A deductible for indemnification. The buyer can't make a claim until total losses exceed the basket. A tipping basket means once you cross the threshold, the seller owes from dollar one; a true deductible means the seller only owes the amount above the basket.

Example. A 0.5% tipping basket on a $20M deal means the buyer absorbs the first $100k of breaches, but once losses cross that line, the seller pays everything.

Definitive agreement

The binding contract that actually transfers the business. Replaces the LOI, includes the full set of representations, covenants, and conditions, and is the document that gets signed at close.

Escrow

A portion of the purchase price held by a neutral third party after close, available to the buyer if specific things go wrong — usually breaches of representations or indemnification claims. Released to the seller after the survival period ends.

Example. On a $10M deal, 10% ($1M) might sit in escrow for 18 months to cover unknown tax or legal issues.

Exclusivity

A period during which the seller agrees not to shop the business or negotiate with other buyers. Gives the buyer a window to complete diligence and finalize documents without competition.

In Tiny deals: only asks for exclusivity after a written offer is on the table — never on a verbal range.

Holdback

Similar to escrow, but the buyer simply holds back part of the purchase price instead of placing it with a third party. Less common and less protective for the seller, who has to trust the buyer to release it.

Indemnification

The seller's promise to compensate the buyer for losses caused by breaches of representations, undisclosed liabilities, or specifically named risks. The deal mechanics — caps, baskets, survival periods — all govern how indemnification actually works.

Indemnity cap

The maximum amount the seller can be required to pay for indemnification claims. Often expressed as a percentage of the purchase price — 10-15% is typical for general reps, with separate (sometimes uncapped) treatment for fundamental reps like ownership and taxes.

Letter of Intent(LOI)

A non-binding written outline of the proposed deal — price, structure, timeline, and key conditions. It signals serious intent and starts the clock on diligence, but neither side is legally committed to close.

Example. A typical LOI lists purchase price, cash vs. stock split, expected close date, exclusivity period, and what the buyer still needs to verify.

In Tiny deals: sends a written offer (functionally an LOI) within seven days of an introductory call. The number on the LOI is the number that gets wired at close.

Material adverse change(MAC)

A negotiated clause that lets the buyer walk away (or renegotiate) if something genuinely bad happens to the business between signing and closing — a major customer leaves, a lawsuit lands, the market collapses. Triggering a MAC is harder than people think; courts apply a high bar.

Memorandum of Understanding(MOU)

A non-binding document outlining the intent of two parties to work toward a transaction. Functionally similar to a letter of intent, but typically broader and used earlier in conversations or for joint ventures.

Merger

A deal structure where two companies combine into one entity, governed by state corporate law. Used when the buyer wants to absorb the target wholesale, often for tax efficiency or to deal with large numbers of shareholders.

Net debt adjustment

Subtracts the company's debt and adds back excess cash to convert the enterprise-value offer into the equity-value check that actually gets paid. The mechanics are usually spelled out as a closing-date balance sheet exercise.

No-shop clause

The contractual mechanism that creates exclusivity. The seller commits not to solicit, encourage, or entertain competing offers for a defined period.

Purchase agreement

The most common form of definitive agreement. Comes in two flavors — asset purchase agreement (APA) and stock purchase agreement (SPA) — depending on whether the buyer is acquiring the assets of the business or the equity of the company that owns them.

Representations and warranties

Statements the seller makes about the business — financials are accurate, taxes are paid, no pending lawsuits, IP is owned outright, etc. If a rep turns out to be false after close, the buyer has a contractual claim for damages.

Stock sale

A deal structure where the buyer purchases the equity of the company, taking on everything inside it — assets, liabilities, contracts, and history. Sellers typically prefer this because gains are taxed once as capital gains.

Survival period

How long after close the seller's representations and indemnification obligations remain enforceable. General reps usually survive 12-24 months; fundamental reps (title, taxes, authority) often survive much longer or indefinitely.

Term sheet

A short summary of the proposed economic and governance terms of a deal. Used more often in venture financings than M&A, but the language sometimes appears in acquisition discussions to capture the headline numbers before lawyers draft anything binding.

Threshold

The minimum amount a single claim must reach to count toward the basket. Filters out nuisance claims so the buyer can't aggregate hundreds of tiny grievances into a real one.

Working capital adjustment

A post-close true-up of the purchase price based on the actual working capital delivered at close versus a negotiated target. Designed to make sure the seller doesn't strip cash out or let receivables and payables drift right before closing.

In Tiny deals: aims for a clean working capital adjustment with a transparent target so the number wired at close is the number that stays.

Acceleration

A clause that causes unvested earn-out or equity payments to pay out immediately if a triggering event happens — sale of the company, termination of the founder without cause, a change of control. The negotiation usually centers on what counts as a trigger.

