Venture Capital Glossary
In this VC Glossary, we translate some commonly used but still sometimes obscure venture capital jargon to plain English. Should you come across any terms you think are important but you cannot find in this list, let us know and we’ll be happy to add them.
Acquisition
The terms merger and acquisition mean slightly different things but often used interchangeably. When one company takes over another company and clearly establishes itself as the new owner, the transaction is called an acquisition. A merger happens when two firms, often of about the same size, agree to go forward as a single new company. M&A means Mergers and Acquisitions.
ACCREDITED INVESTOR
An individual or institution that meets certain wealth criteria (as defined regulators), and is therefore deemed to be sophisticated enough to participate in private, non-public investments.
ADVERSE CHANGE REDEMPTION
A right of a shareholder that requires the company to redeem a class of securities in the event the company experiences a material adverse change to its prospects, business or financial condition. This is a negotiated right that you expect to see in down economic cycles where investors tend to have more bargaining power than the companies seeking to raise capital. Startups should seek to avoid such a provision when negotiating a funding round for a variety of reasons, including the vagueness of the "material adverse change" trigger.
ALTERNATIVE ASSET CLASS
Asset classes that deviate from standard, publically traded debt and equity securities. Alternative asset classes include venture capital, hedge funds, real estate, and commodities. Typically, these assets are not highly correlated to typical equity and debt markets, and may provide diversification to investors.
ALTERNATIVE MINIMUM TAX (AMT)
Cap on the amount of income deduction that can be claimed in an income tax filing, which is filed using IRS Form 6251. Certain forms of deduction, including Incentive Stock Options, are always subject to the Alternative Minimum Tax, while income tax filings that claim an excess of deductions may be entirely subjected to the Alternative Minimum Tax.
ANGEL INVESTOR
Wealthy individuals that invest in startups in their early stages of development or seed round of fundraising. Due to the inherent risk of loss of capital or significant dilution in subsequent fundraising, angel investors typically pursue investments with returns that they believe may have the potential to return multiples of the initial investment.
ANTI-DILUTION CLAUSE
Contractual clause that protects an investor from having their investment as a percentage of ownership significantly reduced in subsequent rounds of fundraising. The method of total protection from dilution is called a Full Ratchet, and ensures that should a fundraising round cause a previous investor's ownership percentage to decrease as a result of newly issued shares, they will be given the opportunity to maintain their ownership level.
Anti-dilution
Protection from the dilution created by a future funding round, especially the extra dilution created by a down round. Typically protecting investors either by issuing them additional shares in future funding rounds or by lowering the conversion price for their preferred shares.
AS-CONVERTED BASIS
Considering a class of securities under the assumption that all of the that class has converted into another class of securities. In the venture context, this is usually with respect to preferred stock, which converts into common stock automatically in some instances and at the election of the preferred stock holder in others. Preferred stock often votes on matters on an "as-converted basis".
AUM
Assets Under Management, sometime Funds Under Management: the total amount of money a VC team is managing. Includes all the funds they are still working with, also the full original size of some very old funds that are no more making new investments, just waiting to liquidate the last few remaining portfolio companies. A more relevant figure is often Dry Powder: the amount of money left for new investments in current funds. Dry Powder can be further divided to money available for totally new investments and money reserved for follow on investment to existing portfolio companies.
BLENDED PREFERENCES
When all classes of preferred stock have equal payment rights in the event of a liquidation
BOOTSTRAPPING
Business strategy by which a startup self-finances, eliminating the need for seed or angel investment. Typically achieved through lean operation and a product that generates revenue early in the companies life cycle.
Bridge Loan
Bridge Loans are short term loans to fund the operations until a more comprehensive longer-term financing is available. In Venture Capital, the need for a bridge loan typically arises when a company runs out of cash before it has enough new track record to close a new funding round with reasonable terms; bride loan creates more runway for negotiating the next funding round.
Business Angel
Individuals that provide funding to seed or early stage companies. Business angels can usually add value through their contacts and expertise.
Buyout Fund
Leveraged buyout funds typically acquire controlling stakes of mature, cash flow stable companies. To finance these transactions, they will use a combination of debt (bank and term loans and subordinated or mezzanine debt) and equity. That means these Private Equity (PE) firms buy companies using a little of their own money and a lot of borrowed money.
Cap Table
A document that shows the capital structure of a company. Generally used to view the ownership of each shareholder and option-holder. After several funding rounds, a company might have a fairly complex cap table with multiple share classes having very distinct rights regarding liquidation preference etc.
Capital Under Management
Also Assets Under Management (AUM), sometime Funds Under Management: the total amount of money a VC team is managing. Includes all the funds they are still working with, also the full original size of some very old funds that are no more making new investments, just waiting to liquidate the last few remaining portfolio companies. A more relevant figure is often Dry Powder: the amount of money left for new investments in current funds. Dry Powder can be further divided to money available for totally new investments and money reserved for follow on investment to existing portfolio companies.
Carried Interest (Carry)
Most VC firms have a business model that consists of three elements:
1. Management fee – An annual fee (typically 2+% of the fund size) covering the daily operations of portfolio management but does not generate any substantial profit for the VC firm.
2. Carried Interest – Profit of a VC fund (i.e. returns in excess of the original investments and other costs) is typically divided between the Limited Partners and the VC firm in an 80/20 split. Additionally, most funds have a hurdle rate, an internal rate of return (IRR) the VC firm must deliver to LPs before starting to receive any profit. Hurdle rates are typically around 7-8%.
3. Investment to the fund – Investors typically insists the VC firm to co-invest substantial amount capital into the fund. By having some real skin in the game and sharing also the risk element in the business, the VC team has more aligned incentives with the investors.
This model tries to balance the need to generate good returns for the investors of the VC fund (often called “Limited Partners” or “LPs”) and the necessity for the VC firm to cover its operational expenses. See the blog entry Why VC’s Seek 10x Returns for more on the VC firm business model and how it relates to the investment strategy.
Cliff
Employee stock agreements have often a cliff, usually one year, before the employee stock options start vesting. Option holders may only exercise an option after it has vested but before the specified expiry date. Other possible vesting requirements typically give the employee an incentive to perform well and remain with the company for longer period.
Closing
The final event to complete a transaction (investment, merger, acquisition) at which time all the legal documents are signed and the funds are transferred. In very complex transactions the signing and closing can be two totally separate phases. After signing there might be still several steps (such as board approvals, money transfers, etc.) to be completed by all parties before the transaction truly closes.
Common Stock
Common stock or common shares: typically issued to founders, management, and employees. Preferred stock or preferred shares: typically offered for the investors of a company. Preferred stock is usually convertible into common stock in certain cases such as an IPO or the sale of the company. In a liquidation event, preferred shares generally take priority over common shares. Later rounds of preferred stock are called Series B, Series C and so on.
Corporate Venture Capital
Corporate venture capital (CVC) is a subset of venture capital. CVC entails a corporation making systematic investments into startup companies by taking an equity stake in an innovative startup somehow related to the company’s own industry and potential future roadmap. The CVC may also offer synergies, network and other support that a regular VC may not bring to the table
Dilution
Generally speaking, as a new financing rounds occur, existing investors will own proportionally less of the company than they did previously: their ownership is diluted. Dilution is not necessarily a bad thing: since new stock can be issued at a higher price, you may own a smaller piece of a larger company, which means the value of your investment is actually higher than it was previously.
