Glossary
A B C D E F G H I J K L M N
O P Q R S T U V W X Y Z
"A" Round : A financing event whereby venture capitalists invest in a company that was previously financed by founders and/or angels. The "A" is from Series "A" Preferred stock. See "B" round.
Accrued Interest: The interest due on preferred stock or a bond since the last interest payment was made.
Acquisition: The process of gaining control, possession or ownership of a private portfolio company by an operating company or conglomerate.
Adjustment Condition: An adjustment condition occurs if the company does not close on an equity investment in the company for a minimum of $xxx, net of brokerage fees, on or before a series of other predetermined events, i.e. delivery of term sheet to preferred stockholders.
Advisory Board: A group of external advisors to a private equity group or portfolio company. Advice provided varies from overall strategy to portfolio valuation. Less formal than a Board of Directors.
Allocation: The amount of securities assigned to an investor, broker, or underwriter in an offering. An allocation can be equal to or less than the amount indicated by the investor during the subscription process depending on market demand for the securities.
Alternative Assets: This term describes non-traditional asset classes. They include private equity, venture capital, hedge funds and real estate. Alternative assets are generally more risky than traditional assets, but they should, in theory, generate higher returns for investors.
Amortization: An Accounting procedure that gradually reduces the book value of a tangible or a definite intangible asset through periodic charges to income.
Angel Financing: Capital raised for a private company from independently wealthy investors. This capital is generally used as seed financing.
Angel Groups: Organizations, funds and networks formed for the specific purpose of facilitating angel investments in start-up companies.
Angel Investor : A person who provides backing to very early-stage businesses or business concepts. Angel investors are typically entrepreneurs who have become wealthy, often in technology-related industries.
Antidilution provisions: Contractual measures that allow investors to keep a constant share of a firm’s equity in light of subsequent equity issues. These may give investors preemptive rights to purchase new stock at the offering price. [See Full Ratchet and weighted Average]
Asset-backed loan: Loan, typically from a commercial bank, that is backed by asset collateral, often belonging to the entrepreneurial firm or the entrepreneur.
Automatic conversion: Immediate conversion of an investor’s priority shares to ordinary shares at the time of a company’s underwriting before an offering of its stock on an exchange.
Average IRR: The arithmetic mean of the internal rate of return.
"B" Round: A financing event whereby professional investors such as venture capitalists are sufficiently interested in a company to provide additional funds after the "A" round of financing. Subsequent rounds are called "C", "D", and so on.
Balance Sheet: A condensed financial statement showing the nature and amount of a company’s assets, liabilities, and capital on a given date.
Bankruptcy: An inability to pay debts.
Benchmarking: Comparing returns of a portfolio to the returns of its peers; in private equity, fund performance is benchmarked against a sample of funds formed in the same vintage year with the same investment focus.
Book Value: Book value of a stock is determined from a company’s balance sheet by adding all current and fixed assets and then deducting all debts, other liabilities and the liquidation price of any preferred issues. The sum arrived at is divided by the number of common shares outstanding and the result is book value per common share.
Bootstrapping: Means of financing a small firm by employing highly creative ways of using and acquiring resources without raising equity from traditional sources or borrowing money from the bank.
Bridge Financing: A limited amount of equity or short-term debt financing typically raised within 6-18 months of an anticipated public offering or private placement meant to "bridge" a company to the next round of financing.
Brokers: Private individuals or firms retained by early-stage companies to raise funds for a finder’s fee. (compare, broker-dealer)
Burn Rate: The rate at which a company expends net cash over a certain period, usually a month.
Business Plan: A document that describes the entrepreneur’s idea, the market problem, proposed solution, business and revenue models, marketing strategy, technology, company profile, competitive landscape, as well as financial data for coming years. The business plan opens with a brief executive summary, most probably the most important element of the document due to the time constraints of venture capital funds and angels.
Call Option: The right to buy a security at a given price (or range) within a specific time period.
Capital (or Assets) Under Management: The amount of capital available to a fund management team for venture investments.
Capital Call: Also known as a draw down - When a venture capital firm has decided where it would like to invest, it will approach its investors in order to "draw down" the money. The money will already have been pledged to the fund but this is the actual act of transferring the money so that it reaches the investment target.
Capital Gains: The difference between an asset’s purchase price and selling price, when the selling price is greater. Long-term capital gains (on assets held for a year or longer) are taxed at a lower rate than ordinary income.
Capitalize: To record an outlay as an asset (as opposed to an Expense), which is subject to depreciation or amortization.
