Glossary

Startup finance terms, defined straight.

132 terms across fundraising, cap tables, accounting, legal, and tax — the vocabulary that shows up in a term sheet or a diligence request, defined in plain language.

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1099-NECForm 1099-NEC is the tax form a business files to report payments of $600 or more made to an independent contractor during the year, separate from the W-2 filed for employees.

409A ValuationA 409A valuation is an independent appraisal of a private company's common stock, used to set a legally defensible strike price for employee stock options. It's required under IRC Section 409A to protect option holders from punitive tax penalties.

83(b) ElectionAn 83(b) election lets a founder or employee pay ordinary income tax on restricted stock at its value on the day it's granted, rather than as it vests, locking in a usually much lower tax basis while the stock is still worth close to nothing.

A

Accounts Receivable & Accounts PayableAccounts receivable is money customers owe a company for goods or services already delivered. Accounts payable is money the company owes its own vendors and suppliers, the same idea from the other side of the transaction.

Accredited InvestorAn accredited investor is someone who meets SEC-defined income, net worth, or professional-knowledge thresholds that legally qualify them to invest in unregistered securities, like startup equity, without the disclosures required for a public offering.

Accrual vs. Cash AccountingCash accounting records revenue and expenses when money actually moves. Accrual accounting records them when they're earned or incurred, regardless of when cash changes hands.

Accrued ExpensesAccrued expenses are costs a company has incurred but hasn't yet paid or been billed for, recorded as a liability under accrual accounting so the expense shows up in the period the obligation was actually created.

Activation RateActivation rate is the percentage of new users who complete a specific early action that correlates with them becoming genuinely engaged long-term customers, sometimes called an "aha moment," rather than just signing up and never returning.

Amended Tax ReturnAn amended tax return corrects a previously filed tax return, used when new information surfaces or an error is discovered after the original return was already submitted.

Angel SyndicateAn angel syndicate is a group of individual investors who pool their money to invest in a startup together, usually organized and led by one experienced angel who negotiates the deal on behalf of the group.

Anti-Dilution ProtectionAnti-dilution protection is a right, usually held by preferred shareholders, that adjusts their effective purchase price if the company later raises a round at a lower valuation, softening the impact of a down round on their ownership stake.

Arbitration ClauseAn arbitration clause requires disputes between parties to be resolved through private arbitration rather than in court, typically faster and more confidential than litigation, but with far more limited rights to appeal a decision.

At-Will EmploymentAt-will employment means either the employer or the employee can end the employment relationship at any time, for any legal reason or no reason at all, without notice, unless a specific contract says otherwise.

Authorized vs. Issued vs. Outstanding SharesAuthorized shares are the total number a company's certificate of incorporation permits it to issue. Issued shares are the portion actually granted to someone. Outstanding shares are issued shares still held by shareholders, excluding any the company has bought back.

B

Backup WithholdingBackup withholding requires a business to withhold a flat percentage of a payment to a contractor and send it directly to the IRS, triggered when the contractor didn't provide a valid taxpayer ID or the IRS has flagged their information as incorrect.

Balance SheetA balance sheet is a financial statement showing what a company owns (assets), what it owes (liabilities), and the difference between the two (equity) at a single point in time.

Bank ReconciliationBank reconciliation is the process of matching a company's own recorded transactions against its actual bank and credit card statements, confirming every transaction is accounted for and the ending balances agree.

Board of Directors (Board Seat)A board of directors is the group with formal legal authority over a company's major decisions, hiring and firing the CEO, approving fundraising, approving a sale, elected by shareholders rather than appointed by the founders alone.

Bookkeeping vs. AccountingBookkeeping is the ongoing recording of financial transactions: categorizing income and expenses, reconciling accounts. Accounting is the higher-level work built on top of that, turning those records into financial statements, tax strategy, and real decisions.

Bridge RoundA bridge round is a smaller, often faster round raised between two larger priced rounds, typically to extend runway until the company hits a milestone that justifies the next full raise, or to get through a rough patch.

Burn MultipleBurn multiple is net burn divided by net new recurring revenue added in the same period, a measure of how much cash a company is spending to generate each new dollar of revenue growth.

Burn RateBurn rate is how much cash a company spends per month beyond what it brings in. Divide it into cash on hand and you get runway: how many months are left.

