Glossary of Terms
Accelerated Cost Recovery System (ACRS)
An accounting technique for calculating the depreciation of tangible assets on the basis of the estimated-life classifications into which the assets are placed. ACRS was initiated by the Economic Recovery Act of 1981. The goal was to make investments more profitable by sheltering large amounts of income from taxation during the early years of an asset’s life. The initial law established classifications of 3, 5, 10, and 15 years; these classifications were subsequently modified in order to reduce depreciation and increase the government’s tax revenues. The classification into which an asset is placed determines the percentage of the cost potentially recoverable in each year.
Accelerated depreciation is the set of IRS rules that allow businesses to deduct from their taxable income the declining value of business-related investments, such as equipment and machinery, faster than the value of those assets actually declines.
The two most common types of accelerated depreciation are sum of the years’ digits and double declining balance.
- Double Declining Balance. To use it, accountants first calculate depreciation as if they were using the straight line method. They then figure out the total percentage of the asset that is depreciated the first year and double it. Each subsequent year, that same percentage is multiplied by the remaining balance to be depreciated. At some point, the value will be lower than the straight-line charge, at which point, the straight line method will be used for the remainder of the asset’s life
- Sum-Of-The-Years’ Digits. This method takes the asset’s expected life and adds together the digits for each year. So if the asset was expected to last for five years, the sum of the years’ digits would be obtained by adding: 5 + 4 + 3 + 2 + 1 to get a total of 15. Each digit is then divided by this sum to determine the percentage by which the asset should be depreciated each year, starting with the highest number in year 1.
Accredited investor is a wealthy investor who meets certain SEC requirements for net worth and income as they relate to some restricted offerings. Accredited investors include institutional investors, company directors and executive officers, high net worth individuals, and certain other entities. Some limited partnerships and angel investor networks accept only accredited investors.
The interest due on a note or bond since the last interest payment was made. At the time of sale, the buyer pays the seller the bond’s price plus accrued interest, which is calculated by multiplying the coupon rate by the number of days that have elapsed since the last payment.
It is interest owed but not yet paid. Accrued interest is listed as a liability on corporate balance sheets. It is also added to the price at which bonds are traded.
Acquisition is the process through which one company takes over the controlling interest of another company. Acquisition includes obtaining supplies or services by contract or purchase order with appropriated or non-appropriated funds, for the use of Federal agencies through purchase or lease.
The cost a company records on its books for the acquisition of property or equipment. Sales tax is not included in this cost.
Add-on Services are the services provided by a venture capitalist that are not monetary in nature, such as helping to assemble a management team and helping to prepare the company for an IPO.
Base price used to judge capital gains or losses upon sale of an asset, for example, a stock or bond. The price is adjusted, for example, to account for any stock splits since the initial purchase price.
Adventure capitalist is an entrepreneur who helps other entrepreneurs financially and often plays an active role in the company’s operations such as by occupying a seat on the board of directors, etc.
Agency Debt or Agency Security
Debt obligation such as: Fannie Mae or Freddie Mac. This debt is generally not backed by the U.S. government, except by what, in jargon, is called a “moral obligation.” Two exceptions are Government National Mortgage Association (GNMA) debt and Small Business Administration (SBA) debt, both of which are backed by the full faith and credit of the U.S. government.
Alternative assets are non-traditional asset classes. They can be hedge funds, private equity, venture capital, or real estate. While they have the potential to generate higher returns, they carry additional risk.
An Angel Fund, or Angel Network, is usually comprised of a group of individual investors who pool their money to make a number of individual investments. This fund will then make a number of individual investments, allowing the individual angels to diversify their risk. If you are seeking funding from an angel fund, there is typically a submission process to follow where you can submit your business plan or overview documents. If selected for the next step, you would present your overall business plan to the members of the fund, which is usually the hardest part for the company seeking funding, where afterwards they will vote to proceed or not. If the fund has voted to proceed, they will often select a small group of members to negotiate the details with the entrepreneur. Angel funds will typically take an equity position in the company and will often require board representation.
Angel or Angel Investor is an individual who provides capital to one or more startup companies. Unlike a partner, the angel investor is rarely involved in management. Angel investors can usually add value through their contacts and expertise.
A technique whereby figures covering a period of less than a year are extended to cover a 12–month period. This technique is helpful in preparing a budget for the next calendar year or when gathering statistics, such as revenue, that are relevant to an investment. The drawback to this technique is that the shorter the period the less accurate projections will be.
Total return per year from an investment, including dividends or interest and capital gains or losses but excluding commissions and other transaction costs and taxes. An annual return is often quoted as a percentage. For funds, the annual return reported assumes reinvestment of dividends and capital distributions. For bonds and other debt instruments, the annual return quoted at the time of sale is only valid if the bond is held to maturity.
This is an attempt to balance risk vs. reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment timeframe.
Asset allocation is based on the principle that different assets perform differently in different market and economic conditions. Its use depends on the notion that different asset classes offer returns that are not perfectly correlated. Therefore, diversification reduces the overall risk in terms of the variability of returns for a given level of expected return.
A loan, typically from a commercial bank, that is backed by asset collateral, often belonging to the entrepreneurial firm or the entrepreneur. The loan is often for a short term. Real estate, accounts receivable (A/R), inventory, and equipment are typical assets used to back the loan. The loan may be backed by a single category of assets or some combination of assets; for instance, a combination of A/R and equipment.
Designed to discourage withdrawals, the Back–End Load is a redemption charge an investor pays when withdrawing money from an investment. The fee is a percentage of the value of the share being sold. The fee percentage is highest in the first year and decreases yearly until the specified holding period ends, at which time it drops to zero.
Selling a security or commodity quickly, without regard to the price received. In desperation, an investor bails out of the position if losses are mounting quickly and he or she is no longer able to sustain further losses.
A condensed financial statement showing the nature and amount of a company’s assets, liabilities, and capital on a given date. Unlike the other financial statements, it is accurate only at one moment in time, not a period of time. A balance sheet is a listing of the items making up the two sides of the accounting equation: Assets = Liabilities + Owner’s Equity.
The balance sheet is the core of the financial statements. All other statements either feed into or are derived from the balance sheet.
A security that tends to lead the market and signal the general direction of future price movements. An increasing price for a bellwether stock is considered a bullish signal for the overall stock market. Bellwether companies are typically the market leader in their segment.
Benchmarks are performance goals against which a company’s success is measured. Benchmarks are often used by investors to help determine whether a company should receive additional funding or whether management should receive extra stock.
Blind pool is a form of limited partnership which doesn’t specify what investment opportunities the general partner plans to pursue.
Common stock of a nationally known company that has a long record of profit growth, dividend payment, and a reputation for quality management. The most popular index which follows US blue chips is the Dow Jones Industrial Average. The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.