Carried Interest: The portion of any gains realized by the fund to which the fund managers are entitled, generally without having to contribute capital to the fund. Carried interest payments are customary in the venture capital industry, in order to create a significant economic incentive for venture capital fund managers to achieve capital gains.
Cash Position: The amount of cash available to a company at a given point in time. Claim Dilution A reduction in the likelihood that one or more of the firm’s claimants will be fully repaid, including time value of money considerations.
Chinese wall: A barrier against information flows between different divisions or operating groups within banks and securities firms. Examples include a policy barrier between the trust department from making investment decisions based on any substantive inside information that may come into the possession of other bank departments. The term also refers to barriers against information flows between corporate finance and equity research and trading operations.
Co-investment: The syndication of a private equity financing round or an investment by an individuals (usually general partners) alongside a private equity fund in a financing round.
Committed Capital: The total dollar amount of capital pledged to a private equity fund.
Company buy-back: The redemption of private of restricted holdings by the portfolio company itself. In essence the company is buying out the VC’s interest.
Conversion Rights: Rights by which preferred stock "converts" into common stock. Usually, one has this right at any time after making an investment. Company may want rights to force a conversion upon an IPO; upon hitting of certain sales or earnings’ targets, or upon a majority or supermajority vote of the preferred stock. Conversion rights may carry with them anti-dilution protections.
Convertible Security: A bond, debenture or preferred stock that is exchangeable for another type of security (usually common stock) at a pre-stated price. Convertibles are appropriate for investors who want higher income, or liquidation preference protection, than is available from common stock, together with greater appreciation potential than regular bonds offer. (See Common Stock, Dilution, and Preferred Stock).
Corporate Venturing: Venture capital provided by [in-house investment funds of] large corporations to further their own strategic interests.
Covenant: A protective clause in an agreement.
Deal Flow: The measure of the number of potential investments that a fund reviews in any given period.
Deal Structure: An Agreement made between the investor and the company defining the rights and obligations of the parties involved. The process by which one arrives at the final term and conditions of the investment.
Depreciation: An expense recorded to reduce the value of a long-term tangible asset. Since it is a non-cash expense, it increases free cash flow while decreasing the amount of a company’s reported earnings.
Dilution: A reduction in the percentage ownership of a given shareholder in a company caused by the issuance of new shares.
Director: Person elected by shareholders to serve on the board of directors. The directors appoint the president, vice president and all other operating officers, and decide when dividends should be paid (among other matters).
Disbursement: The investments by funds into their portfolio companies.
Disclosure Document: A booklet outlining the risk factors associated with an investment.
Dividend: The payments designated by the Board of Directors to be distributed pro-rata among the shares outstanding.
Down Round: Issuance of shares at a later date and a lower price than previous investment rounds.
Due Diligence: A process undertaken by potential investors — individuals or institutions — to analyze and assess the desirability, value, and potential of an investment opportunity.
Early Stage: A state of a company that typically has completed its seed stage and has a founding or core senior management team, has proven its concept or completed its beta test, has minimal revenues, and no positive earnings or cash flows.
EBITDA: "Earnings Before Interest, Taxes, Depreciation and Amortization": A measure of cash flow calculated as: Revenue - Expenses (excluding tax, interest, depreciation and amortization). EBITDA looks at the cash flow of a company. By not including interest, taxes, depreciation and amortization, we can clearly see the amount of money a company brings in. This is especially useful when one company is considering a takeover of another because the EBITDA would cover any loan payments needed to finance the takeover.
Economies of Scale: Economic principle that as the volume of production increases, the cost of producing each unit decreases.
Elevator Pitch: An extremely concise presentation of an entrepreneur’s idea, business model, company solution, marketing strategy, and competition delivered to potential investors. Should not last more than a minute, or the duration of an elevator ride.
Employee Stock Option Plan (ESOP): A plan established by a company whereby a certain number of shares is reserved for purchase and issuance to key employees. Such shares usually vest over a certain period of time to serve as an incentive for employees to build long term value for the company.
Employee Stock Ownership Plan: A trust fund established by a company to purchase stock on behalf of employees.
Equity: Ownership interest in a company, usually in the form of stock or stock options.
Exercise price: The price at which an option or warrant can be exercised.
Exit Strategy: A fund’s intended method for liquidating its holdings while achieving the maximum possible return. These strategies depend on the exit climates including market conditions and industry trends. Exit strategies can include selling or distributing the portfolio company’s shares after an initial public offering (IPO), a sale of the portfolio company or a recapitalization.