BylawsBylaws are the internal rules governing how a corporation operates day to day: how the board is elected, how meetings are called and run, and who has authority to make specific decisions on the company's behalf.

C

CAC (Customer Acquisition Cost)CAC, or customer acquisition cost, is total sales and marketing spend divided by the number of new customers acquired in that period, the average cost to win one new customer.

CAC Payback PeriodCAC payback period is how many months it takes a company to earn back, through gross margin, what it spent to acquire a customer, a measure of how quickly customer acquisition spending is actually recovered.

Cap TableA cap table, short for capitalization table, is the record of who owns what percentage of a company: every founder, investor, and employee equity grant, and how each round of funding changes those percentages.

Capital Gains TaxCapital gains tax is the tax owed on the profit from selling an asset, like company stock, for more than its purchase price. The rate depends heavily on how long the asset was held: short-term (one year or less) gains are taxed as ordinary income, while long-term gains get a lower, preferential rate.

Cash Flow StatementA cash flow statement tracks the actual cash moving in and out of a company over a period of time, broken into operating, investing, and financing activities, separate from the profit or loss shown on the income statement.

Certificate of IncorporationA certificate of incorporation is the founding legal document that creates a corporation, filed with the state, establishing the company's name, its authorized shares, and its basic corporate structure.

Change of Control ProvisionA change of control provision is a clause in a contract, employment agreement, or financing document that gets triggered when a company is acquired or a majority of its ownership changes hands, altering rights, obligations, or vesting as a result.

Chart of AccountsA chart of accounts is the organized list of every category a company uses to classify its financial transactions, the categories that every expense, revenue line, asset, and liability actually get recorded under.

Churn RateChurn rate is the percentage of customers, or revenue, a company loses over a given period, most commonly measured monthly or annually for a subscription business.

Cohort AnalysisCohort analysis groups customers by when they started, the month they signed up, for example, and tracks how that specific group's behavior, retention, revenue, engagement, changes over time, rather than looking only at company-wide averages.

Compilation vs. Review vs. AuditCompilation, review, and audit are three increasing levels of assurance a CPA can provide on a company's financial statements, from simply organizing the numbers as presented to actually verifying them against outside evidence.

Confidentiality and Invention Assignment Agreement (CIIAA)A Confidentiality and Invention Assignment Agreement, often called a CIIAA or PIIA, is the standard startup document combining an NDA and an IP assignment agreement into one signed contract every employee and contractor completes.

Contribution MarginContribution margin is revenue from a product or service minus its variable costs, the amount left over to cover fixed costs and generate profit, expressed either as a dollar amount or a percentage of revenue.

Convertible NoteA convertible note is a short-term loan that converts into equity at a future priced round instead of being repaid in cash. It's the earlier, debt-based version of what a SAFE does more simply.

Convertible SecurityA convertible security is any instrument that starts as debt or a contractual right and later converts into equity, the umbrella term covering both SAFEs and convertible notes.

Cost of Goods Sold (COGS)Cost of goods sold, or COGS, is the direct cost of producing or delivering whatever a company sells: materials and direct labor for a physical product, or hosting and support costs for a software product, but not overhead like marketing or rent.

Cumulative vs. Non-Cumulative DividendsCumulative dividends on preferred stock accrue and stack up even if the company doesn't pay them in a given year, owed in full before common shareholders get anything later. Non-cumulative dividends simply don't carry over if unpaid.

D

Data RoomA data room is the organized collection of financial, legal, and corporate documents a company shares with investors or acquirers during diligence, traditionally a secure online folder rather than a literal room.

DAU/MAU (Daily & Monthly Active Users)DAU and MAU are counts of unique users active on a given day or month. The ratio between them, DAU divided by MAU, is a common measure of how habitual a product actually is for the people using it.

Deferred RevenueDeferred revenue, also called unearned revenue, is money a company has already collected from a customer for a product or service it hasn't fully delivered yet. It's recorded as a liability, not revenue, until the company actually earns it.

Deferred Tax Asset / LiabilityA deferred tax asset or liability arises when there's a timing difference between how income or expenses are recognized for accounting purposes versus for tax purposes, representing tax that will be paid or saved in a future period rather than the current one.

Delaware Franchise TaxDelaware franchise tax is an annual tax Delaware charges every corporation incorporated there, including startups headquartered elsewhere, just for the right to be a Delaware entity, separate from and in addition to any income tax owed.

