Venture Capital Terms

Down Round

A fundraising round in which the company is valued at a lower value per share than previous rounds

Grandfather Rights

A grandfather clause is a provision in which an old rule continues to apply to some existing situations while a new rule will apply to all future cases. Those exempt from the new rules are said to have grandfather rights or acquired rights, or to have been grandfathered in

Investment Syndicate

A group of investors that agree to participate in an investment round of funding for a company

JOBS Act

Jumpstart our business startups act. Includes several provisions related to early stage companies; new regulation regarding max number of shareholders private companies are allowed and changes to the method in which companies can solicit private investors.

Pari Passu

Legal term that refers to the equal treatment for two or more parties in an agreement meaning "on the same term as"

Limited Partner (LP)

Limited Partner, typically funds 99-100% of a fund, major investors

LPA

Limited Partnership Agreement; 70 page document and agreement between LP and GP

Conversion Rate or Ratio

Means the number of shares of Common Stock into which each share of Preferred Stock is convertible

MFN

Most Favored Nation - anchor investor that the largest investor can get all the benefits of all the side letters with the individual LP investors

Net Revenue

Net revenue is not the same as gross revenue. It accounts for certain price reductions, price adjustments, and refunds

Covenant

Obligation in a contract to do something. Obligation to refrain from doing something is called negative convenient.

Cap Table

Official document that shows the capital structure of a company, including the specific ownership level by investor. Used to view the % ownership that each investor or employee owns of a certain company.

PPM

Private Placement Memo - Usually 50-100 pages long that is the business plan for starting a fund or for making an investment

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

Due Diligence

Process performed by prospective investor to assess the viability of an investment and confirm that the information provided by the company is accurate

Price Antidilution Protection

Protects investors from overpaying for stock by adjusting the Conversion Ratio if the company later issues shares for a price less than the price the investors paid. Adjustment of the Conversion Ratio results in more shares of Common Stock becoming issuable upon conversion of each share of Preferred Stock than was agreed at the time of the investment. There are two basic types of Price Antidilution Protection; Full Ratchet and Weighted Average. Weighted Average can be either Broad Based or Narrow Based.

Burn Rate

Rate at which company consumes cash to cover expenses. Expressed monthly or weekly. Usually applied to a company with no revenue, to give a metric of financial health and fundraising needs. A low burn rate means a company can operate longer without new injection of capital.

PEG Ratio

Ratio of (price/earnings to growth ratio) is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share (EPS), and company's expected growth

Key man risk

Referred to as the risk associated with depending on a single charismatic individual of a startup; key tactic is to build a strong capable team around the founder, to mitigate the risk

Growth Equity

Refers to private investments in late-stage companies which aim to finance revenue growth through market expansion. Target minority positions in proven market segment leaders

Non Binding

Refers to the depth of the legal commitment of the document. Term Sheets, MOU, LOIs are non-binding in which the investor or startup can back out of the intended agreement. Not common for investors to back out once term sheet is signed

Investor's Rights Agreement

Required by early, or large, investors in a company. This agreement may include many provisions, such as First offer (right to participate in future funding rounds), and observer rights (right to oversee board meetings). May include a separate right of first refusal for investors.

Piggyback Registration Rights

Right of investors to have shares included in a public offering the company plans to conduct for itself or another shareholder. Usually this applies to an unlimited number of offerings until the registrations rights terminate

Convertible

Right of the investor to convert shares of preferred stock into shares of common stock at the conversion rate stated in corporate charter. Usually automatic in occurrence of IPO, because companies sell common stock in their IPOs.

Demand Registration Rights

Right of the investors to require the company to register the investors' shares for sale to the public even if the company was not otherwise planning to conduct a public offering. Typically, not exercisable until after the company's IPO or stated period of time

Drag-Along Rights

Right of the owners of a specified % of the company to require other shareholders to sell their shares or to vote their shares to approve sales of the company. Prevents one group of shareholders from blocking sales of company to someone who only wants to buy 100%

Control Rights

Rights of an investor or shareholder relating to control over the company's affairs.