Exiting climates: The conditions that influence the viability and attractiveness of various exit strategies.
Factoring: A procedure in which a firm can sell its accounts receivable invoices to a factoring firm, which pays a percentage of the invoices immediately, and the remainder (minus a service fee) when the accounts receivable are actually paid off by the firm’s customers.
Finder: A person who helps to arrange a transaction.
First Refusal Rights : A negotiated obligation of the company or existing investors to offer shares to the company or other existing investors at fair market value or a previously negotiated price, prior to selling shares to new investors.
Flotation: When a firm’s shares start trading on a formal stock exchange, such as the NASDAQ or the NYSE. This is probably the most profitable exit route for entrepreneurs and their financial backers.
Follow-on funding : Companies often require several rounds of funding. If a private equity firm has invested in a particular company in the past, and then provides additional funding at a later stage, this is known as ‘follow-on funding’.
Founders’ Shares: Shares owned by a company’s founders upon its establishment.
Fund Focus : The indicated area of specialization of a venture capital fund usually expressed as Balanced, Seed and Early Stage, Later Stage, Mezzanine or Leveraged Buyout (LBO).
Fund of funds: A fund set up to distribute investments among a selection of private equity fund managers, who in turn invest the capital directly. Fund of funds are specialist private equity investors and have existing relationships with firms. They may be able to provide investors with a route to investing in particular funds that would otherwise be closed to them. Investing in fund of funds can also help spread the risk of investing in private equity because they invest the capital in a variety of funds.
Fund Size: The total amount of capital committed by the investors of a venture capital fund.
Gatekeeper : Specialist advisers who assist institutional investors in their private equity allocation decisions. Institutional investors with little experience of the asset class or those with limited resources often use them to help manage their private equity allocation. Gatekeepers usually offer tailored services according to their clients’ needs, including private equity fund sourcing and due diligence through to complete discretionary mandates.
Golden Handcuffs: This occurs when an employee is required to relinquish unvested stock when terminating his employment contract early.
Golden Parachute: Employment contract of upper management that provides a large payout upon the occurrence of certain control transactions, such as a certain percentage share purchase by an outside entity or when there is a tender offer for a certain percentage of a company’s shares. Discussed in more detail at The Executive Employment Agreement
Harvest: Reaping the benefits of investment in a privately held company by selling the company for cash or stock in a publicly held company, also known as an "exit strategy".
Hockey Stick Projections: The general shape and form of a chart showing revenue, customers, cash, or some other financial or operational measure that increases dramatically at some point in the future. Entrepreneurs often develop business plans with hockey stick charts to impress potential investors.
Hurdle Rate: The internal rate of return that a fund must achieve before its general partners or managers may receive an increased interest in the proceeds of the fund. Often, if the expected rate of return on an investment is below the hurdle rate, the project is not undertaken.
Incubator : An entity designed to nurture business concepts or new technologies to the point that they become attractive to venture capitalists. An incubator typically provides both physical space and some or all of the services-legal, managerial, and/or technical-needed for a business concept to be developed. Incubators often are backed by venture firms, which use them to generate early-stage investment opportunities.
Initial Public Offering (IPO): The sale or distribution of a stock of a portfolio company to the public for the first time. IPOs are often an opportunity for the existing investors (often venture capitalists) to receive significant returns on their original investment. During periods of market downturns or corrections the opposite is true.
Institutional Investors: Organizations that professionally invest, including insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds.
Intellectual property : A venture’s intangible assets, such as patents, copyrights, trademarks, and brand name.
Investment Bankers : Representatives of financial institutions engaged in the issue of new securities, including management and underwriting of issues as well as securities trading and distribution.
IRR: Internal Rate of Return. A typical measure of how VC Funds measure performance. IRR is a technically a discount rate: the rate at which the present value of a series of investments is equal to the present value of the returns on those investments.
Issued Shares: The amount of common shares that a corporation has sold (issued).
Key Employees: Professional management attracted by the founder to run the company. Key employees are typically retained with warrants and ownership of the company.
Later Stage: A fund investment strategy involving financing for the expansion of a company that is producing, shipping and increasing its sales volume. Later stage funds often provide the financing to help a company achieve critical mass in order to position its shareholders for an Exit Event, e.g. an IPO on strategic sale of the company.
Lead Investor: Also known as a bell cow investor. Member of a syndicate of private equity investors holding the largest stake, in charge of arranging the financing and most actively involved in the overall project
Lemon : An investment that has a poor or negative rate of return. An old venture capital adage claims that "lemons ripen before plums."