Depreciation & AmortizationDepreciation spreads the cost of a physical asset (equipment, furniture, a vehicle) over its useful life instead of expensing it all at once. Amortization does the same thing for intangible assets, like a patent or acquired software.

Diligence BriefA diligence brief is a report evaluating how ready a company's books and structure are for the kind of scrutiny that shows up during a fundraise, an exit, or a lender review. It surfaces gaps before an actual buyer or investor finds them first.

Diligence-Ready BooksDiligence-ready books are financial records clean and current enough to hold up the moment a real buyer, investor, or auditor asks to see them, not just good enough for the founder's own internal use.

DilutionDilution is the drop in an existing shareholder's ownership percentage that happens when a company issues new shares, most often by raising a new round of funding.

Down RoundA down round is a funding round priced at a lower valuation than the company's previous round, meaning existing shareholders' stakes are worth less per share than before, even though the company is raising more money.

Drag-Along RightsDrag-along rights let a majority of shareholders, usually including major investors, force minority shareholders to agree to a sale of the company on the same terms, preventing a small holdout group from blocking an otherwise approved deal.

Due DiligenceDue diligence is the investigation a buyer, investor, or lender conducts before closing a deal, reviewing financials, legal documents, contracts, and the cap table to confirm the company is what it claims to be before money changes hands.

E

EBITDAEBITDA stands for earnings before interest, taxes, depreciation, and amortization, a measure of a company's core operating profitability that strips out financing decisions, tax situations, and non-cash accounting charges to make different companies easier to compare.

Effective Tax Rate vs. Marginal Tax RateMarginal tax rate is the rate paid on the next dollar of income earned, the top bracket a company or individual falls into. Effective tax rate is the actual average rate paid across all income, total tax divided by total income, which is almost always lower than the marginal rate.

Employment Agreement vs. Offer LetterAn offer letter is a short document confirming the basic terms of a job (title, compensation, start date), typically not a binding, comprehensive contract. An employment agreement is a more detailed, binding contract covering things like confidentiality, IP assignment, and termination terms.

Entity Structure (C-Corp vs. LLC)Entity structure is the legal form a company is organized under, most commonly a C-corporation or an LLC for a startup, and it determines how the company is taxed, how equity can be issued, and whether it can raise venture funding at all.

Estimated Tax PaymentsEstimated tax payments are quarterly payments made toward income tax owed for the current year, required when tax isn't otherwise withheld, such as for self-employment income, or for a company's own income tax liability.

Exit WaterfallAn exit waterfall is the calculation showing exactly how proceeds from a sale or liquidation get distributed across every class of shareholder, in order, based on liquidation preferences, participation rights, and ownership percentage.

F

Force MajeureA force majeure clause excuses a party from performing its contractual obligations when an extraordinary event outside its control, a natural disaster, war, a pandemic, makes performance impossible or impractical.

Foreign QualificationForeign qualification is the process of registering a company to legally do business in a state other than the one it was originally incorporated in, required once the company has a meaningful physical or business presence there.

Founder Vesting (Reverse Vesting)Founder vesting, sometimes called reverse vesting, applies a standard vesting schedule to stock founders already technically own outright, so a founder who leaves early forfeits the unvested portion instead of walking away with their full stake.

Fractional CFOA fractional CFO provides senior financial strategy and oversight, fundraising support, board reporting, cash planning, on a part-time or as-needed basis, without the cost of a full-time in-house hire.

Fully Diluted SharesFully diluted shares is the total share count of a company if every outstanding option, SAFE, convertible note, and unissued option-pool share were converted into actual stock today, not just the shares that have been formally issued.

G

GAAP (Generally Accepted Accounting Principles)GAAP is the standardized set of accounting rules used in the United States, built so that financial statements from any company are prepared consistently and can actually be compared to each other.

Gross MarginGross margin is revenue minus the direct cost of delivering a product or service (cost of goods sold), expressed as a percentage of revenue. It measures how much of every dollar earned is left after the direct costs of making the sale.

Gross Merchandise Value (GMV)Gross Merchandise Value, or GMV, is the total dollar value of goods or services sold through a platform or marketplace, before the platform's own take rate, fees, refunds, or costs are subtracted.

I

Income Statement (P&L)An income statement, also called a profit and loss statement or P&L, shows a company's revenue, expenses, and resulting profit or loss over a specific period of time, usually a month, quarter, or year.