Anti-dilution (earn-out)

A provision that protects the seller's earn-out payment from being diluted by post-close events the buyer controls — acquisitions rolled into the same business unit, accounting changes, restructurings. Easy to write, hard to enforce.

Ceiling (earn-out)

The maximum amount payable under an earn-out, no matter how well the business performs. Caps the seller's upside even if they crush the targets.

Claw-back

A provision allowing the buyer to recover already-paid consideration if specific conditions are violated after close — typically the founder leaving early, breaching a non-compete, or losing key customers.

Earn-out

A portion of the purchase price the seller only receives if the business hits specific targets after close — revenue, profit, retention, product milestones. Sold as bridging valuation gaps; often functions as a way for the buyer to defer or claw back part of the price.

Example. PE firms commonly structure 20-40% of purchase price as an earn-out tied to EBITDA over three years. Hitting those targets often requires the founder to keep running the company on the buyer's terms.

In Tiny deals: does not use earn-outs to defer the purchase price. Tiny's default is a simple, cash-heavy structure with uncommon earn-outs.

EBITDA-based earn-out

An earn-out tied to profit thresholds. The most contentious type — buyers control the cost line after close and can sandbag the number by piling on corporate allocations, integration costs, or strategic investments that depress EBITDA.

Floor (earn-out)

The minimum amount payable under an earn-out, often regardless of performance. Rare. Most earn-outs have no floor, which is why they so often pay zero.

Milestone-based earn-out

An earn-out tied to specific, binary events — launching a product, signing a customer, integrating a system. Easier to measure and harder to game than financial earn-outs, but also harder to negotiate fairly.

Revenue-based earn-out

An earn-out tied to revenue thresholds in the years after close. Cleaner to measure than EBITDA earn-outs because revenue is harder to manipulate, but it can incentivize the seller to chase unprofitable growth.

Commercial diligence

Market and competitive review. How big is the addressable market, who are the competitors, what's the company's defensible position, where is the industry heading. Buyers use this to test whether the business will keep working after they own it.

Customer reference calls

Direct conversations between the buyer and the seller's customers to validate satisfaction, churn risk, and the truthfulness of the seller's revenue story. Sensitive to set up — most sellers want them done late in the process and with hand-picked references.

Data room

A secure online repository where the seller posts everything the buyer needs for diligence — financials, contracts, cap table, customer data, legal records. The contents and the order in which things appear often shape how diligence actually unfolds.

Financial diligence

The buyer's verification of the seller's financial statements — revenue recognition, expense categorization, working capital trends, customer concentration, churn, and the difference between reported and actual cash flow. The output often informs a quality of earnings report.

IP diligence

Verification that the company actually owns the intellectual property the buyer thinks it's buying — trademarks registered, open-source licenses respected, contractor agreements with proper IP assignment clauses, no third-party claims.

Legal diligence

Review of corporate records, contracts, IP ownership, litigation history, employment matters, and regulatory exposure. Goal: surface anything that could become the buyer's problem after close.

Quality of earnings(QofE)

A deep accounting review, usually by an outside firm, that normalizes the seller's reported earnings — backing out one-time items, owner perks, related-party transactions, and aggressive revenue recognition. The QofE report often becomes the negotiation document for valuation.

In Tiny deals: does its own short, focused QofE rather than running a 90-day exercise designed to retrade the price.

Tech diligence

Review of the codebase, architecture, infrastructure, security posture, and engineering team. Surfaces technical debt, scalability risks, key-person dependencies, and security exposures that could cost real money post-close.

Drag-along right

Lets majority shareholders force minority holders to join a sale on the same terms. Prevents a small holder from blocking a deal everyone else has agreed to.

IP assignment

A contract transferring ownership of intellectual property from the creator to the company. Critical for contractors and consultants — without a written assignment, the contractor may legally own the code they wrote, even if the company paid for it.

Key person clause

A provision tying part of the deal — earn-out payments, indemnification, or even the right to close — to specific named individuals staying with the business. Common when the buyer believes the company's value depends heavily on one or two people.

Mutual NDA

An NDA where both parties agree to protect each other's confidential information. Standard when both sides are sharing — for example, an acquisition discussion where the buyer reveals investment thesis and the seller reveals financials.

Non-compete

A contractual restriction preventing the seller (or key employees) from starting or joining a competing business for a defined period and geography after close. Enforceability varies widely by jurisdiction.

Non-disclosure agreement(NDA)

A contract restricting how a party can use or share confidential information. Almost always signed before sensitive details are exchanged. Usually unilateral (one-way) but can be mutual when both sides are sharing.

Non-solicit

A restriction preventing the seller from poaching the company's employees or customers after the deal closes. More widely enforceable than non-competes, and usually less controversial.

