Venture Capital
Business Summary
A brief statement covering the main points that includes a discussion of management, profits, strategic position, and exit plan
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. endowments funds, foundations etc.).
Term Sheet
Letter of intent summarizing the key legal and financial terms
Bootstrapping
Means of financing a small firm by employing highly creative ways of using and acquiring resources without raising equity from traditional sources or borrowing money from the bank.
debt financing
Money that business owners must pay back with interest. There are myriad types of these, from simple commercial loans to bridge/swing loans in which a lender makes a short-term loan in anticipation of equity financing at a later stage in the development of a business.
S Corporation
No double tax
Post-money
Pre-money valuation plus the amount invested in the latest round
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.
equity offerings
Raising funds by offering ownership in a corporation through the issuing of shares of a corporation's common or preferred stock.
equity financing
Selling an interest in your business to an outside party to raise money.
Restricted Shares
Shares acquired in a private placement are considered restricted shares and may not be sold in a public offering absent registration, or after an appropriate holding period has expired. Non-affiliates must wait one year after purchasing the shares, after which time they may sell less than 1% of their outstanding shares each quarter. For affiliates, there is a two-year holding period.
Capital Call "Drawdown"
a request from the GPs requiring each limited partner to deliver a portion of their capital commitment. Usually specified as a percentage of the capital commitment
Equity
means the residual ownership in a company like a corporation or LLC 51%=control
Senior Stock
most senior form of debt and is usually secured by the assets of the company. Cannot vote on anything
Limited Partner
partner who does not share in a firm's management and is liable for its debts only to the limits of said partner's investment
Stock Price Agreement
"I will buy stock at price we negotiate"
Warrants
"IOU" for stock
Corporation
(Limited liability and taxation) a business owned by stockholders who share in its profits but are not personally responsible for its debts
Allows for anyone to buy stock and now falls under the SEC (No longer accredited investor)
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Confidentiality-Don't talk to the market about the company
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Limited number of investors
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Unlimited number of investors
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form of equity similar to option allowing the Warrant holder to exercise the Warrant and obtain equity
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Preferred Stock
A class of capital stock that may pay dividends at a specified rate and that has priority over common stock in the payment of dividends and the liquidation of assets. Many venture capital investments use preferred stock as their investment vehicle. This preferred stock is convertible into common stock at the time of an IPO.
Business Plan
A detailed document that outlines what you are going to do and how you are going to do it, including a clear and simple discussion of the idea; the management team - including full resumes; business strategy; marketing plan - including sales projections, distribution, market, and competition; financials; and a competitive analysis.
Venture Capitalist
A financial institution specializing in the provision of equity and other forms of long-term capital to enterprises, usually to firms with a limited track record but with the expectation of substantial growth. The venture capitalist may provide both funding and varying degrees of managerial and technical expertise.
Preferred Stock
A form of equity ownership in a corporation that contains preferences over common stock, stock whose holders are guaranteed priority in the payment of dividends but whose holders have no voting rights
Bridge Financing
A limited amount of equity or short-term debt financing typically raised within 6-18 months of an anticipated public offering or private placement meant to "bridge" a company to the next round of financing.
Restricted Stock
A security with limits on its transferability. Usually issued in connection with a private placement
Due Diligence
A study of the background and financial reliability of the company, management team and industry.
follow-on
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 investments.
Preferred Stock
A type of equity ownership in a corporation, stock whose holders are guaranteed priority in the payment of dividends but whose holders have no voting rights.
Common Stock
A unit of ownership of a corporation. In the case of a public company, the stock is traded between investors on various exchanges. Owners of common stock are typically entitled to vote on the selection of directors and other important events and in some cases receive dividends on their holdings. Investors who purchase common stock hope that the stock price will increase so the value of their investment will appreciate. Common stock offers no performance guarantees. Additionally, in the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock.
Cash-out election
Allows the holder to choose whether a merge or sale will be treated as a liquidation event for the purpose of receiving the funds they are entitled to under the liquidation preferences of the term sheet
Capitalization Table
Also called a "Cap Table", this is a table showing the total amount of the various securities issued by a firm. This typically includes the amount of investment obtained from each source and the securities distributed -- e.g. common and preferred shares, options, warrants, etc. -- and respective capitalization ratios.
Lead Investor
Also known as a bell cow investor. Member of a syndicate of private equity investors holding the largest stake, in charge of arranging the financing and most actively involved in the overall project
Deal Structure
An Agreement made between the investor and the company defining the rights and obligations of the parties involved. The process by which one arrives at the final term and conditions of the investment.