IndemnificationIndemnification is a contractual promise by one party to cover another party's losses, legal costs, or damages arising from specific risks, most commonly seen in investment documents, acquisition agreements, and D&O (directors and officers) insurance coverage.

Internal ControlsInternal controls are the processes and checks a company puts in place to prevent errors and fraud in its financial records, things like requiring two people to approve payments over a certain amount, or separating who records transactions from who approves them.

Investor Rights AgreementAn investor rights agreement is one of the core legal documents in a priced financing round, spelling out ongoing rights investors get beyond just their equity: information rights, registration rights, and often pro rata and tag-along rights.

Investor UpdateAn investor update is a regular, usually monthly or quarterly, communication a founder sends to their investors covering key metrics, progress, challenges, and specific asks, keeping investors informed between formal board meetings.

IP Assignment AgreementAn IP assignment agreement is a contract that transfers ownership of intellectual property, code, designs, inventions, created by a founder, employee, or contractor, to the company itself, rather than leaving it owned by the individual who created it.

L

Lead InvestorA lead investor is the investor in a funding round who negotiates the key terms on behalf of the round, typically writing the largest check and often taking a board seat, with other investors following on the same terms.

Liquidation PreferenceA liquidation preference is the right that gives preferred shareholders, typically investors, first claim on proceeds from a sale or liquidation, up to a set multiple of what they invested, before common shareholders see anything.

M

Magic Number (Sales Efficiency)Magic number is a SaaS sales efficiency metric comparing new annualized recurring revenue generated in a quarter against the sales and marketing spend from the prior quarter, a rough measure of how efficiently a company converts sales spend into growth.

MFN (Most Favored Nation) ClauseAn MFN clause, common in SAFEs and convertible notes, guarantees an investor the same or better terms as any investor who invests later on more favorable terms, without having to renegotiate.

Monthly CloseA monthly close is the process of finalizing a company's books for a given month: every transaction categorized, every account reconciled to actual bank and card statements, before moving on to the next month.

MRR & ARR (Monthly & Annual Recurring Revenue)MRR (Monthly Recurring Revenue) is the predictable subscription revenue a company collects each month. ARR (Annual Recurring Revenue) is that same figure annualized, MRR multiplied by 12, used as the standard growth metric for subscription businesses.

Multi-State Payroll Tax ComplianceMulti-state payroll tax compliance is the set of registration and withholding obligations a company takes on once it has employees working in more than one state, since each state generally requires its own payroll tax registration and withholding rules.

N

NDA (Non-Disclosure Agreement)An NDA, or non-disclosure agreement, is a legal contract where one or both parties agree not to share confidential information disclosed during a conversation, negotiation, or business relationship.

Net Operating Loss (NOL)A net operating loss, or NOL, occurs when a company's deductible expenses exceed its taxable income in a given year. That loss can generally be carried forward to offset taxable income, and reduce tax owed, in future profitable years.

Net Promoter Score (NPS)Net Promoter Score, or NPS, measures customer loyalty by asking how likely someone is to recommend a product to others, on a 0-10 scale, then subtracting the percentage of detractors (scores 0-6) from the percentage of promoters (scores 9-10).

Net Revenue Retention (NRR)Net revenue retention, or NRR, measures how much revenue a company keeps and grows from its existing customers over a period, including expansions and downgrades, excluding any revenue from new customers acquired in that time.

Non-Compete AgreementA non-compete agreement restricts someone, typically an employee, founder, or someone selling a business, from working for or starting a competing business for a set period of time and within a defined geographic area after leaving.

North Star MetricA North Star metric is the single number a company chooses to represent the core value it delivers to customers, used to align teams around one shared measure of progress instead of a scattered list of secondary metrics.

O

OpEx vs. CapExOperating expenses (OpEx) are the routine costs of running a business, expensed immediately in the period they're incurred. Capital expenditures (CapEx) are spending on longer-lived assets, expensed gradually over time through depreciation instead.

Option PoolAn option pool is the block of company shares set aside for future equity grants to employees, advisors, and new hires, carved out of the cap table before or during a fundraising round.

P

Payroll TaxPayroll tax is the tax owed on wages paid to employees, split between amounts withheld from the employee's paycheck and additional amounts the employer owes on top of it, covering Social Security, Medicare, and unemployment insurance.