Piggyback Rights

Rights of an investor to have their shares included in a registration of a company's shares in preparation of an IPO

Carried Interest

Share of generated profits that an investment managed is entitled to keep as compensation. VC fund incentive fees range from 20% to 30%. Incentive fee or performance fee

Preemptive Rights

Similar to the rights of first refusal. Refers to the right to purchase a company's new shares before they are offered to anyone. May be titled Right to participate pro rata in future rounds.

Allocation

Size of the round that is set aside for specific investor, usually communicated in dollar amount

Fiduciary

Someone who has special duties to another person and who has liability for not performing that duty

Exit Velocity

Speed between investment and exit, immediately when the investment is made to the liquidity event that allows the investor to cash out

Come Along Rights

Tag Along Rights. Right of an investor to sell shares, if a founder or other key employees sells shares. Designed to protect the investors against being trapped in an investment after founders have cashed out

Participating Preferred Stock

A class of stock with a Liquidation Preference, whereby on liquidation, sale or merger of the company, the owner has the right to share on an equal basis with holders of Common Stock any money or other assets that remain for distribution after payment of the Liquidation Preference of the Preferred Stock. With Nonparticipating Preferred Stock, the holders of Preferred Stock must choose either to receive their Liquidation Preference or to receive the same distribution holders of Common Stock receive. A holder of Participating Preferred Stock doesn't have to choose and receives both.

Portfolio Company

A company that has received an investment from a venture capital fund becomes a portfolio company of that fund

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.

Fund of funds

A fund created to invest in private equity or venture capital funds. This entity if often referred to as a LP to the venture capital funds.

Letter of Intent (LOI)

A letter of intent (LOI) is similar to a memorandum of understanding (MOU) in that is is a common agreement between businesses (including startups) and potential customers to define commitment, interest, terms, and pricing in writing prior to delivering the good or service. This document is used to clarify understanding of both the customer and founder and often used to show investors. LOI and MOU agreements are used interchangeably and usually non-binding. At times, in working with customers on large projects with multiple phases where the customer and business work together before payment and services are exchanged a MOU may be used before a LOI is used to define pricing and terms. Also see Memorandum of Understanding (MOU).

Bridge Loan / Financing

A loan given to a startup by investors that serves to fund the company until the next round of financing. Bridge loan is usually converted into equity at the next equity financing of the company

Convertible Debt

A loan that allows the lender to exchange the debt for common stock at a predetermined ratio instead of collecting the principle as cash.

Earnings before interest and taxes (EBIT)

A measurement of the operating profit of the company. Possible valuation method is based on comparison or private and public companies' value as a multiple of EBIT

Option Pool

A number of shares of Common Stock specified in the corporate charter that can be sold to employees, officers and directors at low prices without triggering the Price Antidilution Protection of the Preferred Stock. 15% of the fully diluted shares is fairly typical, although the size of the Option Pool usually depends on the number of shares estimated to be necessary to grant to employees to attract a team capable of achieving the goals of the company's business plan. This varies from one company to another. Option Pool shares are usually considered to be outstanding shares when calculating the company's valuation.

Lock-up Period

A period of time that must elapse before the hold of a specific security can transfer or sell the security

Employee Stock Ownership Plan (ESOP)

A pool of options that is reserved for future employee compensation

Incubator

A program that provides the mentorship and capital necessary to accelerate the growth and success of young startups. Program will provide some capital in exchange for some equity in the startup

Accelerator

A program that provides the mentorship and capital needed to accelerate the growth and success of young startups. Program will provide some capital in exchange for some equity stake in the company.

Inside Round

A round of financing entirely composed of existing investors

Accredited Investor

An individual or institution that meets certain wealth criteria, and is therefore deemed to be sophisticated enough to participate in private, non-public investments. Individual = >$200,000/yr Couple = >$300,000/yr OR Net Worth = >$1,000,000 Organization =>$5,000,000 in assets

Party Round

A trend beginning several years ago in early financing round where, instead of raising large amounts of money from a few large investors, companies are raising small amounts of money from many small investors

Preferred Stock

Aclass of stock with a Liquidation Preference; that is, the right to receive distributions of money or assets prior to one or more other classes of stock if the company is sold, merged or liquidated. This protects investors by ensuring the investors get their money back (and sometimes a fixed return on the investment) before holders of Common Stock receive any money or assets.