It is a stock that is thought to be safe, in excellent financial shape and firmly entrenched as a leader in its field. Blue chips generally pay dividends and are favorably regarded by investors. Examples of blue chips are Wal-Mart, Coca-Cola, Berkshire Hathaway and Exxon-Mobile.
Book value is an accounting term that describes the value of an asset according to its balance sheet. For assets, the value is based on the original cost of the asset less any depreciation or amortization. A company’s net book value is its total assets minus liabilities.
That sum is divided by the number of common shares outstanding, and the result is book value per common share. Book value may differ substantially from market value.
A method of financing employed by entrepreneurs to help a company start from scratch. Entrepreneurs founding a company with little capital are said to be bootstrapping it in order to become established. Entrepreneurs bootstrap a company with personal finances rather than through loans or venture capital.
Bottom-Up Approach To Investing
An investing strategy that de-emphasizes the significance of economic and market cycles in favor of a focus on the analysis of individual stocks rather than on industries. The strategy searches for outstanding performance of individual stocks.
In a bottom-up analysis, an investor looks at a company’s market prospects, sales growth, profitability, cash flow, debt ratio, price earnings valuations and dividend yield. A company’s numbers are then compared to that of its competitors to decide which stock offers a more attractive investment opportunity.
Bridge loan is a short-term loan that is used until a person or company can arrange a more comprehensive longer-term financing. The need for a bridge loan arises when a company runs out of cash before it can obtain more capital investment through long-term debt or equity.
The rate at which a company expends net cash over a certain period, usually a month.
Buyout is defined as the purchase of a company or a controlling interest of a corporation’s shares or product line or some business. A leveraged buyout is accomplished with borrowed money or by issuing more stock.
An accounting system where the partner’s capital contributions and allocations of income and gains are credited, and distributions and periodic allocations of expenses and losses are debited.
Capital Gain is the gain to investor from selling a stock, bond or mutual fund at a higher price than the purchase price. The capital gain is usually the amount realized (net sales price) less your investment (adjusted tax basis) in the property. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes.
Capital Under Management
Capital under management is the amount of capital available to a management team for venture investments.
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 used to create a significant economic incentive for venture capital fund managers.
The amount of cash available to a company at any given point.
Civilian Unemployment Rate
Civilian unemployment rate is calculated by the number of unemployed people divided by the total size of the labor force and is expressed as a percentage. People who are jobless, looking for jobs, and available for work are considered unemployed. The labor force is defined as people who are either employed or unemployed.
Closing is the final event to complete the investment, at which time all the legal documents are signed and the funds are transferred.
The right afforded specified investors, i.e., the lead limited partner in a venture fund, to invest alongside the fund in a portfolio opportunity on the basis of no management fee and no carried interest.
Collateralized Debt Obligation (CDO)
A type of structured debt, designed to redistribute the risk of default, set up to own a group of securities or loans. The cash flows are divided into different tranches based on risk. “Senior” tranches are the safest. Interest and principal payments are generally made in order of seniority, so that junior tranches offer higher coupon payments to compensate for additional default risk.
Convertibles are the corporate securities, usually preferred shares or bonds, that can be exchanged for a set number of another form, usually common share, at a pre-stated price. Convertibles are appropriate for investors who want higher income than is available from common stock, together with greater appreciation potential than regular bonds offer. From the issuer’s standpoint, the convertible feature is usually designed as a sweetener, to enhance the marketability of the stock or preferred.
Corporate Venture Capital
Corporate venture capital is a subsidiary of a large corporation which makes venture capital investments.
Corporate Venturing is a practice of a large company, taking a minority equity position in a smaller company in a related field.
Dividends that accrue at a fixed rate until paid are “Cumulative Dividends” which are payments to shareholders made with respect to an investor’s Preferred Stock. Generally, holders of Preferred Shares are contractually entitled to receive dividends prior to holders of Common Stock. Dividends can accumulate at a fixed rate (for example 8%) or simply be payable as and when determined by a company’s Board of Directors in such amount as determined by the board. Because venture backed companies typically need to conserve cash, the use of Cumulative Dividends is customary with the result that the Liquidation Preference increases by an amount equal to the Cumulative Dividends. Cumulative Dividends are often waived if the Preferred Stock converts to Common Stock prior to an IPO but may be included in the aggregate value of Preferred Stock applied to the Conversion Ratio for other purposes. Dividends that are not cumulative are generally called “when, as and if declared dividends.”
Cumulative Voting Rights
Shareholders have the right to pool their votes to concentrate them on an election of one or more directors rather than apply their votes to the election of all directors. For example, if the company has 12 openings to the Board of Directors, in statutory voting, a shareholder with 10 shares casts 10 votes for each opening (10 x 12= 120 votes). Under the cumulative voting method however, the shareholder may opt to cast all 120 votes for one nominee.
Deal flow (dealflow) is the rate at which investment offers are presented to funding institutions.
An agreement made between the investor and the company defining the rights and obligations of the parties involved. This is the process by which one arrives at the final terms and conditions of the investment.
Debt financing means when a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise to repay principal and interest on the debt.
Calculated by dividing total liabilities by the total shareholder’s equity, the Debt-to-Equity ratio reveals, to what extent owner’s equity and cushion creditors’ claims are, in the event of liquidation.
An expense recorded to reduce the value of a long-term tangible asset to reduce taxable income. It also increases cash flow while decreasing the amount of a company’s reported earnings.
Direct financing is a financing without the use of underwriting. Direct financing is often done by investment bankers.
The investments by funds by paying out or disbursing money into their portfolio companies. There are several types of disbursements including: money paid out to run a business, spending cash, dividend payments, and/or the amounts that a lawyer might have to pay out on a person’s behalf in connection with a transaction.
The law requires public companies and investment funds to prepare various disclosure documents. These documents provide key information to investors about the company or fund, and the securities they issue.
Securities regulators have requirements for when and how information must be disclosed. This is to help provide investors with timely and accurate information to make informed investment decisions. This also gives investors a standard to compare one company to another.
Most, but not all, disclosure documents must be filed with securities regulators. Some are posted on the fund’s website or sent to investors free of charge upon request.
The payments designated by the Board of Directors to be distributed among the shares outstanding. The type of share determines the amount. On preferred shares, it is generally a fixed amount. With common shares, the dividend can be omitted if the Directors decide to invest the money in a capital expenditure or if the business is slumping. If the dividend is paid, the amount varies depending on the amount of cash on hand.
There are several types of dividends:
Cumulative—Missed dividend payments that continue to accrue.
Non-cumulative—Missed dividend payments that do not accrue.
Participating—Dividends which share (participate) with common stock.
Non-participating—Dividends which do not share with common stock.
