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Eliminate all fear and doubt.
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Welcome to your Financial Literacy Dictionary — your personal resource for breaking down the most commonly misunderstood financial terms and concepts. This isn’t your average FAQ. Instead of answering typical customer questions, this section serves as a growing glossary where we define, explain, and demystify financial terminology.
Were building a living, evolving financial literacy dictionary that not only defines key financial terms but explains how and when to apply them in real-world contexts. This is a powerful tool for those who are starting with little to no financial knowledge and want more than just definitions — they want to understand how to think financially.
Many of us were taught to “go to school, get a job, and retire,” but never truly learned the language of money. Terms like C-Corp, Sic code, or Paydex score can feel intimidating or irrelevant — until you realize they’re the keys to unlocking opportunity.
Here, we break down these words into simple, real-world definitions and explain:
What the term means
Why it matters
🧠 When and how to use it
🌐 Examples and real-life applications
📚 Resources to go deeper
Think of financial literacy as your mental life insurance: the better you understand money, the better you can protect and build your future.
Read - Apply - Execute.
Definitions will include:
Definition – What the term means in plain language
Why It Matters – Why it’s important or relevant
When to Use It – Situations where you’ll encounter or apply the term
Real-World Example – A relatable or actual use case
Resources – Optional deeper learning links, templates, or tools
Let’s begin….
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C-Corporation (C-Corp)
Definition: A legal business structure in the U.S. where the company is taxed separately from its owners.
Why It Matters: Offers strong liability protection, unlimited shareholders, and easier access to capital — but comes with double taxation (corporate and personal level).
When to Use It: If you’re planning to scale, attract investors, or go public.
Real-World Example: Apple, Inc. is a C-Corp. It can issue stock and raise capital, and its owners aren’t personally liable for business debts.
Resources: IRS: Form 1120 Filing Instructions
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SIC Code
(Standard Industrial Classification)
Definition: A 4-digit code used to classify industries by business type for government and statistical purposes.
Why It Matters: Important for loan applications, business credit, licensing, and government classification.
When to Use It: When applying for business credit, registering your company, or dealing with government agencies.
Real-World Example: A restaurant might have SIC code 5812.
Resources: NAICS/SIC Code Lookup
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Paydex Score
Definition: A business credit score developed by Dun & Bradstreet ranging from 0–100 based on how promptly a business pays its suppliers.
Why It Matters: A high score (80+) shows you’re trustworthy to lenders and vendors.
When to Use It: When seeking trade credit, vendor relationships, or business loans.
Real-World Example: A Paydex score of 85 means you consistently pay early or on time.
Resources: Dun & Bradstreet Credit Tools
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Transfer Agent
Definition: A third party (often a bank or trust company) that manages a corporation’s stock records and transactions.
Why It Matters: Ensures accurate records of ownership and facilitates stock transfers.
When to Use It: When issuing shares or managing shareholder transactions.
Real-World Example: Computershare is a major transfer agent for publicly traded companies.
Resources: SEC Guide on Transfer Agents
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7 Structures
(Business Structures)
Definition: Refers to the seven common business structures: Sole Proprietorship, Partnership, LLC, S-Corp, C-Corp, Nonprofit, and Cooperative.
Why It Matters: Determines taxes, liability, and operational rules.
When to Use It: When choosing how to legally form your business.
Real-World Example: A small retail store might use an LLC for simplicity and liability protection.
Resources: SBA Business Structure Overview
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Golden Parachute
Definition: A large financial compensation package given to top executives if they are terminated or the company is taken over.
Why It Matters: Protects executives but can cause controversy if misused.
When to Use It: In executive contracts during mergers/acquisitions.
Real-World Example: Former CEO of Yahoo received a $23 million golden parachute.
Resources: Investopedia: Golden Parachute
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Pitch Deck
Definition: A visual presentation (usually a slide deck) used to explain your business idea to investors.
Why It Matters: Your first impression when raising funds.
When to Use It: When seeking startup capital, partners, or pitching your idea.
Real-World Example: Airbnb’s original pitch deck is now famous for its clarity and simplicity.
Resources: Sequoia’s Pitch Deck Template
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Foreign Filing
(Foreign Entity Registration)
Definition: The process of registering your business in a state other than the one it was originally formed in.
Why It Matters: Required if you operate across state lines.
When to Use It: When opening an office or doing business in another state.
Real-World Example: A Delaware-registered LLC must foreign file in California to legally operate there.