Preemptive rights

The right of existing shareholders to buy their pro-rata share of any new equity issuance, preventing involuntary dilution. Standard in venture-backed companies.

Right of first offer(ROFO)

Lets a party make the first offer to buy shares before they can be marketed to outsiders. Weaker than a ROFR because the holder can't simply match a competing bid — they have to set the price first.

Right of first refusal(ROFR)

Lets a party (usually an existing shareholder) match any third-party offer to buy shares before the sale can close. A common cap table feature that can complicate or delay a deal.

Tag-along right

Lets minority shareholders join a sale by majority holders on the same terms. The mirror of a drag-along: protects the minority from being left behind when the big holders cash out.

Work-for-hire

A US copyright concept where work created by an employee within the scope of employment is automatically owned by the employer. Does not apply to contractors by default — which is why companies need IP assignment agreements with anyone outside the W-2 payroll.

Adjusted EBITDA

EBITDA plus a list of "add-backs" — owner perks, one-time costs, severance, non-recurring projects. The adjusted number is often dramatically higher than reported EBITDA, which is why quality-of-earnings exercises spend so much time scrutinizing add-backs.

Annual recurring revenue(ARR)

The annualized value of subscription contracts in force at a point in time. Used by SaaS companies as the headline measure of business size. Doesn't reflect collections, just contractual run rate.

Capitalization table(cap table)

The ledger of who owns what in the company — common stock, preferred stock, options, warrants, convertible notes. Cleanliness of the cap table affects how fast a deal can close and who has to sign what.

Churn

The rate at which customers (or revenue) leave over a period. Logo churn measures customer count; revenue churn measures dollars. Both matter, but revenue churn is what shows up in the financial model.

Cliff

The minimum tenure before any equity vests. Without it, anyone could leave after a month with a slice of the company. The standard is 12 months for employee grants.

Common stock

The default equity class, typically held by founders and employees. Junior to preferred in the cap stack. In a clean exit, common gets paid after preferences are satisfied.

Dilution

The reduction in ownership percentage caused by issuing new equity. Founders care about dilution at fundraising and at exit, because their take-home is their percentage times the deal price.

EBITDA(EBITDA)

Earnings before interest, taxes, depreciation, and amortization. A proxy for the operating cash a business generates regardless of capital structure or tax situation. The most common valuation anchor in M&A.

Free cash flow

The cash a business actually generates after capital expenditures. For asset-light software or digital businesses, FCF and EBITDA are usually close; for hardware, physical products, or infrastructure businesses, the gap can be huge.

In Tiny deals: anchors valuation on trailing free cash flow or EBITDA — not ARR multiples or projected growth.

Gross margin

Revenue minus the direct cost of delivering that revenue (hosting, payment processing, support, license fees), expressed as a percentage. SaaS businesses typically run 70-85%. Below 60% usually signals a different business model than the seller claims.

Gross revenue retention(GRR)

Same as NRR but ignoring expansion — revenue retained from existing customers, excluding upsells. Capped at 100%. Shows the natural decay rate of the customer base.

Liquidation preference

The right of preferred shareholders to get paid first (usually 1x their investment) before common shareholders see anything in a sale or liquidation. A 1x non-participating preference is standard; anything more aggressive is a red flag for founders.

Example. On a $10M sale with $5M of 1x non-participating preferred, the investors take $5M off the top — but only if that's worse than converting to common. Founders then share the remaining $5M with employees.

Monthly recurring revenue(MRR)

The monthly equivalent of ARR. Often used by earlier-stage SaaS companies and businesses with shorter contract terms.

Net margin

Bottom-line profit (after all expenses, taxes, and interest) as a percentage of revenue. Less useful in deal conversations than EBITDA or free cash flow because it's distorted by tax structure and one-time items.

Net revenue retention(NRR)

Revenue from a cohort of existing customers this period versus the same cohort a year ago — including expansion, contraction, and churn, but excluding new logos. Above 100% means the existing customer base is growing even without new sales. The single best signal of product-market fit in SaaS.

Non-participating preferred

Preferred stock that chooses, at exit, between taking the liquidation preference or converting to common and sharing pro-rata. The standard term — fairer to founders than participating preferred.

Options

The right to buy a fixed number of shares at a fixed price (the strike price) within a defined window. Usually subject to vesting. Issued to employees as part of compensation.

Participating preferred

Preferred stock that takes its liquidation preference and then also participates pro-rata in whatever's left. "Double dipping." Investor-friendly, founder-hostile, and increasingly out of fashion outside of distressed financings.

Preferred stock

Equity that comes with rights senior to common stock — typically liquidation preferences, dividends, anti-dilution, and board seats. Almost always held by investors, not founders or employees.

Restricted stock units(RSUs)

A grant of company stock that vests over time. Unlike options, the employee doesn't pay to exercise — they just receive shares as they vest. More common at later-stage and public companies.