Drive-By Deal is a slang often use when referring to a deal in which a venture capitalist invests in a startup with the goal of a quick exit strategy. The VC takes little to no role in the management and monitoring of the startup.
Due diligence is the process of investigation and evaluation, performed by investors, into the details of a potential investment, such as an examination of operations and management and the verification of material facts.
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.
In mergers and acquisitions, supplementary payments, not part of the original acquisition cost, based on future earnings of the acquired company above a predetermined level.
Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
EBITDA looks at the cash flow of a company. It is a measure of cash flow calculated as: Revenue minus Expenses (excluding tax, interest, depreciation and amortization). 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.
An underwriter who can’t find a buyer may have to buy the stock for its own account. However, to cover for risk associated with not being able to find enough buyers for an issue, underwriters charge an underwriting fee. Thus, even if an underwriter is “eating” stock, it might still make a profit on the deal
The total debt owned by a firm, including the capitalized value of lease payments. Potential investors use effective debt to determine the ongoing expenses of a company due to debt service and similar costs. In general, if the effective debt rises above a certain level, the company is unlikely to be profitable because of a low net cash flow.
The yield on a debt instrument as calculated from the purchase price. The effective rate on a bond is determined by the price, the coupon rate, the time between interest payments, and the time until maturity. Therefore, every bond’s effective rate depends on when it was bought.
Employee Stock Option Plan (ESOP)
A plan established by a company whereby a certain number of shares are reserved for purchase and issuance to key employees. Such shares usually vest over a certain period of time and serve as an incentive for employees to build long term value for the company.
Equity financing is a term used for company’s issuance of shares of common or preferred stock to raise money. Equity financing is commonly done when its per share prices are high-the most money that can be raised for the smallest number of shares.
Equity Offerings is raising funds by offering ownership in a corporation through the issuing of shares of a corporation’s common or preferred stock.
Exit is the sale or exchange of a significant amount of company ownership for cash, debt, or equity of another company.
Exit Route is the method by which an investor would realize an investment.
Exit Strategy is the way in which a venture capitalist or business owner intends to use to get out of an investment that he/she has made. Exit Strategy is also called liquidity event.
Financier is a person or financial institution engaged in the lending and management of money and makes a living participating in commercial financing activities.
Also known as “par value” or simply “par”, it is the value of a bond, note, mortgage, or other security as given on the certificate or instrument. For stocks, it is the original cost of the stock. For bonds, it is the amount paid to the holder at maturity.
Fair Market Value (FMV)
The price that a property would sell for on the open market. It is the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant facts. Fair market value has two conditions:
1. Prospective buyers and sellers are reasonably knowledgeable about the asset; they are behaving in their own best interests and are free of undue pressure to trade.
2. A reasonable time period is given for the transaction to be completed.
Federal Reserve Act
Federal legislation, enacted in 1913, that established the Federal Reserve System. The Federal Reserve System has many responsibilities, including:
- Conducting America’s monetary policy,
- Supervising and regulating banks and protecting consumers’ credit rights,
- Maintaining the stability of America’s financial system, and
- Providing financial services to the U.S. Government, the public, financial, institutions, and foreign financial institutions.
The Federal Reserve makes loans to commercial banks and is authorized to issue the Federal Reserve notes that make up America’s entire supply of paper money.
Financial Industry Regulatory Authority (FINRA)
The Financial Industry Regulatory Authority, a “self-regulatory organization” (SRO) that is responsible for governing business between brokers, dealers and the investing public. FINRA was the successor regulator following the merger of the National Association of Securities Dealers (NASD) and the New York Stock Exchange’s Regulation Committee.
First Refusal Rights
A negotiated obligation of the company or existing investors to offer shares to the company or other existing investors at the price offered, prior to selling shares to new investors.
First-round financing is the first investment in a company made by external investors.
First Stage Capital
First Stage Capital is the money provided to entrepreneur who has a proven product, to start commercial production and marketing, not covering market expansion, de-risking, acquisition costs.
The act of buying shares in an IPO and selling them immediately for a profit. Brokerage firms underwriting new stock issues tend to discourage flipping, and will often try to allocate shares to investors who intend to hold on to the shares for some time. However, the temptation to flip a new issue once it has risen in price sharply is too irresistible for many investors who have been allocated shares in a hot issue.
Follow-On is a subsequent investment made by an investor who has made a previous investment in the company, generally a later stage investment in comparison to the initial investment.
Redemption of convertible debt, convertible preferred stock, or common stock on pre-specified terms in situations where the company’s value has not appreciated according to the agreed upon plan.
Full ratchet is an investor protection provision which specifies that options and convertible securities may be exercised relative to the lowest price at which securities were issued since the issuance of the option or convertible security. The full ratchet guarantee prevents dilution, since the proportionate ownership would stay the same as when the investment was initially made.
Fund of Funds
Fund of Funds is a mutual fund which invests in other mutual funds. Fund of Funds is an investment vehicle designed to invest in a diversified group of investment funds.
Generally Accepted Accounting Principles (GAAP)
The common set of accounting principles, standards, and procedures that companies use to compile their financial statements. GAAP represents both authoritative standards established by policy boards and commonly accepted ways of recording and reporting accounting information (e.g., based upon the standards prevailing in the U.S. or within any other jurisdiction).
General Partner (GP)
A person, but most frequently a separate legal entity, that serves as a “general partner” of a partnership, which capacity typically entails having full liability for the debts and obligations of the partnership. A partnership formed as a limited partnership is required to have at least one partner with unlimited liability for the debts and obligations of the partnership (see, for example, DRUPLA section 101(9) (“’Limited partnership’ and ‘domestic limited partnership’ mean a partnership formed under the laws of the State of Delaware consisting of 2 or more persons and having 1 or more general partners and 1 or more limited partners, and includes, for all purposes of the laws of the State of Delaware, a limited liability limited partnership.”)). So while a partnership may have more than one General Partner, it only makes sense to have one for private funds, which are commonly controlled by the Investment Adviser.
The movement from public ownership to private ownership of a company’s shares either by the company’s repurchase of shares or through purchases by an outside private investor.
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.
The difference between the public offering price of the security and the price paid by an underwriter to the issuer.
Ground floor is a term used for the first stage of a new venture or investment opportunity.
Growth Capital means a round of financing after the company has reached cash flow break even and is approaching an exit. Also known as mezzanine financing. Venture capital funds which have generally abandoned early stage rounds now focus on less risky “growth” and “mezzanine” financing.
High Water Mark
The historical high peak in value that a Fund’s NAV has achieved. A High Water Mark is typically used to determine net appreciation of a portfolio when investment fees are being determined. In general, if the NAV of an investment portfolio drops in value, then the investment adviser will not earn any further Incentive Fees on that investment portfolio until the NAV exceeds it previous greatest value.