Down Round
A funding round in which the company is valued at a lower value per share compared to previous round. A down round creates naturally more dilution than up rounds, i.e. funding rounds where value per share is higher than previous round. Flat round – the valuation is same with the previous round.
Drag-Along Right
Drag-Along Right is a common demand of venture capitalists: when certain shareholders (or shareholders representing a defined minimum percentage of the total number of shares) agree to sell their shares, the rest of the shareholders are forced to go along and sell their shares as well. Compare to Tag-Along Right: the right of a minority shareholder to sell the shares with same terms as a majority shareholder, also known as co-sale right.
Dry Powder
The amount of money a VC fund has available for new investments. Can be further divided to a) money available for totally new investments and b) money reserved for follow on investment to existing portfolio companies.
Due Diligence
The business equivalent of a full-body search. The company hands over a business plan, financials, team information, and more to the VC team considering an investment.
Earnings before interest and taxes (EBIT)
A measurement of the operating profit of the company. (An alternative measurement is EBIDA = Earnings Before Interest, Depreciation and Amortization)
EBIT Multiple
A valuation methodology based on a comparison of private and public companies’ value as a multiple of Earnings Before Interest and Taxes (EBIT). Revenue multiple is usually used for valuing a company when it’s not profitable yet.
Employee Stock Ownership Program (ESOP or SOP)
Also called Employee Stock Option Pool. A pool of options that is reserved for employee compensation. The path from start-up to real success is typically long and a lot of talent is needed. Option pool is used to both attract new talent and keep the existing stars on board and motivated.
Exercise Price (also Strike Price)
The amount that must be paid to execute options i.e. convert options to shares. Generally, in US the exercise price is based on “Fair Market Value” when issued, rather than the vesting date. The differences in taxation and regulation is remarkable between countries and has great impact on the proper and efficient use options.
Exit
The sale or exchange of a significant amount of company ownership for cash, debt, or equity of another company. VC funds typically invests in companies with a clear fairly short term exit target in mind. If you are not ready to sell your company within few years you should not consider VC funding either…
EXERCISE PRICE (ALSO KNOWN AS STRIKE PRICE)
The amount that must be paid to execute your options. Generally, the exercise price is pegged to the "Fair Market Value" on the date of issuance, rather than the vesting date.
EXIT EVENT OR LIQUIDITY EVENT
When an issuer engages in a transaction that allows investors to sell their shares, which generally happens through a tender offer (sale) or an IPO.
External Round
A round of financing including new independent investors with significant investments. Compare to Insider Round – a round of financing entirely composed of existing investors.
Fair Market Value
The value of a company based on what investors are willing to pay for it. For private companies (not traded publicly), fair market value is generally derived from comparable companies, either public companies or private companies that have recently had a transaction associated with them. A recent funding round executed can also give good advice on the fair market value, especially if the round included new independent investors with significant investments.
FRIENDS AND FAMILY ROUND
Capital provided by the friends and family of founders of an early stage startup. This is typically its first outside capital. The startup is generally too early (often still at ideation) to raise capital from professional angel or seed investors, but needs capital to get started.
Follow-On Investment
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.
Fully diluted
Ownership of the company based on the total number of shares outstanding when all possible sources of new shares (convertible loans, options, warrants) are taken into account.
FULLY DILUTED SHARES OUTSTANDING
The total number of shares that would be outstanding if all possible sources of conversion (convertible bonds and stock options) were exercised.
Fund of Funds (FoF)
An investment vehicle designed to invest in group of investment funds. Some Fund of Funds are specializing in VC funds only, a more typical strategy is to distribute the investment to a fairly diversified group of VC and other PE funds.
General Partner (GP)
VC funds are typically structured as limited partnerships having one General Partner (a company run by the VC team and managing the investments) and several Limited Partners (LPs, the investors of the VC fund). The key team members of the VC team are also typically called General Partners.
GENERAL SOLICITATION
The act of publically soliciting investors, usually through advertising or any other non-controlled method of a public offering. If a company or issuer engages in public solicitation, it may eliminate certain safe harbors that were previously afforded to them under current securities regulation.
GOLDEN HANDCUFFS
Financial incentives that discourage founders and early employees from leaving a company before certain dates or milestones. Often found in an acquisition scenario, an example would be a cash or equity payout by an acquiring company that is earned over time.
GROSS MARGIN
The difference between revenue and cost of goods sold (COGS), divided by revenue.
GROWTH EQUITY
Growth Equity refers to private investments in late-stage companies which aim to finance revenue growth through market expansion. Such investments typically target minority positions in proven market segment leaders
ICO
An initial coin offering (ICO) is a crowdfunding project using cryptocurrency. In an ICO, a company (or other organization) releases some quantity of a new cryptocurrency (typically using Ethereum blockchain technology) to investors. ICOs can be used for a wide range of activities, ranging from corporate finance, to charitable fundraising, to outright fraud. In a typical ICO, the new currency can be used within the ecosystem created by the company: buy services, products or even shares of the company. Some early ICO pioneers were Mastercoin (2013), Ethereum (2014) and Dao (2016; the first ICO over $100 million). In September 2017, a successful $100 million ICO by Kik (a Canadian instant messaging company founded in 2009) made the method much widely promoted and developed the ecosystem thinking further. In late 2017, the ICO activity has peaked to extreme levels, and close to $10 billion has been raised by the end of 2017. In some jurisdictions, ICOs fall outside of the current regulations (depending on the nature of the project) and are banned altogether in e.g. China and South Korea.
INCENTIVE STOCK OPTION (ISO)
Stock options that are generally only granted to employees or advisors. Generally, the option holder does not pay income tax on exercise - capital gains are paid based on when the stock is sold. The difference between the exercise price and the value at exercise is considered for determining implications of the "alternative minimum tax". Read our blog post for a deeper dive on startup employee compensation.
INCUBATOR
A program that provides the mentorship and capital necessary to accelerate the growth and success of young startups. Typically, the program will provide some capital and in exchange will take an equity stake in the startup.
INFORMATION RIGHTS
Under Delaware (and most state) law, a stockholder has the right to inspect and make copies of the corporation's information, including their stock ledger, a list of stockholders, and its books and records. However, such a demand must be for a "proper purpose", which means a purpose reasonably related to the person's interest as a stockholder.
INITIAL PUBLIC OFFERING (IPO)
Process by which a formerly private company first issues stock to the public. New disclosures must be made, as the company must now adhere to SEC reporting requirements.
Insider Round
A round of financing entirely composed of existing investors. Compare to External Round – a round of financing including new independent investors with significant investments.
Institutional Investors
It 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 (e.g. endowment funds, foundations etc.). The majority of assets of a typical VC fund are coming from various institutional investors. These investors of a fund are called Limited Partners, LPs.
INVESTMENT SYNDICATE
A group of investors that agree to participate in an investment round of funding for a company.
INVESTOR'S RIGHTS AGREEMENT
An agreement that is frequently required by early, or large, investors in a company. This agreement may include many provisions, such as "First Offer" (the right, but not the obligation, to participate in future fundraising rounds) and "Observer Rights" (the right to observe board meetings). This provision is relevant to shareholders because it may include a separate right of first refusal for investors.
IPO (Initial Public Offering)
Issue of shares of a company to the public by the company for the first time. You can find detailed information about the IPO activity of Nordic companies and other statistics here (site in Swedish).