Leveraged Buyout (LBO): A takeover of a company, using a combination of equity and borrowed funds. Generally, the target company’s assets act as the collateral for the loans taken out by the acquiring group. The acquiring group then repays the loan from the cash flow of the acquired company. For example, a group of investors may borrow funds, using the assets of the company as collateral, in order to take over a company. Or the management of the company may use this vehicle as a means to regain control of the company by converting a company from public to private. In most LBOs, public shareholders receive a premium to the market price of the shares.
Lifestyle firms : Catagory comprising around 90 percent of all start-ups. These firms merely afford a reasonable living for their founders, rather than incurring the risks associated with high growth. These ventures typically have growth rates below 20 percent annually, have five-year revenue projections below $10 million, and are primarily funded internally-only very rarely with outside equity funds.
Liquidation: 1) The process of converting securities into cash. 2) The sale of the assets of a company to one or more acquirers in order to pay off debts. In the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock.
Liquidity Event: An event that allows a VC to realize a gain or loss on an investment. The ending of a private equity provider’s involvement in a business venture with a view to realizing an internal return on investment. Most common exit routes include Initial Public Offerings [IPOs], buy backs, trade sales and secondary buy outs. See also: Exit strategy
Management buy-out (MBO): A private equity firm will often provide financing to enable current operating management to acquire or to buy at least 50 per cent of the business they manage. In return, the private equity firm usually receives a stake in the business. This is one of the least risky types of private equity investment because the company is already established and the managers running it know the business - and the market it operates in - extremely well.
Management Fee: Compensation for the management of a venture fund’s activities, paid from the fund to the general partner or investment advisor. This compensation generally includes an annual management fee.
Market Capitalization: The total dollar value of all outstanding shares. Computed as shares multiplied by current price per share. Prior to an IPO, market capitalization is arrived at by estimating a company’s future growth and by comparing a company with similar public or private corporations. (See also Pre-Money Valuation)
Merchant banking: An activity that includes corporate finance activities, such as advice on complex financings, merger and acquisition advice (international or domestic), and at times direct equity investments in corporations by the banks.
Merger: Combination of two or more corporations in which greater efficiency is supposed to be achieved by the elimination of duplicate plant, equipment, and staff, and the reallocation of capital assets to increase sales and profits in the enlarged company.
Mezzanine Financing: Refers to the stage of venture financing for a company immediately prior to its IPO. Investors entering in this round have lower risk of loss than those investors who have invested in an earlier round. Mezzanine level financing can take the structure of preferred stock, convertible bonds or subordinated debt.
NASDAQ: An automated information network which provides brokers and dealers with price quotations on securities traded over the counter.
NDA (Non-disclosure agreement): An agreement issued by entrepreneurs to potential investors to protect the privacy of their ideas when disclosing those ideas to third parties.
Net Asset Value (NAV): NAV is calculated by adding the value of all of the investments in the fund and dividing by the number of shares of the fund that are outstanding. NAV calculations are required for all mutual funds (or open-end funds) and closed-end funds. The price per share of a closed-end fund will trade at either a premium or a discount to the NAV of that fund, based on market demand. Closed-end funds generally trade at a discount to NAV.
Net Financing Cost: Also called the cost of carry or, simply, carry, the difference between the cost of financing the purchase of an asset and the asset’s cash yield. Positive carry means that the yield earned is greater than the financing cost; negative carry means that the financing cost exceeds the yield earned.
Net income: The net earnings of a corporation after deducting all costs of selling, depreciation, interest expense and taxes.
Net IRR: IRR if a portfolio or fund taking into account the effect of management fees and carried interest.
Net Present Value: An approach used in capital budgeting where the present value of cash inflow is subtracted from the present value of cash outflows. NPV compares the value of a dollar today versus the value of that same dollar in the future after taking inflation and return into account.
Net present value (NPV): A firm or project’s net contribution to wealth. This is the present value of current and future income streams, minus initial investment.
Non-Compete Clause: An agreement often signed by employees and management whereby they agree not to work for competitor companies or form a new competitor company within a certain time period after termination of employment. Governed by state law.
Oversubscription: Occurs when demand for shares exceeds the supply or number of shares offered for sale. As a result, the underwriters or investment bankers must allocate the shares among investors. In private placements, this occurs when a deal is in great demand because of the company’s growth prospects.
Post-Money Valuation: The valuation of a company immediately after the most recent round of financing. For example, a venture capitalist may invest $3.5 million in a company valued at $2 million "pre-money" (before the investment was made). As a result, the startup will have a post-money valuation of $5.5 million.