Phantom Stock & Stock Appreciation Rights (SARs)Phantom stock and stock appreciation rights (SARs) are compensation arrangements that pay an employee cash based on the increase in company value, mimicking the economics of equity ownership without actually issuing real shares.

Piercing the Corporate VeilPiercing the corporate veil is a legal doctrine that lets a court hold a company's owners personally liable for the company's debts or actions, overriding the normal legal separation between a business and the people who own it.

Post-Money ValuationPost-money valuation is what a company is worth immediately after a new round closes: the pre-money valuation plus the new money raised.

Pre-Money ValuationPre-money valuation is what a company is worth immediately before a new round of funding gets added to it, the starting point investors and founders negotiate around before the new cash comes in.

Preferred Stock vs. Common StockPreferred stock is the class of shares typically issued to investors, carrying rights common stock doesn't have, most importantly a liquidation preference and often a board seat or veto rights. Common stock, usually held by founders and employees, carries no such preferences.

Prepaid ExpensesPrepaid expenses are payments a company has already made for goods or services it hasn't fully received yet, recorded as an asset and expensed gradually over the period the benefit is actually used.

Priced RoundA priced round is a funding round where the company's valuation is explicitly set and shares are sold at a fixed price per share, unlike a SAFE or convertible note, where the price gets determined later.

Pro Rata RightsPro rata rights give an existing investor the right, but not the obligation, to invest in a future round to maintain their current ownership percentage, rather than being diluted down like anyone who doesn't participate.

Product-Market FitProduct-market fit is the point at which a product satisfies real market demand well enough that customers are pulling it forward, through organic growth, low churn, and strong word of mouth, rather than the company having to push it out through effort alone.

Profits InterestA profits interest is an equity-like grant used by LLCs, giving the recipient a share of the company's future growth in value from the date of grant forward, without giving them any claim on the value that already existed.

Q

QSBS (Qualified Small Business Stock)QSBS is a federal tax provision, IRC Section 1202, that lets founders and early investors exclude some or all of their capital gain from taxes when they sell qualifying stock in a C-corporation, as long as it's been held long enough.

R

R&D Tax CreditThe R&D tax credit is a federal, and often state, tax credit that rewards qualifying research spend, engineering and product work that meets the IRS's four-part test, with a dollar-for-dollar credit against tax owed rather than just a deduction.

Regulation Crowdfunding (Reg CF)Regulation Crowdfunding (Reg CF) is an SEC framework that lets startups raise money from non-accredited investors, ordinary members of the public, through registered online funding portals, subject to disclosure requirements and an annual fundraising cap.

Representations and WarrantiesRepresentations and warranties are factual statements a company makes in a financing or acquisition agreement, about its finances, legal standing, IP ownership, and more, that the other party is relying on when deciding to invest or buy.

Restricted Stock (RSA vs. RSU)Restricted stock is company stock granted directly to a founder or early employee, subject to a vesting schedule, as distinct from a stock option, which grants the right to buy shares later rather than the shares themselves.

Revenue MultipleA revenue multiple is the rough ratio buyers and investors use to estimate what a business could be worth: annual revenue multiplied by a range typical for that industry and stage.

Revenue Per EmployeeRevenue per employee is annual revenue divided by headcount, a rough efficiency metric buyers and lenders use as an early signal of how much a business depends on people versus product or process.

Revenue Recognition (ASC 606)Revenue recognition is the set of accounting rules, codified in the U.S. under ASC 606, governing exactly when and how much revenue a company can record for a sale, based on when it actually delivers value to the customer rather than when cash is collected.

Right of First Refusal (ROFR)A right of first refusal, or ROFR, gives a company or its existing investors the option to buy shares a shareholder wants to sell before that shareholder can sell them to an outside buyer, on the same terms the outside buyer offered.

Rule of 40The Rule of 40 is a rough benchmark for software companies stating that growth rate plus profit margin should add up to 40% or more, a way of judging whether a fast-growing but unprofitable company or a slower, profitable one is performing acceptably overall.

RunwayRunway is the number of months a company can keep operating before its cash runs out, calculated as cash on hand divided by monthly net burn.

S

SAFE (Simple Agreement for Future Equity)A SAFE is an investment contract, created by Y Combinator in 2013, where an investor gives a startup cash now in exchange for the right to receive equity later, typically when the company raises a priced round, without setting a valuation up front.