IPR (Intellectual Property Rights)
Intellectual property (IP) includes copyrights, patents, trademarks, trade secrets, and other forms of intangible creations of the human intellect.
IRR
Compound Internal Rate of Return. A common measure of an investment fund’s performance.
ISSUER
The entity / company that shares represent ownership in. For example, if you were investing in shares of EquityZen Inc., EquityZen would be the issuer.
J-Curve
This is the curve of value creation over time that is typical in a venture capital fund. The value of VC portfolio (consisting of several separate investments) goes first down but starts later climbing up despite some of portfolio investments are totally unsuccessful – the few real home runs can return over 10x the investment made.
Lead Investor
The investor who leads a group of investors into an investment. Usually one venture capitalist will be the lead investor when a group of venture capitalists invest in a single business. Other investors are called co-investors.
Leveraged Buy-Out (LBO)
Leveraged buyout funds typically acquire controlling stakes of mature, cash flow stable companies. To finance these transactions, they will use a combination of debt (bank and term loans and subordinated or mezzanine debt) and equity. That means these PE firms buy companies using a bit of their own money, and a lot of borrowed money.
Limited Partner (LP)
The investors of a VC fund are called Limited Partners or LPs
Limited Partnerships
The legal structure used by most venture capital funds. Usually has a fixed life time, typically 10 + 2 years. The General Partners (= fund managers) manages the partnership using policy laid down in a Limited Partnership Agreement (LPA). The Agreement also covers terms, fees, structures and other items agreed between the limited partners and the general partner.
Liquidation Preference
The order in which investors, or debt holders, get paid in the event of company liquidation or bankruptcy. Different share classes can have also very distinct liquidation preference multiples. Typically, the last invested money is in highest priority in the liquidation preference stack and common shares are at the bottom of the stack. In a successful high value exit all share classes will get their full share of the exit proceeds. In a distressed fire sale exit typically only the share classes close to the top of the stack has any value. Liquidation preference is commonly used by venture capitalists to ensure they see at least some return on their investment in different liquidation scenarios.
LIQUIDITY
The ability of an asset to be freely transferred with minimal interference from the issuer. Public equity is deemed to be extremely liquid since there are many buyers and sellers, while stock in private companies is generally much less liquid since the buyers and sellers are more limited.
Lock-Up Period
The period an investor must wait before selling company shares subsequent to a transaction – usually in an initial public offering the lock-up period is determined by the underwriters.
Management Buy-In (MBI)
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)
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.
MANAGEMENT FEE
The fees that a fund will charge its limited partners each year. Venture capital fund management fees typically range from 1% to 3% annually and are generally charged based on committed capital during the investment period, and then invested capital after the investment period has finished.
Mergers and Acquisitions (M&A)
The terms merger and acquisition mean slightly different things but often used interchangeably. When one company takes over another company and clearly establishes itself as the new owner, the transaction is called an acquisition. A merger happens when two firms, often of about the same size, agree to go forward as a single new company.
NDA (Non-disclosure agreement or Confidentiality agreement)
A non-disclosure agreement (NDA) is a legal contract between two or more parties defining confidential material and information that the parties wish to share with one another, but should not be made available to others.
NET REVENUE
Net revenue is not the same as gross revenue. It accounts for certain price reductions, price adjustments and refunds. It's important to always consult GAAP and IASBaccounting rules and industry standards to determine what specific types of discounts are appropriate here; some are more appropriately recorded as marketing expenses. Net revenue generally does not account for the cost of goods sold, general and administrative expenses or other costs (those are typically incorporated in the operating income calculation). Net revenue is generally intended to be a measure of the "real top line" rather than the bottom line.
NON-DISCLOSURE AGREEMENT (NDA)
An agreement issued by entrepreneurs to protect the privacy of their ideas when disclosing those ideas to third parties such as investors.
NON-STATUTORY STOCK OPTION
Options that can be granted to anyone, including contractors or consultants. Generally taxed as ordinary income at the time of exercise based on the difference between the exercise price and the price paid for the options.
ORDINARY INCOME RATE
The rate at which ordinary income (mainly composed of salaries, commissions, wages, and interest income) is taxed based on the individual's tax bracket.
Pari passu
Legal term that refers to equal treatment for two or more parties in an agreement.
PARTY ROUND
A trend beginning several years ago in early financing rounds where, instead of raising large amounts of money fro ma few large investors, companies are raising small amounts of money from many small investors.
Pay To Play
A term in a financing agreement where an investor who does not participate in a future financing round will lose certain rights of existing shares. The rights lost can be anti-dilution rights, liquidation preference etc.
PIGGYBACK RIGHTS
Rights of an investor to have their shares included in a registration of a company's shares in preparation for an IPO.
PLEDGE
A contract that requires one party to transfer the cash proceeds from a liquidation of equity to another party in exchange for cash received prior to the liquidation event.
PORTFOLIO COMPANY
A company that has received an investment from a venture capital fund becomes a portfolio company of that fund.
Post-money Valuation
The valuation of a company that includes the capital provided by the current round of financing. For example, if an individual invests $5 million in a company with a $10 million pre-money valuation, the post-money valuation is $15 million.
Pre-money Valuation
Valuation of a company excluding the capital from the current round of financing. For example, if an individual invests $5 million in a company with a $10 million pre-money valuation, the pre-money valuation is $10 million (and post-money valuation is $15 million).
Preferred Stock
Preferred stock or preferred shares: typically offered for the investors of a company. Common stock or common shares: typically issued to founders, management, and employees. Preferred stock is usually convertible into common stock in certain cases such as an IPO or the sale of the company. In a liquidation event, preferred shares generally take priority over common shares. Later rounds of preferred stock in a private company are called Series B, Series C and so on.
Private Equity (PE)
Private equity is a generic term used to identify a family of alternative investing methods; it can include leveraged buyout funds, growth equity funds, venture capital funds, real estate investment funds, special debt funds (mezzanine, distressed, etc.), and other types of special situations funds. The exact use of the terminology evolves between different markets; for example, Venture Capital is sometimes excluded from PE.
PRE-MONEY VALUATION
Valuation of a company excluding the capital from the current round of financing.
PRIVATE PLACEMENT
The direct sale of a security to a limited number of qualified buyers, which may include accredited investors or institutional investors. Proper controls and structuring may exempt the placement from standard disclosure and registration policies mandated by the SEC.
Pro Rata
Pro rata is a Latin phrase meaning in proportion. In North American English this term has been vernacularized to prorated.
Right of First Refusal
In Venture Capital, the right of first refusal is a special exit right given sometimes to a strategic partner of the company. The partner is given the right to acquire the company on same terms it is offered to a third-party. In many exit scenarios, this limits the third-party interest of even starting any serious M&A process and can have a strong negative impact on the exit potential of their company.
Recapitalization (also Recap)
The reorganization of a company’s capital structure. After several funding rounds the company cap table i.e. ownership structure might have grown to be too complex by having several very distinct share classes with strong liquidation preferences etc. In this kind of situation, a recap might be needed to convince new investors to join the party or existing investors invest additional funds. A recap might mean that all different share classes are converted to one or two more simple share classes.
PRO RATA RIGHT
The right of a shareholder to purchase shares in a future financing round equal to the percentage of ownership the shareholder currently holds at the time of the financing.