A corporation that owns the securities of another company, in most cases with voting control. A holding company doesn’t have any operations, activities, or other active business of its own. Instead, it owns assets.
The amount of time an investor has held an investment. The period begins on the date of purchase and ends on the date of sale, and determines whether a gain or loss is considered short-term or long-term, for capital gains tax purposes.
A takeover of a company against the wishes of current management and its board of directors. This takeover may be attempted by another company or by a well-financed raider. It is done by going around the company’s shareholders or replacing management with people who will approve the takeover.
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. Usually, to collect incentive fees, the hurdle rate must be exceeded.
Incremental Cost of Capital
Weighted cost of the additional capital raised in a given period. Weighted cost of capital, also called composite cost of capital, is the weighted average of costs applicable to the issues of debt and classes of equity that compose the firm’s capital structure.
Incubator is a company or facility designed to foster entrepreneurship and help startup companies, usually technology-related, to grow through the use of shared resources, management expertise and intellectual capital.
Rate of change in prices. Two primary U.S. indicators of the inflation rate are the consumer price index and the producer price index, which track changes in prices paid by consumers and by producers. The rate can be calculated on an annual, monthly, or other basis.
Rights granting access to company’s information, i.e., inspecting the company books and receiving financial statements, budgets and executive summaries.
The required amount of cash or eligible securities on deposit with a broker before engaging in margin transactions. A margin transaction is one in which the broker extends credit to the customer in a margin account. Under Regulation T of the Federal Reserve Board, the initial margin is currently 50% of the purchase price when buying eligible stock or convertible bonds or 50% of the proceeds of a short sale.
Initial Public Offering (IPO)
The first time sale of a stock of a portfolio company to the public. The IPO process is complicated but it begins with the issuer obtaining assistance, usually from a bank, or underwriter, in determining how many shares to offer, the best price, and best time to make the offering.
Bid or asked quotes between dealers trading for their own inventories. Distinguished from the retail market, where quotes reflect the prices that customers pay to dealers.
Institutional Investors refers mainly to insurance companies, pension funds and investment companies collecting savings and supplying funds to markets but also to other types of institutional wealth like endowment funds, foundations, etc.
A venture’s intangible assets that are protected under law. The general types of intellectual property are patents, copyrights, trade secrets and trademarks/servicemarks. The amount of protection varies from country to country in both term and scope.
Investment Bank is a financial intermediary that performs a variety of services which includes underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients.
Invisible Venture Capital
Invisible venture capital is a venture capital from angel investors.
Initial public offering: Initial Public Offering or IPO is the first sale of stock by a private company to the public. IPOs are often smaller, younger companies seeking capital to expand their business.
Internal Rate of Return or IRR is often used in capital budgeting, it’s the interest rate that makes net present value of all cash flow equal zero. Essentially, IRR is the return that a company would earn if they expanded or invested in themselves, rather than investing that money abroad.
The amount of common shares that a corporation has sold (issued).
The price per share deemed to have been paid for a series of Preferred Stock. This number is important because Cumulative Dividends, the Liquidation Preference and Conversion Ratios are all based on Issue Price. In some cases, it is not the actual price paid. The most common example is where a company does a bridge financing (a common way for investors to provide capital without having to value the Company as a whole) and sells debt that is convertible into the next series of Preferred Stock sold by the Company at a discount to the Issue Price.
A Joint Venture is when two or more companies, leveraging their strengths, work together on a project. The two companies usually have complementary technology and wish to create a product or service that plays to their combined strength.
Jumpstart Our Business Startups Act (JOBS Act)
The Jumpstart Our Business Startups Act or JOBS Act is a law intended to encourage funding of United States small businesses by easing various securities regulations. It passed with bipartisan support, and was signed into law by President Barack Obama on April 5, 2012. Its goal is to promote American entrepreneurship and innovation while maintaining important protections for American investors. Some highlights of the JOBS Act:
- Allowing Small Businesses to Harness “Crowdfunding”: The Internet already has been a tool for fundraising from many thousands of donors. Subject to rulemaking by the U.S. Securities and Exchange Commission (SEC), startups and small businesses will be allowed to raise up to $1 million annually from many small-dollar investors through web-based platforms, democratizing access to capital. Because the Senate acted on a bipartisan amendment, the bill includes key investor protections the President called for, including a requirement that all crowdfunding must occur through platforms that are registered with a self-regulatory organization and regulated by the SEC. In addition, investors’ annual combined investments in crowdfunded securities will be limited based on an income and net worth test.
- Expanding “Mini Public Offerings”: Prior to this legislation, the existing “Regulation A” exemption from certain SEC requirements for small businesses seeking to raise less than $5 million in a public offering was seldom used. The JOBS Act will raise this threshold to $50 million, streamlining the process for smaller innovative companies to raise capital consistent with investor protections.
- Creating an “IPO On-Ramp”: The JOBS Act makes it easier for young, high-growth firms to go public by providing an incubator period for a new class of “Emerging Growth Companies.” During this period, qualifying companies will have time to reach compliance with certain public company disclosure and auditing requirements after their initial public offering (IPO). Any firm that goes public already has up to two years after its IPO to comply with certain Sarbanes-Oxley auditing requirements. The JOBS Act extends that period to a maximum of five years, or less if during the on-ramp period a company achieves $1 billion in gross revenue, $700 million in public float, or issues more than $1 billion in non-convertible debt in the previous three years.
Additionally, the JOBS Act changes some existing limitations on how companies can solicit private investments from “accredited investors,” tasks the SEC with ensuring that companies take reasonable steps to verify that such investors are accredited, and gives companies more flexibility to plan their access to public markets and incentivize employees.
Bond rated at BB or lower. Junk bonds are typically issued by companies without long track records of sales and earnings, or by those with questionable credit strength. They pay a higher yield but are often unpredictable.
Subordinated debt, sometimes deeply subordinated, compensating the holders for their risk with high interest rates and equity kickers … warrants, for example.
Key Man Clause
A contractual clause in a venture capital or PE fund stating that, if a specified number of key named principals cease to devote a specified amount of time to the Partnership, then the “key man” clause provides that the manager of the fund is prohibited from making any further new investments until such a time that new replacement key executives are appointed, with the exception of investments that have been agreed to before the key man clause takes effect.
An economic theory by British economist and government adviser, John Maynard Keynes. In “The General Theory of Employment, Interest and Money,” published in 1935, Keynes argued that, in contrast to Adam Smith’s idea of little government involvement, active government intervention in the marketplace was the only method of ensuring economic growth and stability. He believed that insufficient demand causes unemployment and that excessive demand results in inflation; government should therefore manipulate the level of aggregate demand by adjusting levels of government expenditure and taxation. He believed that to avoid depression increased government spending and easy money was needed, resulting in more investment, higher employment, and increased consumer spending.