Pre-Money Valuation: The valuation of a company prior to a round of investment. This amount is determined by using various calculation models, such as discounted P/E ratios multiplied by periodic earnings or a multiple times a future cash flow discounted to a present cash value and a comparative analysis to comparable public and private companies.
Preference shares: Shares of a firm that encompass preferential rights over ordinary common shares, such as the first right to dividends and any capital payments.
Preferred Dividend: A dividend ordinarily accruing on preferred shares payable where declared and superior in right of payment to common dividends.
Prospectus: A formal written offer to sell securities that provides an investor with the necessary information to make an informed decision. A prospectus explains a proposed or existing business enterprise and must disclose any material risks and information according to the securities laws. A prospectus must be filed with the SEC and be given to all potential investors. Companies offering securities, mutual funds, and offerings of other investment companies including Business Development Companies are required to issue prospectuses describing their history, investment philosophy or objectives, risk factors and financial statements. Investors should carefully read them prior to investing.
Put option: The right to sell a security at a given price (or range) within a given time period.
Ratchet : Ratchets reduce the price at which venture capitalists can convert their debt into preferred stock, which effectively increases their percentage of equity. Often referred to as an "antidilution adjustment." See Anti-dilution, full ratchet and weighted average.
Right of First Refusal: The right of first refusal gives the holder the right to meet any other offer before the proposed contract is accepted.
Risk: The chance of loss on an investment due to many factors including inflation, interest rates, default, politics, foreign exchange, call provisions, etc. In Private Equity, risks are outlined in the Risk Factors section of the Placement Memorandum.
Seed Money: The first round of capital for a start-up business. Seed money usually takes the structure of a loan or an investment in preferred stock or convertible bonds, although sometimes it is common stock. Seed money provides startup companies with the capital required for their initial development and growth. Angel investors and early-stage venture capital funds often provide seed money.
Seed Stage Financing: An initial state of a company’s growth characterized by a founding management team, business plan development, prototype development, and beta testing.
Series A - first round of institutional investment capital
Series B - second round of institutional investment capital
Series C - third round of institutional investment capital
Spin out: A division or subsidiary of a company that becomes an independent business. Typically, private equity investors will provide the necessary capital to allow the division to "spin out" on its own; the parent company may retain a minority stake.
Strategic Investors: Corporate or individual investors that add value to investments they make through industry and personal ties that can assist companies in raising additional capital as well as provide assistance in the marketing and sales process.
Sweat Equity: Ownership of shares in a company resulting from work rather than investment of capital–usually founders receive "sweat equity".
Syndication : A number of investors offering funds together as a group on a particular deal. A lead investor often coordinates such deals and represents the group’s members. Within the last few years, syndication among angel investors (an angel alliance) has become more common, enabling them to fund larger deals closer to those typifying a small venture capital fund.
An offer to purchase stock made directly to the shareholders. One of the more common ways hostile takeovers are implemented.
Term Sheet: Term sheet for convertible promissory notes
Time Value of Money: The basic principle that money can earn interest, therefore something that is worth $1 today will be worth more in the future if invested. This is also referred to as future value.
Trade sale: The sale of the equity share of a portfolio company to another company.
Venture Capital Financing: An investment in a startup business that is perceived to have excellent growth prospects but does not have access to capital markets. Type of financing sought by early-stage companies seeking to grow rapidly.
Venture Capitalist: A financial institution specializing in the provision of equity and other forms of long-term capital to enterprises, usually to firms with a limited track record but with the expectation of substantial growth. The venture capitalist may provide both funding and varying degrees of managerial and technical expertise.
Warrant: A type of security that entitles the holder to buy a proportionate amount of common stock or preferred stock at a specified price for a period of years. Warrants are usually issued together with a loan, a bond or preferred stock –and act as sweeteners, to enhance the marketability of the accompanying securities. They are also known as stock-purchase warrants and subscription warrants.
Wash-Out Round: A financing round whereby previous investors, the founders, and management suffer significant dilution. Usually as a result of a washout round, the new investor gains majority ownership and control of the company. Also known as burn-out or cram-down rounds.
Write-off: The act of changing the value of an asset to an expense or a loss. A write-off is used to reduce or eliminate the value an asset and reduce profits.
Write-up/Write-down: An upward or downward adjustment of the value of an asset for accounting and reporting purposes. These adjustments are estimates and tend to be subjective; although they are usually based on events affecting the investee company or its securities beneficially or detrimentally.
Reference: (2007) VC Experts, Inc. Click here for the latest revision.