RATCHET
A provision that provides an investor with down-round protection (i.e., where the company raises a subsequent round of financing, which can include IPO, at a lower price) by providing for the issuance of additional shares in the subsequent round. In the IPO context, a ratchet provision provides that if the IPO price does not meet a certain level, say at least the price paid by the investor in the private round or some baked in rate of return above that price, the IPO conversion of those shares to common shares is adjusted such that an additional number of shares are issued to investors which would meet the predetermined level.
RECAPITALIZATION
The reorganization of a company's capital structure.
REDEMPTION RIGHTS
The right of an investor to force the company to buy back shares issues as a result of an investment. The investor has a right to take back their investment and may negotiate a right to receive an additional sum in excess of the original investment.
REPURCHASE OPTION
The right of a company to buy back vested or issued shares.
RESTRICTED STOCK (ALSO KNOWN AS RSU)
Represents a class of stock that has some restrictions on the transfer or sale of the instrument. Generally, most non-public stock has some restrictions, though they may vary depending on the issuer and holder. See our post on RSUs for a deeper dive.
Return On Investment (ROI)
The internal rate of return (IRR) of an investment.
Revenue Multiple
A valuation methodology based on a comparison of private and public company values as a multiple of Revenue. Revenue multiple is usually used for valuing a company when it’s not profitable yet. For profitable companies, EBIT (Earnings before interest and taxes) multiple is an often-used valuation method.
REVENUE MULTIPLE
TEV/TTM Revenue, usually used for valuing a company when it's not profitable yet.
REVENUE RUN RATE
The Revenue Run Rate (also runrate - one word) is the annualized revenue of a company if you were to extrapolate the current revenue over a year. It refers to the financial performance of a company based on using current financial information as a predictor of future performance. The run rate functions as an extrapolation of current financial performance and is based on the assumption that current conditions will continue. Run rates are useful for new business or business units within a company that have only had a short period of revenue generation opportunity. This figure allows managers, venture capitalists and investors to measure the annualized revenue.
REVERSE DILUTION
When stock is returned to a company by departed employees whose stock has not yet vested.
RIGHT OF FIRST REFUSAL (ROFR)
A common transfer restriction that gives companies / issuers the right to purchase the stock at the same price, before allowing a shareholder to transfer it to a third party. Large investors in companies are also often granted a ROFR prior to transfers or sales.
RIGHTS OF CO-SALE WITH FOUNDERS
A clause allowing venture capital investors to sell shares in a company at the same time that the founders decide to sell.
ROAD SHOW
Presentations usually made in several cities to potential investors and other potentially interested parties. A company will often use a road show to create interest from investors before its IPO.
RUN RATE
The run rate is how the financial performance (usually revenue) of a company would look like if the current results are extrapolated out over a certain period of time.
RULE 506(B)
A legal "safe harbor" that allows issuers of non-public stock to sell interests to accredited investors without having to register with the SEC. Under this provision, issuers cannot engage in "general solicitation", such as advertising.
SECONDARY TRANSACTION
The acquisition of stock, or other securities, from sources other than the issuer. Under this definition, all transactions that are not part of a corporate transaction, such as an IPO, primary fundraising round, or spinoff, are considered secondary transactions.
SEED ROUND
The earliest round of fundraising, typically backed by a company's founders, their friends, family, or Angel investors. The company is generally not generating revenues and is in the process of developing their product.
SENIOR LIQUIDATION PREFERENCE
An entitlement given to a certain class of shareholders that gives them a higher liquidation preference over other shareholders. Also known as Stacked Preference
Shareholders’ Agreement
A contract that sets out how the company will be operated and the shareholders’ obligation and rights. It often provides protection to minority shareholders.
SHARES OUTSTANDING
Refers to a company's stock currently held by all of its shareholders, including shares held by institutional investors and restricted shares owned by a company's executives. This number is used to calculate key metrics such as a company's market capitalization, earnings per share, and cash flow per share.
STACKED PREFERENCE
When different classes of preferred stock have senior rights to payment over other classes of preferred stock. Also known as Senior Liquidation Preference
Stock Option
A right to purchase a share of stock at a specific price within a specified period of time. Stock options are often used as long-term incentive compensation for management and employees at high-growth companies.
STOCK PLAN OR EMPLOYEE INCENTIVE PLAN
The Stock Plan is an assimilation of all the rights and economic interests that are attached to company stock, including the company's bylaws, grant documents, shareholder agreements, etc. See here for a full list of employee incentive documents that you should keep on file.
Syndication
Multiple venture capital funds (or other investors) investing jointly in a single company.
Tag-Along Right
The right of a minority shareholder to sell the shares with same terms as a majority shareholder, also known as co-sale right. Compare to Drag-Along Right, which is common demand of venture capitalists: when certain shareholders (representing a defined minimum percentage of the total number of shares) agree to sell their shares the rest of the shareholders are forced to go along.
TENDER OFFER
An offer from a company to the existing share holders, offering to repurchase their shares at a given price.
Term Sheet
A non-binding agreement setting forth the basic terms and conditions under which an investment or other transaction will be made. The Term Sheet is a template that is used to develop more detailed legal documents. Read more from the Capshare term sheet guide.
TRANSFER RESTRICTIONS
Contractually defined limitations on an individual's ability to sell or transfer their shares in the company.
Turnaround
This word is used to describe businesses that are in trouble and whose management will cause the business to become profitable so they are no longer in trouble.
UNICORN
A slang term used to describe a startup with a valuation of $1 billion or more.
Venture Capital
Venture capital funds usually invest in minority stakes in startup companies, often in high-growth sectors like software, internet and consumer technology. Some VC firms are focusing in very early stage (pre-revenue) companies and make large number of fairly small investments. Later stage VC funds typically pick more mature companies with serious revenue and customer traction but that are still typically unprofitable. Some VC funds have very generic industry focus – some have a strategy to invest only in very sharply defined area.
Venture Debt
Venture Debt is debt financing provided by specialized banks or venture debt funds. Venture debt usually complements venture capital funding. Unlike traditional bank lending, venture debt is available to promising startups and growth companies that do not have positive cash flows or significant assets to use as collateral. Venture debt is dilutive – venture debt providers combine their loans with warrants (rights to purchase equity) to compensate for the higher risk.
Vesting
After a stock option has vested the option can be converted to a share by paying the exercise price. This conversion must be done before the specified option expiry date. The vesting schedule set up by the option program determines the timing and other possible requirements typically giving the employee an incentive to perform well and remain with the company.
Generally, when something that is promised is delivered and ownership is officially granted to the recipient. For employees, shares generally vest according a predetermined schedule. Vesting effectively means that employees only receive their equity compensation after a period of employment to ensure alignment of interest between the company and the employee. The current market standard for vesting schedules is 4 years with a one-year "cliff". Typically, this means that 25% of the grant will vest after one year, and the balance will vest in equal monthly installments over the following 36 months. See our blog post on vesting schedules for additional information.
Warrants
Warrants are bit similar to options: Warrants give the right, but not the obligation, to buy a certain number of shares at a certain price before a certain time. In venture capital Warrants are typically used as additional incentive in Venture debt and bridge loans.
WASHOUT ROUND
A round of financing where previous investors, the founders, and management suffer significant dilution. The new investor in a washout round will typically gain majority ownership and control of the company.