Resources: Nolo: Foreign Qualification Explained
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Water Law
Definition: Legal rules governing water ownership, usage, and rights — especially relevant for landowners, agriculture, or developers.
Why It Matters: In some regions, owning land doesn’t guarantee access to water.
When to Use It: When investing in land, agriculture, or real estate development.
Real-World Example: Western U.S. states use “prior appropriation” law: first in time, first in right.
Resources: USGS Water Law Basics
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Letter of Intent (LOI)
Definition: A formal document stating one party’s intention to do business with another — not legally binding, but a serious commitment.
Why It Matters: Starts negotiations and lays out deal terms.
When to Use It: In mergers, investments, or joint ventures.
Real-World Example: A startup might sign an LOI with an investor before finalizing a deal.
Resources: NOLO Sample LOIs
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Data Points
Definition: Individual pieces of information collected for analysis or decision-making.
Why It Matters: Helps you make informed business or financial choices.
When to Use It: In marketing, analytics, investment research, and more.
Real-World Example: A clothing brand may track customer age, purchase history, and location as data points.
Resources: Khan Academy: Data Basics
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Seed Round
Definition: The first official round of funding for a startup, usually from angel investors, friends, family, or early-stage venture capitalists.
Why It Matters: It helps turn an idea into a working business — covering development, legal fees, MVP creation, etc.
When to Use It: When your business idea is ready to test in the real world and you need initial funding.
Real-World Example: Uber raised a $200K seed round in 2009 to build its prototype.
Resources: Seed Round Guide – AngelList
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SPAC
(Special Purpose Acquisition Company)
Definition: A company with no operations, formed strictly to raise capital through an IPO and later merge with an existing company.
Why It Matters: It’s a shortcut for companies to go public without the traditional IPO process.
When to Use It: When you’re exploring funding strategies or planning a public exit.
Real-World Example: DraftKings went public via a SPAC in 2020.
Resources: SEC SPAC Overview
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Digital Wallet
Definition: An electronic method of storing payment information (like credit cards, crypto, or tokens) used for digital transactions.
Why It Matters: It makes online payments secure and fast. Also essential in Web3 and blockchain.
When to Use It: Anytime you buy online or use crypto.
Real-World Example: Apple Pay, MetaMask, and PayPal are digital wallets.
Resources: Investopedia Digital Wallets
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APR (Annual Percentage Rate)
Definition: The yearly interest rate charged on borrowed money or earned through investment, including fees.
Why It Matters: It tells you the real cost of borrowing.
When to Use It: When comparing credit cards, loans, or mortgage offers.
Real-World Example: A credit card might have a 19.99% APR, meaning you pay that much annually on balances.
Resources: APR Calculator – NerdWallet
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Letter of Credit (LOC)
Definition: A bank document guaranteeing payment on behalf of a buyer to a seller, often used in international trade.
Why It Matters: It reduces risk for both parties in large or overseas transactions.
When to Use It: In large B2B or international deals.
Real-World Example: A U.S. importer may use a letter of credit to pay a Chinese manufacturer safely.
Resources: World Bank Trade Finance Guide
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Debt-to-Income Ratio (DTI)
Definition: A percentage that compares your monthly debt payments to your gross monthly income.
Why It Matters: Lenders use this to evaluate your ability to repay.
When to Use It: When applying for loans, mortgages, or business financing.
Real-World Example: If you earn $5,000/month and pay $2,000 in debts, your DTI is 40%.
Resources: DTI Calculator – Bankrate
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DAO (Decentralized Autonomous Organization)
Definition: A blockchain-based organization that is governed by smart contracts and member voting, not executives.
Why It Matters: Gives community-driven control over business decisions.
When to Use It: In Web3 startups, NFT projects, or decentralized apps.
Real-World Example: ConstitutionDAO raised $47M in crypto to buy a copy of the U.S. Constitution.
Resources: What is a DAO – Ethereum.org
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KYC (Know Your Customer)
Definition: A process used by financial institutions to verify the identity of clients to prevent fraud and money laundering.
Why It Matters: Mandatory for opening bank, crypto, or trading accounts.
When to Use It: Anytime you’re onboarding a financial service or investor.
Real-World Example: Uploading your passport and utility bill to verify your identity on Coinbase.
Resources: FinCEN KYC Requirements
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Tokenomics
Definition: The economic model and design behind a cryptocurrency or token — including supply, incentives, and usage.
Why It Matters: Influences the value and sustainability of blockchain-based projects.
When to Use It: When creating or analyzing crypto tokens and NFTs.