General Solicitation

Act of publicly soliciting investors, usually through advertising or any other non-controlled method of a public offering. If a company engages in public solicitation, it may eliminate certain safe harbors that were previously afforded to them under current securities regulation

exercise price (strike price)

Amount that must be paid to execute your options. Exercise price is pegged to the "Fair Market Value" on the date of issuance, rather than the vesting date

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

Milestone

An event that triggers another investment by the venture investors

ARR

Annual revenue run rate; the revenue for the last month multiplied times 12 months as an estimate of the total revenue rate for the year.

Dilution

As subsequent financing rounds occur, existing investors will own proportionally less of the company than they did since additional equity is generally issues as a part of a new round. Not always bad, since new stock can be issued at higher price. Value could be worth more.

AOV

Average Order Value

ARRG Ratio

Average Recurring Revenue (RRR) / Growth Rate

ARPU

Average Revenue Per User

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.

Post-Money Valuation

Calculating by adding the dollar amount invested in the transaction to the pre-money valuation

Friends and Family Round

Capital provided by the friends and families of founders of an early stage startup. This is typically first outside capital. The startup is generally too early to raise capital from professional angel or seed investors, but needs capital to get started

No Shop clause

Clause in term sheet that states to the founder they are not to share the term sheet with other investors in order to receive a competing offer. Give founder about a week or less for a decision on Aterm sheet to limit the time founders have to unofficially shop around the deal

Key man clause

Clause in the Limited Partnership Agreement (LPA) that enables the LP to break the agreement if one of the major GPs in the fund leave

Elevator Pitch

Concise presentation given from an entrepreneur to a potential investor about investment opportunity.

Anti-dilution clause

Contractual clause that protects an investor from having their investment as a % of ownership significantly reduced in subsequent rounds of financing. The provision increases the number of shares of common stock issuable upon conversion of a convertible security or upon exercise of a warrant or option upon the occurrence of specified events, usually the issuance of more shares for a low price.

Gross Margin

Different between revenue and cost of goods sold (Cogs), divided by revenue

Clawback

Employee stock vesting agreements generally have a cliff, one per year, before which no employee stock options vest

Liquidation

Event that could result in either investors or debt holders to receive cash from the company, either through acquisition or a sale of assets resulting from bankruptcy. Preference clauses determine order of payout to claimants, valuing debt holders and preferred shareholders over common stockholders

OA

GP Operation Agreement - governance document for the GP that is based on the term sheet and includes specifics related to the economics of the deal among fund managers, management and operations, transfers and substitutions, termination, and dissolution and vesting

GP

General Partner of a fund

Management Fee

Fees that a fund will charge its LP each year. Range from 1-3% annually and are generally charged based on committed capital during the investment period, and then invested capital after the investment period has finsihed

Anchor Investor

First investor in a fund; aka lead investor

Participating Preferred

For the term, the Participating preferred stock holders are entitled to receive a share of any remaining liquidation proceeds on an as-converted to common stock basis, after they have already gotten back their liquidation preference, whereas non-participating preferred stock holders either get (i) their liquidation preference back, or (ii) the amount they would have gotten had they converted to common stock. In other words, participating preferred gets the original capital back and the share of ownership. This term is sometimes referred to as investors double dipping as investors are getting the capital and the ownership verses just the percentage of the capital.

Fully Diluted

Fully diluted means the total number of shares of Common Stock the company has issued, plus all shares of Common Stock issuable if all outstanding options, warrants, convertible, preferred stock and convertible debt were to be exercised or converted. Fully diluted calculations are used to compare the % ownership of a company of different classes of securities by reducing each class to its common stock equivalent.