Write-Off
When reporting the state of the portfolio, a VC fund might need to make a partial wrote-off i.e. a decrease in the reported value of a poorly performing portfolio company. A total write-off means the portfolio company is worthless.
Acquisition
The terms merger and acquisition mean slightly different things but often used interchangeably. When one company takes over another company and clearly establishes itself as the new owner, the transaction is called an acquisition. A merger happens when two firms, often of about the same size, agree to go forward as a single new company. M&A means Mergers and Acquisitions.
ACCREDITED INVESTOR
An individual or institution that meets certain wealth criteria (as defined regulators), and is therefore deemed to be sophisticated enough to participate in private, non-public investments.
ADVERSE CHANGE REDEMPTION
A right of a shareholder that requires the company to redeem a class of securities in the event the company experiences a material adverse change to its prospects, business or financial condition. This is a negotiated right that you expect to see in down economic cycles where investors tend to have more bargaining power than the companies seeking to raise capital. Startups should seek to avoid such a provision when negotiating a funding round for a variety of reasons, including the vagueness of the "material adverse change" trigger.
ALTERNATIVE ASSET CLASS
Asset classes that deviate from standard, publically traded debt and equity securities. Alternative asset classes include venture capital, hedge funds, real estate, and commodities. Typically, these assets are not highly correlated to typical equity and debt markets, and may provide diversification to investors.
ALTERNATIVE MINIMUM TAX (AMT)
Cap on the amount of income deduction that can be claimed in an income tax filing, which is filed using IRS Form 6251. Certain forms of deduction, including Incentive Stock Options, are always subject to the Alternative Minimum Tax, while income tax filings that claim an excess of deductions may be entirely subjected to the Alternative Minimum Tax.
ANGEL INVESTOR
Wealthy individuals that invest in startups in their early stages of development or seed round of fundraising. Due to the inherent risk of loss of capital or significant dilution in subsequent fundraising, angel investors typically pursue investments with returns that they believe may have the potential to return multiples of the initial investment.
ANTI-DILUTION CLAUSE
Contractual clause that protects an investor from having their investment as a percentage of ownership significantly reduced in subsequent rounds of fundraising. The method of total protection from dilution is called a Full Ratchet, and ensures that should a fundraising round cause a previous investor's ownership percentage to decrease as a result of newly issued shares, they will be given the opportunity to maintain their ownership level.
Anti-dilution
Protection from the dilution created by a future funding round, especially the extra dilution created by a down round. Typically protecting investors either by issuing them additional shares in future funding rounds or by lowering the conversion price for their preferred shares.
AS-CONVERTED BASIS
Considering a class of securities under the assumption that all of the that class has converted into another class of securities. In the venture context, this is usually with respect to preferred stock, which converts into common stock automatically in some instances and at the election of the preferred stock holder in others. Preferred stock often votes on matters on an "as-converted basis".
AUM
Assets Under Management, sometime Funds Under Management: the total amount of money a VC team is managing. Includes all the funds they are still working with, also the full original size of some very old funds that are no more making new investments, just waiting to liquidate the last few remaining portfolio companies. A more relevant figure is often Dry Powder: the amount of money left for new investments in current funds. Dry Powder can be further divided to money available for totally new investments and money reserved for follow on investment to existing portfolio companies.
BLENDED PREFERENCES
When all classes of preferred stock have equal payment rights in the event of a liquidation
BOOTSTRAPPING
Business strategy by which a startup self-finances, eliminating the need for seed or angel investment. Typically achieved through lean operation and a product that generates revenue early in the companies life cycle.
Bridge Loan
Bridge Loans are short term loans to fund the operations until a more comprehensive longer-term financing is available. In Venture Capital, the need for a bridge loan typically arises when a company runs out of cash before it has enough new track record to close a new funding round with reasonable terms; bride loan creates more runway for negotiating the next funding round.
Business Angel
Individuals that provide funding to seed or early stage companies. Business angels can usually add value through their contacts and expertise.
Buyout Fund
Leveraged buyout funds typically acquire controlling stakes of mature, cash flow stable companies. To finance these transactions, they will use a combination of debt (bank and term loans and subordinated or mezzanine debt) and equity. That means these Private Equity (PE) firms buy companies using a little of their own money and a lot of borrowed money.
Cap Table
A document that shows the capital structure of a company. Generally used to view the ownership of each shareholder and option-holder. After several funding rounds, a company might have a fairly complex cap table with multiple share classes having very distinct rights regarding liquidation preference etc.
Capital Under Management
Also Assets Under Management (AUM), sometime Funds Under Management: the total amount of money a VC team is managing. Includes all the funds they are still working with, also the full original size of some very old funds that are no more making new investments, just waiting to liquidate the last few remaining portfolio companies. A more relevant figure is often Dry Powder: the amount of money left for new investments in current funds. Dry Powder can be further divided to money available for totally new investments and money reserved for follow on investment to existing portfolio companies.
Carried Interest (Carry)
Most VC firms have a business model that consists of three elements:
1. Management fee – An annual fee (typically 2+% of the fund size) covering the daily operations of portfolio management but does not generate any substantial profit for the VC firm.
2. Carried Interest – Profit of a VC fund (i.e. returns in excess of the original investments and other costs) is typically divided between the Limited Partners and the VC firm in an 80/20 split. Additionally, most funds have a hurdle rate, an internal rate of return (IRR) the VC firm must deliver to LPs before starting to receive any profit. Hurdle rates are typically around 7-8%.
3. Investment to the fund – Investors typically insists the VC firm to co-invest substantial amount capital into the fund. By having some real skin in the game and sharing also the risk element in the business, the VC team has more aligned incentives with the investors.
This model tries to balance the need to generate good returns for the investors of the VC fund (often called “Limited Partners” or “LPs”) and the necessity for the VC firm to cover its operational expenses. See the blog entry Why VC’s Seek 10x Returns for more on the VC firm business model and how it relates to the investment strategy.
Cliff
Employee stock agreements have often a cliff, usually one year, before the employee stock options start vesting. Option holders may only exercise an option after it has vested but before the specified expiry date. Other possible vesting requirements typically give the employee an incentive to perform well and remain with the company for longer period.
Closing
The final event to complete a transaction (investment, merger, acquisition) at which time all the legal documents are signed and the funds are transferred. In very complex transactions the signing and closing can be two totally separate phases. After signing there might be still several steps (such as board approvals, money transfers, etc.) to be completed by all parties before the transaction truly closes.
Common Stock
Common stock or common shares: typically issued to founders, management, and employees. Preferred stock or preferred shares: typically offered for the investors of a company. Preferred stock is usually convertible into common stock in certain cases such as an IPO or the sale of the company. In a liquidation event, preferred shares generally take priority over common shares. Later rounds of preferred stock are called Series B, Series C and so on.
Corporate Venture Capital
Corporate venture capital (CVC) is a subset of venture capital. CVC entails a corporation making systematic investments into startup companies by taking an equity stake in an innovative startup somehow related to the company’s own industry and potential future roadmap. The CVC may also offer synergies, network and other support that a regular VC may not bring to the table
Dilution
Generally speaking, as a new financing rounds occur, existing investors will own proportionally less of the company than they did previously: their ownership is diluted. Dilution is not necessarily a bad thing: since new stock can be issued at a higher price, you may own a smaller piece of a larger company, which means the value of your investment is actually higher than it was previously.