Vesting

The schedule on which equity actually becomes the holder's property. The four-year vest with a one-year cliff is the convention: nothing for 12 months, then 25% on the cliff, then monthly thereafter.

Working capital

Current assets (cash, receivables, inventory) minus current liabilities (payables, accruals). The day-to-day operating capital required to run the business. Often becomes a deal-mechanics issue at close.

338(h)(10) election

A US tax election that lets a stock sale be treated as an asset sale for tax purposes. The buyer gets the step-up in basis (and the depreciation that comes with it); the seller takes a tax hit. Routinely a negotiation point with a price-adjustment offset.

Asset step-up

The same idea as a basis step-up, applied specifically to the assets acquired. Translates into real future tax savings for the buyer — which is why asset-sale buyers can often pay more than stock-sale buyers all-in.

Basis step-up

An adjustment that raises the tax basis of assets to fair market value, allowing the buyer to depreciate or amortize them going forward. Step-ups are the main reason buyers favor asset sales over stock sales.

Capital gains

Income from selling a capital asset (like stock) at a profit. Long-term capital gains (assets held more than a year) get favorable US tax rates — typically 15-20% federal — versus ordinary income rates.

Ordinary income

Income taxed at the regular (higher) US rates — wages, salary, interest, short-term capital gains. The difference between capital gains and ordinary income treatment can be the single biggest variable in the seller's after-tax outcome.

Qualified Small Business Stock(QSBS)

US founders and early employees who held stock in a qualifying C-corporation for at least five years can exclude up to $10M (or 10x basis) of federal capital gains under IRC Section 1202. Massive benefit when it applies — early planning is critical.

In Tiny deals: Most software founders should confirm QSBS eligibility years before contemplating a sale; the holding period and corporate-form requirements aren't fixable retroactively.

Section 1202

The IRS code section that defines QSBS. Specifies the eligibility rules: domestic C-corp, gross assets under $50M at issuance, active business, and a five-year holding period.

Stock-for-stock

A deal structure where the seller receives the buyer's stock instead of cash. Can qualify for tax-deferred treatment if structured correctly, but exposes the seller to the buyer's future stock performance.

Tax-free reorganization

A deal structure (typically stock-for-stock) that qualifies under IRC Section 368 to defer capital gains tax for the seller until they later sell the buyer's stock. Useful when sellers want to roll into the acquirer rather than cash out.

Integration

The process of merging the acquired company into the buyer's operations — systems, brand, team, finances. Aggressive integration usually means the target's brand and culture disappear within a year.

In Tiny deals: does not integrate. Portfolio companies keep their brand, their team, and their operating independence.

Master services agreement(MSA)

A framework contract governing the ongoing commercial relationship between two parties. In M&A diligence, the seller's customer MSAs are scrutinized for change-of-control clauses, term length, and the buyer's ability to enforce them post-close.

Post-close adjustment

Any true-up to the purchase price calculated after closing — working capital, net debt, accrued items. The mechanics are spelled out in the definitive agreement; the actual numbers come from the closing-date balance sheet.

Transition services agreement(TSA)

A contract under which the seller (or in carve-out deals, the parent company) continues to provide specific services to the business for a defined period after close — IT, HR, finance, payroll. Bridges the gap while the buyer stands up its own systems.

True-up

The act of reconciling estimates used at close with the actual numbers when they become available. Most commonly applied to working capital, but also taxes, accruals, and earn-out calculations.

Acquihire

An acquisition primarily motivated by the team, not the product or business. Common when a startup is failing but the founders and engineers are attractive. The product usually gets shut down shortly after close.

Earn-out tied to retention

An earn-out structure where part of the seller's deferred payment depends on the founder (or key employees) staying with the company. Functionally a multi-year employment commitment dressed up as a price term.

In Tiny deals: When Tiny uses retention-linked consideration at all, it is structured as straightforward founder employment or transition compensation — not as a clawback on the purchase price.

Founder vesting

Vesting applied to founder equity, usually imposed by early investors. Standard is a four-year vest with a one-year cliff, sometimes with credit for prior tenure. In an exit, unvested founder equity may accelerate or convert depending on the deal terms.

Golden handcuffs

Financial incentives (unvested equity, deferred bonuses, earn-out payments) that make it economically painful for a founder or key employee to leave the buyer before a defined date. Sometimes the point of the deal structure; sometimes the price of the deal.

Retention bonus

Cash paid by the buyer to specific employees who stay for a defined period after close. Usually paid in installments at six, twelve, and eighteen months. The buyer's hedge against the post-close talent flight that often follows a sale.

Stay-pay

Another term for a retention bonus, often used in distressed or carve-out situations where the buyer needs specific institutional knowledge to survive the transition.