Real-World Example: Bitcoin has fixed supply (21M coins) — that’s part of its tokenomics.
Resources: Tokenomics Explained – Binance Academy
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Operating Agreement
Definition: A document that outlines how an LLC will operate — including member roles, capital contributions, and dispute resolution.
Why It Matters: Legally protects your business and personal interests.
When to Use It: Required when forming an LLC (especially with multiple members).
Real-World Example: An LLC with three partners uses the operating agreement to assign profit-sharing percentages.
Resources: Free Operating Agreement Template – RocketLawyer
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Accredited Investor
Definition: An individual or entity allowed to invest in private securities offerings due to meeting certain income or net worth thresholds.
Why It Matters: Grants access to exclusive investment opportunities like hedge funds, private equity, and early-stage startups.
When to Use It: When raising capital or investing in private deals.
Real-World Example: You qualify as an accredited investor if your annual income exceeds $200,000 (or $300,000 with a spouse) or your net worth exceeds $1 million (excluding your home).
Resources: SEC Accredited Investor Definition
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Pro Forma
Definition: Financial projections based on hypothetical scenarios or planned future operations.
Why It Matters: Shows how a business might perform under specific conditions, often used for fundraising or planning.
When to Use It: In business plans, investor decks, mergers/acquisitions.
Real-World Example: A startup presents pro forma income statements showing expected revenue and costs for the next three years.
Resources: Pro Forma Templates – SCORE
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Burn Rate
Definition: The rate at which a business spends its cash reserves, typically calculated monthly.
Why It Matters: Indicates how long a company can operate before needing new capital.
When to Use It: Critical in startup budgeting and fundraising rounds.
Real-World Example: A startup with $500,000 in the bank and a $50,000/month burn rate has 10 months of runway.
Resources: Burn Rate Calculator – Foundersuite
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Preferred Shares
Definition: A type of stock that gives shareholders priority over common stockholders for dividends and assets in the event of liquidation.
Why It Matters: Offers investors more security and consistent returns.
When to Use It: Often issued in venture capital or corporate investment rounds.
Real-World Example: A VC firm might invest in a startup and receive preferred shares with a 6% guaranteed annual dividend.
Resources: Preferred vs. Common Stock – Investopedia
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Convertible Note
Definition: A short-term debt instrument that converts into equity at a later financing round, typically with a discount or bonus.
Why It Matters: Helps startups raise early capital without setting a valuation.
When to Use It: In pre-seed or seed fundraising rounds.
Real-World Example: An angel investor gives $100,000 to a startup via convertible note that will convert to equity in the next Series A.
Resources: Convertible Notes Explained – Y Combinator
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Capital Stack
Definition: The hierarchy of financial claims on a company’s assets, typically including common equity, preferred equity, mezzanine debt, and senior debt.
Why It Matters: Determines who gets paid first (or last) in a liquidation event.
When to Use It: In investment analysis, especially for real estate or startups.
Real-World Example: In a startup exit, senior lenders are paid first, followed by preferred shareholders, then common stockholders.
Resources: Capital Stack Breakdown – Harvard Business Review
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Runway (Financial)
Definition: The amount of time a business can continue operating before it runs out of money, based on current cash and burn rate.
Why It Matters: Determines how urgently you need to raise more capital or cut expenses.
When to Use It: In startup management, especially during rapid growth or downturns.
Real-World Example: If you have $200K in cash and burn $25K/month, your runway is 8 months.
Resources: Startup Runway Calculator – Slidebean
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Cap Table (Capitalization Table)
Definition: A document or spreadsheet that outlines a company’s ownership structure, including who owns what percentage, how much equity, and at what valuation.
Why It Matters: Essential for investors and founders to understand dilution, ownership, and value.
When to Use It: During fundraising, exits, or issuing equity to employees.
Real-World Example: A startup’s cap table shows 60% founder ownership, 20% investor shares, and 20% reserved for employees.
Resources: Free Cap Table Template – Carta
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Vesting Schedule
Definition: A timeline outlining when employees or founders earn full rights to their stock options or equity.
Why It Matters: Helps retain talent and prevent people from leaving with large equity stakes early.
When to Use It: In startup equity plans, employee agreements, and founder arrangements.
Real-World Example: A 4-year vesting schedule with a 1-year cliff means an employee earns 25% of their shares after 1 year, then monthly thereafter.
Resources: Vesting Explained – TechCrunch
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Cliff (Vesting Cliff)
Definition: The period of time before the first portion of equity or benefits vest — if someone leaves before the cliff, they get nothing.