Down Round
A funding round in which the company is valued at a lower value per share compared to previous round. A down round creates naturally more dilution than up rounds, i.e. funding rounds where value per share is higher than previous round. Flat round – the valuation is same with the previous round.
Drag-Along Right
Drag-Along Right is a common demand of venture capitalists: when certain shareholders (or shareholders representing a defined minimum percentage of the total number of shares) agree to sell their shares, the rest of the shareholders are forced to go along and sell their shares as well. Compare to Tag-Along Right: the right of a minority shareholder to sell the shares with same terms as a majority shareholder, also known as co-sale right.
Dry Powder
The amount of money a VC fund has available for new investments. Can be further divided to a) money available for totally new investments and b) money reserved for follow on investment to existing portfolio companies.
Due Diligence
The business equivalent of a full-body search. The company hands over a business plan, financials, team information, and more to the VC team considering an investment.
Earnings before interest and taxes (EBIT)
A measurement of the operating profit of the company. (An alternative measurement is EBIDA = Earnings Before Interest, Depreciation and Amortization)
EBIT Multiple
A valuation methodology based on a comparison of private and public companies’ value as a multiple of Earnings Before Interest and Taxes (EBIT). Revenue multiple is usually used for valuing a company when it’s not profitable yet.
Employee Stock Ownership Program (ESOP or SOP)
Also called Employee Stock Option Pool. A pool of options that is reserved for employee compensation. The path from start-up to real success is typically long and a lot of talent is needed. Option pool is used to both attract new talent and keep the existing stars on board and motivated.
Exercise Price (also Strike Price)
The amount that must be paid to execute options i.e. convert options to shares. Generally, in US the exercise price is based on “Fair Market Value” when issued, rather than the vesting date. The differences in taxation and regulation is remarkable between countries and has great impact on the proper and efficient use options.
Exit
The sale or exchange of a significant amount of company ownership for cash, debt, or equity of another company. VC funds typically invests in companies with a clear fairly short term exit target in mind. If you are not ready to sell your company within few years you should not consider VC funding either…
EXERCISE PRICE (ALSO KNOWN AS STRIKE PRICE)
The amount that must be paid to execute your options. Generally, the exercise price is pegged to the "Fair Market Value" on the date of issuance, rather than the vesting date.
EXIT EVENT OR LIQUIDITY EVENT
When an issuer engages in a transaction that allows investors to sell their shares, which generally happens through a tender offer (sale) or an IPO.
External Round
A round of financing including new independent investors with significant investments. Compare to Insider Round – a round of financing entirely composed of existing investors.
Fair Market Value
The value of a company based on what investors are willing to pay for it. For private companies (not traded publicly), fair market value is generally derived from comparable companies, either public companies or private companies that have recently had a transaction associated with them. A recent funding round executed can also give good advice on the fair market value, especially if the round included new independent investors with significant investments.
FRIENDS AND FAMILY ROUND
Capital provided by the friends and family of founders of an early stage startup. This is typically its first outside capital. The startup is generally too early (often still at ideation) to raise capital from professional angel or seed investors, but needs capital to get started.
Follow-On Investment
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.
Fully diluted
Ownership of the company based on the total number of shares outstanding when all possible sources of new shares (convertible loans, options, warrants) are taken into account.
FULLY DILUTED SHARES OUTSTANDING
The total number of shares that would be outstanding if all possible sources of conversion (convertible bonds and stock options) were exercised.
Fund of Funds (FoF)
An investment vehicle designed to invest in group of investment funds. Some Fund of Funds are specializing in VC funds only, a more typical strategy is to distribute the investment to a fairly diversified group of VC and other PE funds.
General Partner (GP)
VC funds are typically structured as limited partnerships having one General Partner (a company run by the VC team and managing the investments) and several Limited Partners (LPs, the investors of the VC fund). The key team members of the VC team are also typically called General Partners.
GENERAL SOLICITATION
The act of publically soliciting investors, usually through advertising or any other non-controlled method of a public offering. If a company or issuer engages in public solicitation, it may eliminate certain safe harbors that were previously afforded to them under current securities regulation.
GOLDEN HANDCUFFS
Financial incentives that discourage founders and early employees from leaving a company before certain dates or milestones. Often found in an acquisition scenario, an example would be a cash or equity payout by an acquiring company that is earned over time.
GROSS MARGIN
The difference between revenue and cost of goods sold (COGS), divided by revenue.
GROWTH EQUITY
Growth Equity refers to private investments in late-stage companies which aim to finance revenue growth through market expansion. Such investments typically target minority positions in proven market segment leaders
ICO
An initial coin offering (ICO) is a crowdfunding project using cryptocurrency. In an ICO, a company (or other organization) releases some quantity of a new cryptocurrency (typically using Ethereum blockchain technology) to investors. ICOs can be used for a wide range of activities, ranging from corporate finance, to charitable fundraising, to outright fraud. In a typical ICO, the new currency can be used within the ecosystem created by the company: buy services, products or even shares of the company. Some early ICO pioneers were Mastercoin (2013), Ethereum (2014) and Dao (2016; the first ICO over $100 million). In September 2017, a successful $100 million ICO by Kik (a Canadian instant messaging company founded in 2009) made the method much widely promoted and developed the ecosystem thinking further. In late 2017, the ICO activity has peaked to extreme levels, and close to $10 billion has been raised by the end of 2017. In some jurisdictions, ICOs fall outside of the current regulations (depending on the nature of the project) and are banned altogether in e.g. China and South Korea.
INCENTIVE STOCK OPTION (ISO)
Stock options that are generally only granted to employees or advisors. Generally, the option holder does not pay income tax on exercise - capital gains are paid based on when the stock is sold. The difference between the exercise price and the value at exercise is considered for determining implications of the "alternative minimum tax". Read our blog post for a deeper dive on startup employee compensation.
INCUBATOR
A program that provides the mentorship and capital necessary to accelerate the growth and success of young startups. Typically, the program will provide some capital and in exchange will take an equity stake in the startup.
INFORMATION RIGHTS
Under Delaware (and most state) law, a stockholder has the right to inspect and make copies of the corporation's information, including their stock ledger, a list of stockholders, and its books and records. However, such a demand must be for a "proper purpose", which means a purpose reasonably related to the person's interest as a stockholder.
INITIAL PUBLIC OFFERING (IPO)
Process by which a formerly private company first issues stock to the public. New disclosures must be made, as the company must now adhere to SEC reporting requirements.
Insider Round
A round of financing entirely composed of existing investors. Compare to External Round – a round of financing including new independent investors with significant investments.
Institutional Investors
It 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 (e.g. endowment funds, foundations etc.). The majority of assets of a typical VC fund are coming from various institutional investors. These investors of a fund are called Limited Partners, LPs.
INVESTMENT SYNDICATE
A group of investors that agree to participate in an investment round of funding for a company.
INVESTOR'S RIGHTS AGREEMENT
An agreement that is frequently required by early, or large, investors in a company. This agreement may include many provisions, such as "First Offer" (the right, but not the obligation, to participate in future fundraising rounds) and "Observer Rights" (the right to observe board meetings). This provision is relevant to shareholders because it may include a separate right of first refusal for investors.
IPO (Initial Public Offering)
Issue of shares of a company to the public by the company for the first time. You can find detailed information about the IPO activity of Nordic companies and other statistics here (site in Swedish).