Driving stock prices to high levels through manipulative trading methods, such as the creation of artificial trading activity by the buyer and the seller working together and using the same funds.
A fund investment strategy involving financing for the expansion of a company with increasing its sales volume. Later stage funds often provide the financing to help a company a threshold in order to position its shareholders for an exit event, for example, an IPO.
Lead investor is a company’s principal provider of capital, such as the entity which originates and structures a syndicated deal.
Leveraged Buy-Out (LBO)
Leveraged Buy-out or LBO is an acquisition of a business using mostly debt and a small amount of equity. The debt is secured by the assets of the business. In LBO, the acquiring company uses its own assets as collateral for the loan in hopes that the future cash flows will cover the loan payments.
This terms applies to firms that provide a reasonable living for their founders, rather than incurring the risks associated with high growth. These types of firms usually have modest revenue and annual growth rate projections. The founders resist an exit … trade sale … because it deprives them of their lifestyle.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a business structure providing limited liability to the owners, but is taxed as a partnership.
Owners of an LLC are called members. (Most states do not restrict ownership, and so members may include individuals, corporations, other LLCs and foreign entities. There is no maximum number of members.) Most states permit “single-member” LLCs, for those having only one owner.
A few types of businesses generally cannot be LLCs, such as banks and insurance companies.
Limited partnership is a business organization with one or more general partners, who manage the business and assume legal debts and obligations and one or more limited partners, who are liable only to the extent of their investments. Limited partnership is the legal structure used by most venture and private equity funds. Limited partners also enjoy rights to the partnership’s cash flow, but are not liable for company obligations.
Liquidation is the sale of the assets of a portfolio company to one or more acquirers when venture capital investors receive some of the proceeds of the sale.
Liquidity preference is the right to receive a specific value for the stock if the business is liquidated.
Liquidity event is the way in which an investor plans to close out an investment. Liquidity event is also known as exit strategy.
Lock-Up Period is the period an investor must wait before selling or trading company shares subsequent to an exit, usually in an initial public offering the lock-up period is determined by the underwriters.
A shareholder who controls more than half (51%) of the outstanding shares in a corporation. The majority shareholders need not be an individual, but can also be an affiliated group of shareholders.
Management Buy-In (MBI)
Management Buy-in or MBI is the purchase of a business by an outside team of managers who have found financial backers and plan to manage the business actively themselves.
Management Buy-Out (MBO)
Management Buy-out or MBO is the term used for the funds provided to enable operating management to acquire a product line or business, which may be at any stage of development, from either a public or private company.
The collateral value that must be maintained when borrowing money using securities or some other asset that fluctuates in value as collateral for the loan. If the value of the collateral falls below the lender’s margin requirement, the borrower will generally be required to provide additional collateral. When the margin is low relative to the size of the borrowing, the borrower is said to be highly leveraged.
The total dollar value of all outstanding shares that is 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.
An accounting rule FASB 157 that requires companies to value assets at prices determined in the marketplace. Mark-to-Market gives a realistic appraisal of a company’s financial situation. In practice, a variety of issues surround the application of mark-to-market accounting, such as what to do when the market is inactive, unstable, or nonexistent.
Master Limited Partnership
Master limited partnership or MLP is a limited partnership that is publicly traded. MLP combines the tax benefits of a limited partnership with the liquidity of publicly traded securities.
Combination of two or more corporations. The goal is greater efficiency by the elimination of duplication of staff and production. It is usually followed by the reallocation of capital assets to increase sales and profits in the enlarged company. It is accomplished by offering the stockholders of one company stock in acquiring company in exchange for surrendering their stock.
Mezzanine debts are debts that incorporates equity-based options, such as warrants, with a lower-priority debt. Mezzanine debt is actually closer to equity than debt, in that the debt is usually only of importance in the event of bankruptcy. Mezzanine debt is often used to finance acquisitions and buyouts, where it can be used to prioritize new owners ahead of existing owners in the event that a bankruptcy occurs.
Mezzanine Financing is a late-stage venture capital, usually the final round of financing prior to an IPO. Mezzanine Financing is for a company expecting to go public usually within 6 to 12 months, usually so structured to be repaid from proceeds of a public offerings, or to establish floor price for public offer.
Mezzanine level is a term used to describe a company which is somewhere between startup and IPO. Venture capital committed at mezzanine level usually has less risk but less potential appreciation than at the startup level, and more risk but more potential appreciation than in an IPO.
A broad definition of companies and firms which are between early stage vs. Fortune 500
Minority enterprise small business investment companies (MESBICS)
Minority Enterprise Small Business Investment Companies or MESBICS are government-chartered venture firms that can invest only in companies that are at least 51 percent owned by members of a minority group or persons recognized by the rules that govern MESBICs.
Mortgage Backed Security (MBS)
A security backed by a pool of mortgages. Investors in the security receive payments derived from interest and principal on the underlying mortgages, similar to coupon payments.
An open-end mutual fund, a public requested investment company (RIC), sells as many shares as investor demand requires. It pools money from investors and purchases securities. As money comes into the fund, the fund grows. If money flows out of the fund, the number of the fund’s outstanding shares drops. Mutual funds are regulated by the SEC, where the funds are registered. Mutual funds are classified by their type of investments. The four largest categories of funds are money market funds, bond or fixed income funds, stock or equity funds and hybrid funds. Funds may also be categorized as index or actively-managed. In order to sell shares an investor usually sells the shares back to the fund. If an investor wishes to buy additional shares in a mutual fund, the investor must buy newly issued shares directly from the fund.
National Venture Capital Association (NVCA)
The NCVA is the trade association for venture capitalists. According to the NCVA, its mission is to “empower its members and the entrepreneurs they fund by advocating for policies that encourage innovation and reward long-term investment … [and to] serve as the definitive resource for venture capital data and unite its 400 plus members through a full range of professional services.” (http://www.nvca.org/)
Negative Cash Flow
In a given accounting period, a business spends more cash that what it takes in.
The borrower owes more than the property is worth because the borrower’s mortgage principal is greater than the value of the property that is securing the mortgage.
Negative Working Capital
Current liabilities exceed current assets
Net Asset Value (NAV)
Refers to the amount by which the value of all of the assets of a fund exceeds all debt and liabilities of the fund. The value of assets and liabilities can be determined in accordance with GAAP or other accounting or valuation metrics. This is sometimes the same as the book value of a business. NAV represents the total equity of the firm; if divided by the number of outstanding shares it is the net asset value per share of the business. Mutual funds generally must calculate their NAV at least once every business day, typically after the major U.S. exchanges close. A closed-end fund, whose shares generally are not “redeemable”—that is, not required to be repurchased by the fund—is not subject to this requirement. The share price of a mutual fund is based on its NAV. That is, the price that investors pay to purchase mutual fund is the approximate per share NAV, plus any fees that the fund imposes at purchase (such as sales loads or purchase fees). The price that investors receive on redemptions is the approximate per share NAV at redemption, minus any fees that the fund deducts at that time (such as deferred sales loads or redemption fees).
