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