IPR (Intellectual Property Rights)
Intellectual property (IP) includes copyrights, patents, trademarks, trade secrets, and other forms of intangible creations of the human intellect.
IRR
Compound Internal Rate of Return. A common measure of an investment fund’s performance.
ISSUER
The entity / company that shares represent ownership in. For example, if you were investing in shares of EquityZen Inc., EquityZen would be the issuer.
J-Curve
This is the curve of value creation over time that is typical in a venture capital fund. The value of VC portfolio (consisting of several separate investments) goes first down but starts later climbing up despite some of portfolio investments are totally unsuccessful – the few real home runs can return over 10x the investment made.
Lead Investor
The investor who leads a group of investors into an investment. Usually one venture capitalist will be the lead investor when a group of venture capitalists invest in a single business. Other investors are called co-investors.
Leveraged Buy-Out (LBO)
Leveraged buyout funds typically acquire controlling stakes of mature, cash flow stable companies. To finance these transactions, they will use a combination of debt (bank and term loans and subordinated or mezzanine debt) and equity. That means these PE firms buy companies using a bit of their own money, and a lot of borrowed money.
Limited Partner (LP)
The investors of a VC fund are called Limited Partners or LPs
Limited Partnerships
The legal structure used by most venture capital funds. Usually has a fixed life time, typically 10 + 2 years. The General Partners (= fund managers) manages the partnership using policy laid down in a Limited Partnership Agreement (LPA). The Agreement also covers terms, fees, structures and other items agreed between the limited partners and the general partner.
Liquidation Preference
The order in which investors, or debt holders, get paid in the event of company liquidation or bankruptcy. Different share classes can have also very distinct liquidation preference multiples. Typically, the last invested money is in highest priority in the liquidation preference stack and common shares are at the bottom of the stack. In a successful high value exit all share classes will get their full share of the exit proceeds. In a distressed fire sale exit typically only the share classes close to the top of the stack has any value. Liquidation preference is commonly used by venture capitalists to ensure they see at least some return on their investment in different liquidation scenarios.
LIQUIDITY
The ability of an asset to be freely transferred with minimal interference from the issuer. Public equity is deemed to be extremely liquid since there are many buyers and sellers, while stock in private companies is generally much less liquid since the buyers and sellers are more limited.
Lock-Up Period
The period an investor must wait before selling company shares subsequent to a transaction – usually in an initial public offering the lock-up period is determined by the underwriters.
Management Buy-In (MBI)
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)
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.
MANAGEMENT FEE
The fees that a fund will charge its limited partners each year. Venture capital fund management fees typically range from 1% to 3% annually and are generally charged based on committed capital during the investment period, and then invested capital after the investment period has finished.
Mergers and Acquisitions (M&A)
The terms merger and acquisition mean slightly different things but often used interchangeably. When one company takes over another company and clearly establishes itself as the new owner, the transaction is called an acquisition. A merger happens when two firms, often of about the same size, agree to go forward as a single new company.
NDA (Non-disclosure agreement or Confidentiality agreement)
A non-disclosure agreement (NDA) is a legal contract between two or more parties defining confidential material and information that the parties wish to share with one another, but should not be made available to others.
NET REVENUE
Net revenue is not the same as gross revenue. It accounts for certain price reductions, price adjustments and refunds. It's important to always consult GAAP and IASBaccounting rules and industry standards to determine what specific types of discounts are appropriate here; some are more appropriately recorded as marketing expenses. Net revenue generally does not account for the cost of goods sold, general and administrative expenses or other costs (those are typically incorporated in the operating income calculation). Net revenue is generally intended to be a measure of the "real top line" rather than the bottom line.
NON-DISCLOSURE AGREEMENT (NDA)
An agreement issued by entrepreneurs to protect the privacy of their ideas when disclosing those ideas to third parties such as investors.
NON-STATUTORY STOCK OPTION
Options that can be granted to anyone, including contractors or consultants. Generally taxed as ordinary income at the time of exercise based on the difference between the exercise price and the price paid for the options.
ORDINARY INCOME RATE
The rate at which ordinary income (mainly composed of salaries, commissions, wages, and interest income) is taxed based on the individual's tax bracket.
Pari passu
Legal term that refers to equal treatment for two or more parties in an agreement.
PARTY ROUND
A trend beginning several years ago in early financing rounds where, instead of raising large amounts of money fro ma few large investors, companies are raising small amounts of money from many small investors.
Pay To Play
A term in a financing agreement where an investor who does not participate in a future financing round will lose certain rights of existing shares. The rights lost can be anti-dilution rights, liquidation preference etc.
PIGGYBACK RIGHTS
Rights of an investor to have their shares included in a registration of a company's shares in preparation for an IPO.
PLEDGE
A contract that requires one party to transfer the cash proceeds from a liquidation of equity to another party in exchange for cash received prior to the liquidation event.
PORTFOLIO COMPANY
A company that has received an investment from a venture capital fund becomes a portfolio company of that fund.
Post-money Valuation
The valuation of a company that includes the capital provided by the current round of financing. For example, if an individual invests $5 million in a company with a $10 million pre-money valuation, the post-money valuation is $15 million.
Pre-money Valuation
Valuation of a company excluding the capital from the current round of financing. For example, if an individual invests $5 million in a company with a $10 million pre-money valuation, the pre-money valuation is $10 million (and post-money valuation is $15 million).
Preferred Stock
Preferred stock or preferred shares: typically offered for the investors of a company. Common stock or common shares: typically issued to founders, management, and employees. Preferred stock is usually convertible into common stock in certain cases such as an IPO or the sale of the company. In a liquidation event, preferred shares generally take priority over common shares. Later rounds of preferred stock in a private company are called Series B, Series C and so on.
Private Equity (PE)
Private equity is a generic term used to identify a family of alternative investing methods; it can include leveraged buyout funds, growth equity funds, venture capital funds, real estate investment funds, special debt funds (mezzanine, distressed, etc.), and other types of special situations funds. The exact use of the terminology evolves between different markets; for example, Venture Capital is sometimes excluded from PE.
PRE-MONEY VALUATION
Valuation of a company excluding the capital from the current round of financing.
PRIVATE PLACEMENT
The direct sale of a security to a limited number of qualified buyers, which may include accredited investors or institutional investors. Proper controls and structuring may exempt the placement from standard disclosure and registration policies mandated by the SEC.
Pro Rata
Pro rata is a Latin phrase meaning in proportion. In North American English this term has been vernacularized to prorated.
Right of First Refusal
In Venture Capital, the right of first refusal is a special exit right given sometimes to a strategic partner of the company. The partner is given the right to acquire the company on same terms it is offered to a third-party. In many exit scenarios, this limits the third-party interest of even starting any serious M&A process and can have a strong negative impact on the exit potential of their company.
Recapitalization (also Recap)
The reorganization of a company’s capital structure. After several funding rounds the company cap table i.e. ownership structure might have grown to be too complex by having several very distinct share classes with strong liquidation preferences etc. In this kind of situation, a recap might be needed to convince new investors to join the party or existing investors invest additional funds. A recap might mean that all different share classes are converted to one or two more simple share classes.
PRO RATA RIGHT
The right of a shareholder to purchase shares in a future financing round equal to the percentage of ownership the shareholder currently holds at the time of the financing.