The net revenues of a corporation after deducting all costs of selling, administration, depreciation, interest expense, and taxes. It is used synonymously with profit, however, net income is precisely defined accounting term, whereas profit can have several meanings, i.e., gross profit or profit before tax. The net income is a measure of how profitable the company has been over a period of time.
Net Present Value (NPV)
NPV compares the value of the dollar today versus the value of that same dollar in the future after taking inflation and return into account. A positive NPV means an investment is acceptable. It is calculated by taking the present value of cash inflow and subtracting them from the present value of cash outflows using a given discount rate.
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. Non-compete clauses are governed by state law. The purpose of the clause is the fear that an former will gain competitive advantage by abusing confidential information about their former employer’s operations or trade secrets, or sensitive information such as customer/client lists, business practices, upcoming products, and marketing plans.
Non-Disclosure Agreement (NDA)
If a person has an unpatented idea, a non-disclosure agreement or confidentiality agreement is typically used. It is a form of protection for the person with the unpatented idea since with a signed NDA, a third party, to whom you show your idea, is retracted from revealing any information, except under the terms of the agreement, about your idea. An NDA also prevents a third party from marketing the idea on their own or competing with you. Without a signed NDA, a meeting about your idea would be a public disclosure.
A loan that is secured by a pledge of collateral (such as the borrower’s house or other property), for which the lender agrees to rely solely on the collateral if the borrower fails to make the required payments of principal and interest. The lender has no recourse to other assets of the borrower and cannot insist on any further compensation, even if the lender does not receive the full amount of the loan from the value of the collateral. The borrower can fulfill the obligation to repay the loan by surrendering the collateral.
Corporate securities that do not give the holder a right to vote on corporate resolutions or the election of directors. This type of stock is often issued in connection with a takeover attempt, when management creates nonvoting shares to dilute the target firm’s equity and thereby discourage the merger attempt.
Documents evidencing a private-placement transaction. They include some combination of a purchase agreement and/or subscription agreement, warrants, registration-rights agreement, invest or rights agreement, investor questionnaire, and other documents required by the particular deal.
Open Market Operations
Open market operations are one of three basic tools used by the Federal Reserve to reach its monetary policy objectives. The other tools are changing the terms and conditions for borrowing at the discount window and adjusting reserve requirement ratios. The execution of OMOs in the “open market”—also known as the secondary market for securities purchases—is the Federal Reserve’s most flexible means of carrying out its objectives. By adjusting the level of reserve balances in the banking system through open market operations, the Fed can offset or support permanent, seasonal or cyclical shifts in the supply of reserve balances and thereby affect short-term interest rates and, by extension, other interest rates.
Over-the-Counter Market (OTC)
A negotiated market for securities made up of dealers who may or may not be members of a formal securities exchange such as NYSE, which is an auction market. It is trading directly between two parties. OTC trades are usually for small companies that are not listed on the big exchanges.
A stock whose current price is not justified by the earnings outlook, the PE ratio, or other fundamentals. It is expected that the stock will drop in price to a level more in line with its PE ratio.
Owner-employee is a sole proprietor or any individual who has ownership of at least one-fifth of the capital and/or profits associated with a given venture.
The amount of capital raised in a financing round. It is the amount a corporation receives, from both common and preferred stock, when it issues its shares.
Paper Profit or Loss
Unrealized capital gain or capital loss in an investment. Paper profits and losses are calculated by comparing the current market prices of a security to the price that it was originally bought. These profits or losses are realized only when the securities are sold.
Pareto’s Distribution (The 80-20 Rule) is an observation that, for any situation 80% of the effects, come from 20% of the causes. With income distribution it states that income distribution is constant, regardless of any tax or welfare policies, i.e., 20 percent of the people own 80 percent of the wealth. The value of this principle is as a reminder to focus on the 20 percent that is important.
Pari-passu is a latin term that means “of equal footing.”
Percentage of a firm’s profits that is paid out to shareholders in the form of dividends.
Payment Ratio = Dividends Per Share / Earnings Per Share
A way to generate tax deferred earnings. A corporation, labor union, or a government sets up a fund to pay pension benefits to workers. Since the amount that pensions invest in the economy is so large, i.e., in the billions annually, they are a major factor in the balance of the markets.
A warrant, with no expiration date, giving the holder the right to buy a specified number of common shares of stock at a stipulated price. The warrant will remain in effect until exercised.
PIPE or Private Investment in Public Equity (PIPE) or Private Investment in Public Equity
Is a term used when a private investment or mutual fund buys common stock for a company at a discount to the current market value per share.
Pipeline is the flow of upcoming underwriting deals.
Pitch is the set of activities intended to persuade someone to buy a product or take a specific course of action.
A company that specializes in finding institutional investors that are willing and able to invest in a company. Sometimes the company or “issuer” will hire a placement agent so the fund partners can focus on management issues rather than on raising capital. In the U.S., these companies are regulated by FINRA and the SEC.
Pooled Investment Vehicle (PIV)
A mutual fund or a pension fund that pools various investors’ capital and invests it according to a specific investment strategy. The investors know what is being invested in; by contrast, in a blind pool none of the investors are aware of the strategy.
A portfolio company is a company or entity in which a venture capital firm or buyout firm invests. All of the companies currently backed by a private equity firm can be spoken of as the firm?s portfolio.
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.
A shareholder’s right to acquire an amount of shares in a future offering at current prices per share paid by new investors, whereby his/her percentage ownership remains the same as before the offering. Its purpose is to protect shareholders from dilution of value and control when new shares are issued.
Shares of a firm that give preferential rights over common shares, such as the first right to dividends and any capital payments or liquidations; the dividends are typically fixed, whereas common stock dividends are not.
A dividend accruing on preferred shares payable when declared and superior in right of payment to common dividends. Preferred dividends have a priority over dividends on common shares.
A offer to acquire a position in a company’s stock by offering holders a premium over the market value of their shares. The purpose is control and not investment.
The valuation of a company prior to a round of investment.
Present Value (PV)
The current value, given a specified rate of return, of a future sum of money or cash flows. In other words, $1,000 today is worth more than $1,000 five years from now because if you invest the money now you can receive interest for the five years. The higher the discount rate, the lower the present value of the future cash flows.
Price/Earnings Ratio (PE)
The price of a stock divided by its earnings per share. The price/earnings ratio gives investors an indication of how much the market will pay for a company’s earning power. The higher the PE, the more investors are paying, and therefore the more earnings growth they are expecting. A lower PE could mean the stock has been missed by the market, but is very valuable.