Sales Tax NexusSales tax nexus is the connection between a business and a state significant enough that the state can require the business to collect and remit sales tax there, whether from having a physical presence or, increasingly, just enough sales volume.

Secondary SaleA secondary sale is the sale of existing shares from one shareholder to a new buyer, with the proceeds going to the selling shareholder rather than to the company, as distinct from a primary round where the company issues new shares and keeps the cash.

Section 174 (R&D Capitalization)Section 174 is the part of the tax code governing how research and development costs are deducted. Rules changed substantially in 2022, requiring R&D costs to be spread out (amortized) over several years instead of deducted immediately, with a partial reversal restoring immediate deduction starting in 2025.

Seed RoundA seed round is typically the first official round of institutional funding a startup raises, usually happening after friends-and-family money and before a Series A, aimed at getting the company to a point where it can prove out its core assumptions.

Series AA Series A is typically a startup's first major priced round of venture funding, raised after a seed round once the company has real evidence, usually revenue or strong usage growth, that the business model works.

Side LetterA side letter is a separate agreement between a company and one specific investor, granting that investor rights or terms not given to other investors in the same round, without changing the main financing documents everyone else signed.

State Income Tax ApportionmentState income tax apportionment is the method states use to divide a multi-state company's income, so each state taxes only the share of income considered earned within its own borders, rather than every state taxing the full amount.

Stock Options (ISO vs. NSO)A stock option gives an employee or advisor the right to buy company shares at a fixed price (the strike price) later, regardless of what the shares are worth by then. Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs) are the two main types, and they're taxed differently.

T

Tag-Along Rights (Co-Sale Rights)Tag-along rights, also called co-sale rights, let minority shareholders join in when a majority shareholder sells their stake, selling a proportional amount of their own shares on the same terms instead of being left behind under a new owner they didn't choose.

Tax ExtensionA tax extension gives a business or individual additional time, typically six months, to file a tax return, but it does not extend the deadline to actually pay any tax owed.

Term SheetA term sheet is a non-binding document laying out the proposed terms of an investment: valuation, how much is being raised, board seats, and investor rights. The binding agreements come later, once the lawyers draft them.

Total Addressable Market (TAM)Total Addressable Market, or TAM, is the total revenue opportunity available if a company captured 100% of the market for its product, used as a rough ceiling on how large a business could theoretically become.

Treasury StockTreasury stock is stock a company has issued and later bought back from a shareholder, held by the company itself rather than canceled, and excluded from the outstanding share count until it's reissued or formally retired.

Trial BalanceA trial balance is an internal accounting report listing every account's ending balance, used to confirm that total debits equal total credits before financial statements are finalized for a period.

U

Unit EconomicsUnit economics is the profitability of a single customer or transaction, examined in isolation from the company's overall size, most commonly comparing customer acquisition cost against the revenue and margin that customer generates over time.

V

Vesting Acceleration (Single vs. Double Trigger)Vesting acceleration lets some or all of an employee's or founder's unvested equity vest immediately upon a specific event, most commonly an acquisition, rather than continuing on the normal schedule.

Vesting ScheduleA vesting schedule is the timeline over which a founder, employee, or advisor earns full ownership of their equity grant, instead of receiving it all at once.

Voting AgreementA voting agreement is a contract among shareholders committing them to vote their shares a certain way on specific matters, most commonly used to guarantee board composition and support drag-along provisions in a sale.

W

W-9 vs. W-4A W-9 is the form an independent contractor gives a business to provide their taxpayer ID for 1099 reporting. A W-4 is the form an employee gives their employer to determine how much income tax to withhold from each paycheck.

WarrantA warrant is similar to a stock option: it gives the holder the right to buy company shares at a fixed price later. Warrants are typically issued to investors or lenders rather than employees, often attached to a debt or SAFE deal as a sweetener.

Worker Classification (1099 vs. W-2)Worker classification is the legal determination of whether someone doing work for a company counts as an independent contractor (1099) or an employee (W-2). It affects taxes, benefits, and legal liability, and it isn't the company's choice to make freely.

Working CapitalWorking capital is a company's current assets (cash, receivables, inventory) minus its current liabilities (accounts payable, short-term debt), a measure of whether it has enough short-term resources to cover its short-term obligations.