RATCHET
A provision that provides an investor with down-round protection (i.e., where the company raises a subsequent round of financing, which can include IPO, at a lower price) by providing for the issuance of additional shares in the subsequent round. In the IPO context, a ratchet provision provides that if the IPO price does not meet a certain level, say at least the price paid by the investor in the private round or some baked in rate of return above that price, the IPO conversion of those shares to common shares is adjusted such that an additional number of shares are issued to investors which would meet the predetermined level.
RECAPITALIZATION
The reorganization of a company's capital structure.
REDEMPTION RIGHTS
The right of an investor to force the company to buy back shares issues as a result of an investment. The investor has a right to take back their investment and may negotiate a right to receive an additional sum in excess of the original investment.
REPURCHASE OPTION
The right of a company to buy back vested or issued shares.
RESTRICTED STOCK (ALSO KNOWN AS RSU)
Represents a class of stock that has some restrictions on the transfer or sale of the instrument. Generally, most non-public stock has some restrictions, though they may vary depending on the issuer and holder. See our post on RSUs for a deeper dive.
Return On Investment (ROI)
The internal rate of return (IRR) of an investment.
Revenue Multiple
A valuation methodology based on a comparison of private and public company values as a multiple of Revenue. Revenue multiple is usually used for valuing a company when it’s not profitable yet. For profitable companies, EBIT (Earnings before interest and taxes) multiple is an often-used valuation method.
REVENUE MULTIPLE
TEV/TTM Revenue, usually used for valuing a company when it's not profitable yet.
REVENUE RUN RATE
The Revenue Run Rate (also runrate - one word) is the annualized revenue of a company if you were to extrapolate the current revenue over a year. It refers to the financial performance of a company based on using current financial information as a predictor of future performance. The run rate functions as an extrapolation of current financial performance and is based on the assumption that current conditions will continue. Run rates are useful for new business or business units within a company that have only had a short period of revenue generation opportunity. This figure allows managers, venture capitalists and investors to measure the annualized revenue.
REVERSE DILUTION
When stock is returned to a company by departed employees whose stock has not yet vested.
RIGHT OF FIRST REFUSAL (ROFR)
A common transfer restriction that gives companies / issuers the right to purchase the stock at the same price, before allowing a shareholder to transfer it to a third party. Large investors in companies are also often granted a ROFR prior to transfers or sales.
RIGHTS OF CO-SALE WITH FOUNDERS
A clause allowing venture capital investors to sell shares in a company at the same time that the founders decide to sell.
ROAD SHOW
Presentations usually made in several cities to potential investors and other potentially interested parties. A company will often use a road show to create interest from investors before its IPO.
RUN RATE
The run rate is how the financial performance (usually revenue) of a company would look like if the current results are extrapolated out over a certain period of time.
RULE 506(B)
A legal "safe harbor" that allows issuers of non-public stock to sell interests to accredited investors without having to register with the SEC. Under this provision, issuers cannot engage in "general solicitation", such as advertising.
SECONDARY TRANSACTION
The acquisition of stock, or other securities, from sources other than the issuer. Under this definition, all transactions that are not part of a corporate transaction, such as an IPO, primary fundraising round, or spinoff, are considered secondary transactions.
SEED ROUND
The earliest round of fundraising, typically backed by a company's founders, their friends, family, or Angel investors. The company is generally not generating revenues and is in the process of developing their product.
SENIOR LIQUIDATION PREFERENCE
An entitlement given to a certain class of shareholders that gives them a higher liquidation preference over other shareholders. Also known as Stacked Preference
Shareholders’ Agreement
A contract that sets out how the company will be operated and the shareholders’ obligation and rights. It often provides protection to minority shareholders.
SHARES OUTSTANDING
Refers to a company's stock currently held by all of its shareholders, including shares held by institutional investors and restricted shares owned by a company's executives. This number is used to calculate key metrics such as a company's market capitalization, earnings per share, and cash flow per share.
STACKED PREFERENCE
When different classes of preferred stock have senior rights to payment over other classes of preferred stock. Also known as Senior Liquidation Preference
Stock Option
A right to purchase a share of stock at a specific price within a specified period of time. Stock options are often used as long-term incentive compensation for management and employees at high-growth companies.
STOCK PLAN OR EMPLOYEE INCENTIVE PLAN
The Stock Plan is an assimilation of all the rights and economic interests that are attached to company stock, including the company's bylaws, grant documents, shareholder agreements, etc. See here for a full list of employee incentive documents that you should keep on file.
Syndication
Multiple venture capital funds (or other investors) investing jointly in a single company.
Tag-Along Right
The right of a minority shareholder to sell the shares with same terms as a majority shareholder, also known as co-sale right. Compare to Drag-Along Right, which is common demand of venture capitalists: when certain shareholders (representing a defined minimum percentage of the total number of shares) agree to sell their shares the rest of the shareholders are forced to go along.
TENDER OFFER
An offer from a company to the existing share holders, offering to repurchase their shares at a given price.
Term Sheet
A non-binding agreement setting forth the basic terms and conditions under which an investment or other transaction will be made. The Term Sheet is a template that is used to develop more detailed legal documents. Read more from the Capshare term sheet guide.
TRANSFER RESTRICTIONS
Contractually defined limitations on an individual's ability to sell or transfer their shares in the company.
Turnaround
This word is used to describe businesses that are in trouble and whose management will cause the business to become profitable so they are no longer in trouble.
UNICORN
A slang term used to describe a startup with a valuation of $1 billion or more.
Venture Capital
Venture capital funds usually invest in minority stakes in startup companies, often in high-growth sectors like software, internet and consumer technology. Some VC firms are focusing in very early stage (pre-revenue) companies and make large number of fairly small investments. Later stage VC funds typically pick more mature companies with serious revenue and customer traction but that are still typically unprofitable. Some VC funds have very generic industry focus – some have a strategy to invest only in very sharply defined area.
Venture Debt
Venture Debt is debt financing provided by specialized banks or venture debt funds. Venture debt usually complements venture capital funding. Unlike traditional bank lending, venture debt is available to promising startups and growth companies that do not have positive cash flows or significant assets to use as collateral. Venture debt is dilutive – venture debt providers combine their loans with warrants (rights to purchase equity) to compensate for the higher risk.
Vesting
After a stock option has vested the option can be converted to a share by paying the exercise price. This conversion must be done before the specified option expiry date. The vesting schedule set up by the option program determines the timing and other possible requirements typically giving the employee an incentive to perform well and remain with the company.
Generally, when something that is promised is delivered and ownership is officially granted to the recipient. For employees, shares generally vest according a predetermined schedule. Vesting effectively means that employees only receive their equity compensation after a period of employment to ensure alignment of interest between the company and the employee. The current market standard for vesting schedules is 4 years with a one-year "cliff". Typically, this means that 25% of the grant will vest after one year, and the balance will vest in equal monthly installments over the following 36 months. See our blog post on vesting schedules for additional information.
Warrants
Warrants are bit similar to options: Warrants give the right, but not the obligation, to buy a certain number of shares at a certain price before a certain time. In venture capital Warrants are typically used as additional incentive in Venture debt and bridge loans.
WASHOUT ROUND
A round of financing where previous investors, the founders, and management suffer significant dilution. The new investor in a washout round will typically gain majority ownership and control of the company.
Write-Off
When reporting the state of the portfolio, a VC fund might need to make a partial wrote-off i.e. a decrease in the reported value of a poorly performing portfolio company. A total write-off means the portfolio company is worthless.
