Venture Capital Terms

"Skin in the Game"

a significant amount of money that risk is felt and you want the company to succeed

Angel Investor

an early investor in technology-based start-up companies who tended to both a financial and a social motive in participating in the risk capital market

Firm Commitment

an investment bank agrees to take on all the risk for the IPO

Ratchets

anti-dilution clauses as a form of protections

Burn Rate

any money used to finance overhead costs as a new company before they generate profits (it's a negative number)

S Corp

not subject to corporate taxes, but are limited on who owns their shares (only US citizens)

General Partnership

personally liable for the firm's debt

Convertible Preferred Stock

preferred stock that can be converted at the shareholder's option into common stock - forces the shareholder to choose whether he will take his returns through the liquidation feature or through the underlying common equity position

Redeemable/Straight Preferred Stock

preferred stock that has no convertibility into equity - therefore its intrinsic value is the face value (plus any dividends)

Limited Partners (VC)

put money into the fund

Dilution

reduction in the ownership percentage of a share of stock caused by the issuance of new stock

Accelerators/Incubators

seed funding vehicles that functioned as boot camps or academics for start-up teams, with or without a business idea

Valuation Cap

sets a lower bound in terms of the seed investor's ownership; entrepreneurs want the cap to be as high as possible & the investors want it to be low

Super Angel

someone who invested $100,000 per deal, investing only in the realm of his or her professional experience

Investment/ Post-Money =

% you are getting

Investment/(Investment + Pre-Money) =

% you are getting

Capitalization Tables show:

1. Post & pre-money valuation 2. Dilution & ownership % 3. Share price & shares issued 4. Who 5. FD - Fully diluted share amount

Sole Proprietorship

- Run & owned by one person - unlimited liability - most common in the world

Corporation

- legal entity, separate from owners

Limited Liability Corporation (LLC)

- like a limited partnership but without general partners - separates business from your personal assets -legal entity with tax benefits (only personal income tax) - owners = "members"

Partnership

-Run & owned by a group - all partners are liable for the firm's debt - ends with withdrawal or death of one partner

Cons of Venture Capitalists:

1. Expect big returns on their investments 2. Diligent - the process takes months 3. They ask for equity (ownership) - results in loss of control

3 Exit Strategies:

1. M&A 2. IPO 3. Inherent put - sell stock back to the company

Pros of Venture Capitalists:

1. They have a lot of money - investment numbers are high 2. come with knowledge, experience, networking & critique

VC funds expect a return of

25-35% per year over the lifetime of the investment

Term Sheet

5-7 page document that needs to be papered to turn into a legal document

Rolodex

a person's list of business contacts & friends

Carried interest

a portion of the returns you generate - 20% to GPs & 80% to LPs

Pre & Post Money are

IMPLIED valuations based off of financing events

C Corp

a regular corporation - subject to corporate taxes with no restrictions on who owns their shares so it's easier to raise money

Preferred stock has liquidation preference over

common stock

Exit Strategy is

how you get out of the investment

Accredited Investor concept is to

identify persons who can bear the economic risk if investing in unregistered securities

Committed Capital

legal agreement for money in the future - because you only want to take money when you need it

Capital Call/Takedown

legal right of the entrepreneur to ask for a portion of the promised money

Limited Partnership

limited liability to their investment

General Partners (VC)

manage the fund

"psychic income"

the potential to leverage technology for the social good

Vintage Year

the year the fund was started

Management Fee

used to fund the overhead managing of the company - usually 2-2.5% of committed capital