K1

IRS tax form issued annually for an investment in partnership interests. Report each partners' share of the partnership's earnings, losses, deductions, and credits. Similar to Forms 1099, which report dividend or interest from securities or income from the sale of securities Document sent to LP investors by the fund that tells investors the % of the profits and losses of the fund that they are responsible for

Cumulative Dividend

If the dividend is not declared during the period stated in the corporate charter, the divided accrues and is payable in a later period. If not cumulative, it would be lost forever. Accrued but unpaid are sometimes convertible into shares of common stock

Key man insurance

Insurance on the life of the key employees which the investors require the company to obtain

Lead Investor

Investor who takes on most of the work in negotiating the investment terms, doing due diligence and monitoring the company after the closing. Lead investor usually invests more than other investors who participate in the round. They often located near the company or specializes in the company's industry

Pay to Play

Investors can raise there ante with con-investors by means of a pay to play provision, requiring that all investors in a portfolio company continue their pro rata financial commitment to the company, or else lose certain rights with respect to their original investment. Rights can often be anti-dilution right.

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.

Issuer

The entity / company that shares represent ownership in

Memorandum of Understanding (MOU)

The memorandum of understanding (MOU) is a common agreement between startups who are pre-product and potential customers to define commitment, interest, terms, and pricing in writing prior to delivering the good or service. LOI and MOU agreements are used interchangeably and usually non-binding. At times the MOU is used in partnerships to define working relationships where no financial exchange is yet made. At times, in working with customers on large projects with multiple phases where the customer and business work together before payment and services are exchanged a MOU may be used before a LOI is used to define pricing and terms. This document is usually also used to clarify understanding of both the customer and founder and often used to show investors. Also see Letter of Intent (LOI).

Full Ratchet

The method of total protection from dilution is called a 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. In more technical terms, it is a type of Antidilution Protection that adjusts the Conversion Ratio so that each share of Preferred Stock will be convertible into a number of shares of Common Stock equal to the number of shares the investor would have received, if the investor had purchased the shares at the lowest subsequent price at which the company later sells its stock. The number of shares sold at the lower price doesn't matter. Only the lower price matters. For example, if the company sells Preferred Stock with a one-for-one Conversion Ratio for $10 per share and later sells Common Stock for $1 per share, each share of Preferred Stock would become convertible into ten shares of Common Stock, even if only one share is sold at the lower price.

Liquidation Preference

The order in which investors, or debt holders, get paid in the event of company liquidation or bankruptcy. Commonly used by venture capitalists to ensure they see a return on their investment in different liquidation scenarios.

Protective Provisions

The right of an investor or group of investors to veto certain transactions by the company. Achieved by prohibiting certain transactions, unless they are approved by a class vote of the preferred stock

Over Allotment Options

The right of investors to exercise the First Refusal Rights and Come Along Rights of other investors who do not exercise their own rights

Information Rights

The right of investors to have the company provide financial information annually, quarterly or monthly and other information as requested by investors. 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.

First Refusal Right

The right to purchase stock in future offerings by the company on the same terms as other investors. Usually the right is designed to enable investors to maintain their percentage ownership of the company by purchasing a pro rata share of all new stock sold by the company. Investors also often require company founders to grant first refusal rights on shares the founders own. Also sometimes called Preemptive Rights.

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 $3 million in a company with a $10 million pre-money valuation, the post-money valuation is $13 million.

Pre-Money Valuation

Theoretical value of the company before the investment agreed upon by the company and the investors. Pre-Money valuation is calculated by multiplying the number of fully diluted shares of the company before the investment transaction by the purchase price per share in the investment transaction

409A Valuation

Third party valuation of a company's stock. Used by startup companies to help determine the exercise price for company stock options

Common Stock

Type of equity security, contrasted with preferred shares. Common stock is most frequently issued to founders management, and employees. In liquidation event, preferred shares generally take priority over common shares

Fair Market Value

Value of a company based on what investors are willing to pay for it. For private companies or illiquid assets fair market value is derived from comparable companies for assets that have recently had a transaction associated with them.

Angel Investor

Wealthy individuals that invest in startups in their early stages of development or seed rounding of fundraising. Due to risk of loss and dilution, they look for companies in which they can earn multiples of their initial investment

Capital Call

When a fund makes an investment and messages LPs to put capital into the fund account to invest in the portfolio companies

Blended Preferences

When all classes of preferred stock have equal payment rights in the event of liquidation

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

Cutback Rights

Where shareholders exercise piggyback registrations rights, but there are too many shares for the underwriters to sell in the public offering without adversely affecting the price. Cutback rights determine whose shares are left out of the offering and whose shares are included in the offering