Why It Matters: Protects startups from giving equity to employees or partners who leave early.
When to Use It: In all equity contracts.
Real-World Example: A 1-year cliff means the recipient gets 0 equity until 12 months of service.
Resources: Cliff Period in Vesting – Carta
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1031 Exchange
Definition: A tax-deferral strategy that allows real estate investors to sell a property and reinvest the proceeds into another “like-kind” property, deferring capital gains taxes.
Why It Matters: It lets investors grow wealth by reinvesting without immediate tax liability.
When to Use It: When selling a rental or investment property and planning to reinvest.
Example: An investor sells a duplex and uses the funds to buy an apartment building within 180 days.
Resources: IRS 1031 Exchange Guidelines
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Recourse vs. Non-Recourse Loan
Definition:
Recourse Loan: The lender can seize other personal assets if the collateral doesn’t cover the debt.
Non-Recourse Loan: The lender can only claim the collateral.
Why It Matters: Affects your personal financial risk in a default.
When to Use It: When evaluating real estate or business loan agreements.
Example: Most home mortgages are recourse; some investment property loans are non-recourse.
Resources: Investopedia – Loan Types
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Credit Utilization
Definition: The percentage of your available credit you’re using at any given time.
Why It Matters: It’s a major factor in your credit score — the lower, the better (under 30% is ideal).
When to Use It: When managing personal credit cards and loans.
Example: You have $10,000 available and use $2,000. Your utilization rate is 20%.
Resources: MyFICO Credit Utilization Guide
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Promissory Note
Definition: A written agreement where one party promises to pay another a specific sum at a specified time or on demand.
Why It Matters: Used in loans between individuals, private lenders, or businesses.
When to Use It: When lending or borrowing money privately.
Example: A startup signs a promissory note to repay a $50,000 loan in 18 months at 5% interest.
Resources: LegalZoom – Promissory Notes
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Escrow
Definition: A neutral third-party account that temporarily holds funds or property until all conditions of a transaction are met.
Why It Matters: Provides protection and trust in high-stakes transactions like real estate or business deals.
When to Use It: Buying/selling homes, domains, businesses, or investments.
Example: A homebuyer deposits $5,000 in escrow, released to the seller after closing.
Resources: Consumer Financial Protection Bureau – Escrow
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Lien
Definition: A legal claim or hold on a property, typically as security for a debt owed.
Why It Matters: Affects ownership rights and must be cleared to sell or refinance.
When to Use It: Understanding title reports or securing a loan.
Example: A mechanic’s lien for unpaid repairs or a mortgage lien on a home.
Resources: Nolo – Lien Laws Explained
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Debt-to-Income Ratio (DTI)
Definition: A measure of how much of your monthly income goes toward debt payments.
Why It Matters: Lenders use it to assess your ability to repay new debt.
When to Use It: Before applying for mortgages, car loans, or credit cards.
Example: You earn $5,000/month and pay $2,000 toward debts. DTI = 40%.
Resources: CFPB – DTI Explained
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Amortization
Definition: The process of gradually paying off a loan through scheduled, equal payments of principal and interest.
Why It Matters: Helps you understand how much of your payment goes to debt vs. interest.
When to Use It: With mortgages, student loans, or auto loans.
Example: In a 30-year mortgage, early payments are mostly interest; later ones reduce principal.
Resources: Amortization Calculator – Bankrate
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Deed of Trust
Definition: A legal document that secures a real estate loan by transferring title to a third-party trustee until the loan is paid.
Why It Matters: Common in states that don’t use mortgage agreements.
When to Use It: When financing real estate in states like California or Texas.
Example: A borrower signs a deed of trust when securing a property with a loan.
Resources: Rocket Mortgage – Deed of Trust Explained
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Underwriting
Definition: The process lenders or investors use to assess risk before approving a loan or investment.
Why It Matters: Determines your loan terms, approval, and insurance rates.
When to Use It: Any time you apply for a loan, insurance, or investment funding.
Example: Mortgage underwriting includes credit review, income verification, and appraisal.
Resources: Investopedia – What is Underwriting?
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Seasoning (Loan or Credit)
Definition: The length of time an asset, account, or financial record has been held or active.
Why It Matters: Lenders use it to determine stability and reduce fraud risk.
When to Use It: Applying for mortgages or using tradelines to build credit.
Example: Most mortgage lenders require 6–12 months seasoning on bank funds or employment.