P/E = Stock Price/EPS
Private equities are equity securities of unlisted companies. Private equities are generally illiquid and thought of as a long-term investment. Private equity investments are not subject to the same high level of government regulation as stock offerings to the general public. Private equity is also far less liquid than publicly traded stock.
Private Limited Partnership
Private limited partnership is a limited partnership having no more than 35 limited partners and thus able to avoid SEC registration.
Private placement is a term used specifically to denote a private investment in a company that is publicly held. Private equity firms that invest in publicly traded companies sometimes use the acronym PIPEs to describe the activity. Private placements do not have to be registered with organizations such as the SEC because no public offering is involved.
Private securities are securities that are not registered and do not trade on an exchange. The price per share is set through negotiation between the buyer and the seller or issuer.
A segment of a business organization that is responsible for producing profits on its own. The advantage of profit centers is that is allows management to evaluate the profitability of each unit or business activity.
A statement of certain information once certain events have occured. A pro forma cap table assumes all the shares on offer have in fact been issued.
A binding contract whereby one party, the maker, makes a promise in the note, to pay a sum of money to the payee or holder on demand, or at a specific future time. A generic term for notes by borrowers to lenders.
A formal written offer to sell securities publicly that provides an investor with the necessary information to make an informed decision, based on the issuer’s registration statement filed with the SEC. 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 are required to issue prospectuses describing their history, investment philosophy or objectives, risk factors and financial statements.
A document the Securities and Exchange Commission requires be provided to public shareholders before they vote by proxy on company matters. The purpose of a proxy statement is so the shareholders can make informed decisions before they vote on matters at a shareholder meeting.
An offering, of new securities, to the investing public after registration requirements of the Securities and Exchange Commission have been complied with. The purpose of a public offering is usually to raise capital for business expansion. Public offerings are usually offered by investment banks acting as underwriters.
A feature of some preferred stock and bond indentures requiring the issuer to use its best efforts to purchase a specified number of shares or bonds annually at a price not to exceed par value if they fall below a stipulated price.
Qualified Professional Asset Manager (QPAM)
Qualified professional asset manager is a registered investment adviser (RIA) that helps pension plans and similar entities make investments. The criteria to qualify as a QPAM is controlled by Employee Retirement Income Security Act (ERISA). Typically, RIAs must have at least $85 million of assets under management and at least $1 million of partners’ or shareholders’ equity. QPAMs usually represent pension plans looking to invest in private placements.
A corporation that is operated privately but is backed by a branch of government and has a public mandate to provide a given service. Two examples are: the Federal National Mortgage Association (Fannie Mae), which was founded to encourage growth in the secondary mortgage market; and the Student Loan Marketing Association (Sallie Mae), which was started to encourage the growth of a secondary market for student loans. The most typical scenario is that the quasi-public corporation began as a government agency but over time has become private.
A minimum number of people who must be present at a meeting to transact business legally, usually a majority. A quorum may be required at a board of directors, committee, shareholder, legislative, or other meeting for any decisions to have legal standing.
Raising Capital refers to obtaining capital from investors or venture capital sources.
Recapitalization is a financing technique used by companies to defend against hostile takeovers. By recapitalization, a company restructures it’s debt and equity mixture without affecting the total amount of balance sheet equity.
A fee typically calculated as a percentage of the proceeds from a redemption that is paid to the hedge fund in lieu of the imposition of a lock-up period. It is used to prevent short term trading.
A preliminary prospectus. It is called a “Red Herring” because of the red SEC required legend on the cover. The red herring is a rough draft of the company’s prospectus and includes a description of a new issue of stock and any risk factors.
Registered Investment Adviser (RIA)
Refers to an Investment Adviser registered with the SEC pursuant to the Advisers Act.
The Investment Advisers Act of 1940 describes a RIA as “person or firm that, for compensation, is engaged in the act of providing advice, making recommendations, issuing reports or furnishing analyses on securities, either directly or through publications.”
A registered offering is a public offering of securities registered with the SEC.
The ’33 Act requires that a registration statement be filed in conjunction with public securities offerings. This document includes operational and financial information about the company, the management and the purpose of the offering. The registration statement and the prospectus are often referred to interchangeably. Technically, the SEC does not “approve” the disclosures in prospectuses.
Resyndication Limited Partnership
Resyndication Limited Partnership is a limited partnership in which existing properties are sold to new limited partners, so that they can receive the tax advantages that are no longer available to the old partners.
Return on investment (ROI)
Return On Investment or ROI is the profit or loss resulting from an investment transaction, usually expressed as an annual percentage return. ROI is a return ratio that compares the net benefits of a project verses its total costs.
Right of First Refusal (ROFR)
The right of first refusal (ROFR) gives the holder the right to meet any other offer before the proposed contract is accepted. If the holder of the right does not enter into an agreement, the company can open the bidding up to others.
Issuance of “rights” to current shareholders allowing them to purchase additional shares before the shares are issued to fund parties.
Risk is the quantifiable likelihood of loss or less-than-expected returns. Risk includes the possibility of losing some or all of the original investment. Risk is usually measured using the historical returns or average returns for a specific investment.
Risk capital are funds made available for startup firms and small businesses with exceptional growth potential.
Round of Funding
Round of funding is the stage of financing a start-up company is in. The usual progression is from startup to first round to mezzanine to pre-IPO.
A corporation that limits its ownership structure to 100 shareholders and disallows certain types of shareholders (e.g., partnerships cannot hold shares in a S corporation.) An S corporation does not pay taxes, rather, similar to a partnership, its owners pay taxes on their proportion of the corporation’s profits at their individual tax rates.
After securities are traded in the primary market, they are traded in the secondary market. Most trading occurs in the secondary market. The secondary market allows investors to purchase securities for other investors, instead of from a company. This is done, sometimes, so investors can raise cash to meet obligations for investing capital.
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.
Secondary Public Offering
Secondary Public Offering refers to a public offering subsequent to an initial public offering. A secondary public offering can be either an issuer offering or an offering by a group that has purchased the issuer’s securities in the public markets.
Secondary Purchase is purchase of stock in a company from a shareholder rather than purchasing stock directly from the company.
Second Stage Capital
Second Stage Capital is the capital provided to expand marketing and meet growing working capital need of an enterprise that has commenced production but does not have positive cash flows sufficient to take care of its growing needs.
Seed Capital is the money used to purchase equity-based interest in a new or existing company. This seed capital is usually quite small because the venture is still in the idea or conceptual stage.
Debt that is given a priority before other debt in terms of claims if the issuer goes bankrupt. If the issuer goes bankrupt, senior debt must be repaid before other creditors receive any payment. Senior debt is often secured by collateral on which the lender has a first lien.
Series a Preferred Stock
Series A Preferred Stock is the first round of stock offered during the seed or early stage round by a portfolio company to the venture capitalist. Series A preferred stock is convertible into common stock in certain cases such as an IPO or the sale of the company. Later rounds of preferred stock in a private company are called Series B, Series C and so on.
A corporation with no assets and no business. The remains of public companies, shells used for … i.e. reverse IPOs/ going public by merging into a public shell, a truncated process.
The selling of a stock or another security that is not owned by the seller. In effect, the seller is betting that the price of the security will fall. The assumption is that the short seller, will be able to buy the stock at a lower price than they sold it for.
A silent partner is an investor who does not have any management responsibilities but provides capital and shares liability for any losses experienced by the entity. Silent partners are liable for in any losses up to the amount of their invested capital and participate in any tax and cash flow benefits.
Small Business Investment Companies
SBIC: Small Business Investment Companies or SBIC are lending and investment firms that are licensed and regulated by the Small Business Administration . The licensing enables them to borrow from the federal government to supplement the private funds of their investors. SBICs prefer investments between $100,000 to $250,000 and have much more generous underwriting guidelines than a venture capital firm.
Companies, spun out of an academic complex, which have been founded to exploit science and tech developed in the Center’s labs and in which the Center retains an interest.
Startup is a new business venture in its earliest stage of development.
The traditional method of voting for members of the Board of Directors of a corporation. Under this method, a shareholder receives one vote for each share and may cast those votes for each of the directorships. For example: An individual owning 100 shares of stock of a corporation that is electing six directors could cast 100 votes for each of the six candidates. The contrast is cumulative voting. The shareholder must vote for a different candidate for each available seat.
Contracts that allow the owners to buy or sell a stock at a specific price before it expires. Options are a popular investment medium, offering an opportunity to hedge positions in other securities, to speculate on stocks with relatively little investment, and to capitalize on changes in the market value of options contracts themselves through a variety of options strategies.
A widely used form of employee incentive and compensation. The employee is given an option to purchase its shares at a certain price (at the market price at the time the option is granted) for a specified period of years.
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. They are often accredited customers of the issuer.
Ownership of shares in a company resulting from work rather than investment of capital—usually founders receive “sweat equity.”
Syndication is the process whereby a group of venture capitalists will each put in a portion of the amount of money needed to finance a small business.
It is the risk that applies to the entire market and not just one company. This type of risk has can have a chain reaction in the economy as more and more sectors are affected. Since systemic risk often comes from the economy, political action, or changes in interest rates, among other things, they can’t be avoided but they can possibly be minimized by shifting investments to markets that are not as strongly affected.
Tag-Along Rights/Rights of Co-Sale
This right assures that if the majority shareholder sells his stake, minority holders have the right to sell their stake on the same terms and conditions as apply to the majority shareholder. Tag-along rights are fairly standard terms in shareholders agreements.
A target multiple is the maximum multiple of the original investment that you could pay, given value drivers, and receive a desired return on your investment. The desired multiple is when the NPV is zero, in other words, the reciprocal of the internal rate of return: 1/IRR.
Types of business combinations in which the selling shareholders do not incur tax liabilities. The transaction must meet strict statutory and nonstatutory requirements. To qualify as a tax-free reorganization, stock of the buyer generally must be used as a significant portion of the consideration. Tax is generally deferred rather than eliminated, because the basis of stock or assets received in a tax-free reorganization generally is a carryover basis.
Term sheet is a non-binding agreement setting forth the basic terms and conditions under which an investment will be made. The term sheet is a template that is used to develop more detailed legal documents.
Third Stage Capital
Third Stage Capital is the capital provided to an enterprise that has established commercial production and basic marketing set-up, typically for market expansion, acquisitions, product development, etc.
Agreement between the Company, the debt holders, and the trustee for the debt holders. Required for registered offerings of debt securities.
Turnaround is the term used when the poor performance of a company or the business experiences a positive reversal.
Underwriter is an investment banking firm committing successful distribution of a public issue, failing which the firm would take the securities being offered into its own books. An underwriter may also be a company that backs the issue of a contract, agreeing to accept responsibility for fulfilling the contract in return for a premium.
Private or public offering of securities in groups of more than one security. Most often a share of stock and warrant to purchase some number of shares of stock, but could be two shares of stock, a note and a share of stock, etc. Also used in some cases to refer to the sale of LP and LLC interests, since those interests are composed of more than one right.
Venture is often use for referring to a risky start-up or enterprise company.
Venture Capital is the money and resources made available to startup firms and small businesses with exceptional growth potential. Most venture capital money comes from an organized group of wealthy investors.
Venture Capital Firm
Venture Capital Firm is an investment company that invests its shareholders’ money in startups and other risky but potentially very profitable ventures.
Venture Capital Funds
Venture capital funds pool and manage money from investors seeking private equity stakes in small and medium-size enterprises with strong growth potential.
Venture Capitalist is a term used of an investor who provides capital to either start-up ventures or support small companies who wish to expand but do not have access to public funding.
Venture Capital Limited Partnership
Venture Capital Limited Partnership is a limited partnership which is formed to invest in small startup businesses with exceptional growth potential.
Timetables for stock grants and options mandating that entrepreneurs earn (vest) their equity stakes over a number of years. This format seeks to provide comfort to investors and the market that the entrepreneurs will stick around, rather than converting and cashing in their shares upon receipt.
For example, if stock and options vest over four years–it means that you have to be associated with the company for four years to own all of your stock or options. If you voluntarily leave the company before the four years are up, then a vesting formula applies and you only get a percentage of your stock
Vulture Capitalist is a slang word for a venture capitalist who deprives an inventor of control over their own innovations and most of the money they should have made from the invention.
A financing round whereby previous investors, the founders, and management suffer significant dilution. Often as a result of a washout round, the new investors gains majority ownership and control of the company. Also known as burn-out or cram-down rounds.
Weighted Average Anti-dilution
The investor’s conversion price is reduced, and thus the number of common shares received on conversion increased, in the case of a down round; it takes into account both: (a) the reduced price and, (b) how many shares (or rights) are issued in the dilutive financing.
The equation is:
CP2 = CP1 * (A+B) / (A+C), where:
CP2 = New Series A Conversion Price
CP1 = Series A Conversion Price in effect immediately prior to new issue
A = Number of shares of Common Stock deemed to be outstanding immediately prior to new issue (includes all shares of outstanding common stock, all shares of outstanding preferred stock on an as-converted basis, and all outstanding options on an as-exercised basis; and does not include any convertible securities converting into this round of financing)
B = Aggregate consideration received by the Corporation with respect to the new issue divided by CP1
C = Number of shares of stock issued in the subject transaction
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.
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.