Qualified IPO
An IPO that has met certain
leverage buy-out(LBO)
An acquisition of a business using mostly debt and a small amount of equity. The debt is secured by the assets of the business.
NDA (Non-disclosure agreement)
An agreement issued by entrepreneurs to potential investors to protect the privacy of their ideas when disclosing those ideas to third parties.
Elevator Pitch
An extremely concise presentation of an entrepreneur's idea, business model, company solution, marketing strategy, and competition delivered to potential investors. Should not last more than a few minutes, or the duration of an elevator ride.
Dividends
Cash, stock and other property by the company to the investor in the investor's capacity as a stock. payment to owner for their appreciation
Venture Capital Financing
An investment in a startup business that is perceived to have excellent growth prospects but does not have access to capital markets. Type of financing sought by early-stage companies seeking to grow rapidly.
fund of funds
An investment vehicle designed to invest in a diversified group of investment funds.
Anti-Dilution Protections
Are the means by which an investor preserves its percentage of ownership in the company without having to make a new investment.
C Corporation
Assets are subject to double taxation
No Shop/Confidentiality
Cannot get other outside investors-No Shop
Angel Financing
Capital raised for a private company from independently wealthy investors. This capital is generally used as seed financing.
IRR
Compound internal rate of return.
Initial Public Offering
Corporation's first offer to sell stock to the public.
Closing
Date the LP's subscription is effective and they become partner
Limited Partnership Agreement
Document between general and limited partnership of each fund spells out details of the partnership.
Private Equity
Equity securities of companies that have not "gone public" (are not listed on a public exchange). Private equities are generally illiquid and thought of as a long-term investment. As they are not listed on an exchange, any investor wishing to sell securities in private companies must find a buyer in the absence of a marketplace. In addition, there are many transfer restrictions on private securities. Investors in private securities generally receive their return through one of three ways: an initial public offering, a sale or merger, or a recapitalization.
Common Equity
First to absorb losses. Represents common shareholders' investment in a company. It includes common stock value, retained earnings, capital surplus.
Conversion Rights
Force sell of stock at a predetermined price. The rights by which the investor's preferred stock or subordinated debt "converts" into common stock
buyout
Funds provided to enable an enterprise to acquire another enterprise or product line or business.
Liquidation
How fast you can turn it into cash, termination of a business operation by using its assets to discharge its liabilities
Pre-Money Valuation
How much the company is worth before an investment
Liquidation Preference
How you get out
Voting Rights
How you get to vote
angel investors
Individuals that provide venture capital to seed or early stage companies. They can usually add value through their contracts and expertise.
IPO(initial public offerings)
Issue of shares of a company to the public by the company (directly) for the first time.
Term Sheet
Term sheet for equity offering
acquisition
The act of one company taking over controlling interest in another company. Investors often look for companies that are likely candidates for this, because the acquiring firms are often willing to pay a premium to the market price for the shares.
Outstanding Stock
The amount of common shares of a corporation which are in the hands of investors. It is equal to the amount of issued shares less treasury stock.
capital under management
The amount of this available to a management team for venture investments.
Liquidation Preference
The amount to be paid when the company is liquidated or sold before any payments are made lower classes of investors. Not everyone gets paid equally
Capital
The equity of the company and some types of debts (subordinated debt) but generally not senior secured debt (bank loan)
Membership Interest
The equity ownership in a LLC. May be either common or preferred. Partnership agreement
Common Stock
The equity ownership in a corporation. Also has basic voting rights
Liquidity Event
The event in which the company is liquidated or sold (bankruptcy or sale to a public company)
Seed Money
The first round of capital for a start-up business. Seed money usually takes the structure of a loan or an investment in preferred stock or convertible bonds, although sometimes it is common stock. Seed money provides startup companies with the capital required for their initial development and growth. Angel investors and early-stage venture capital funds often provide seed money.
Series A Preferred Stock
The first round of stock offered during the seed or early stage round by a portfolio company to the venture investor or fund. This stock is convertible into common stock in certain cases such as an IPO or the sale of the company. Later rounds of preferred stock in a private company are called Series B, Series C and so on.
due diligence
The investigation and evaluation of a management team's characteristics, investment philosophy, and terms and conditions prior to committing capital to the fund.
lead investor
The investor who leads a group of investors into an investment. Usually one venture capitalist will be this when a group of venture capitalists invest in a single business.
Capital Commitment
The maximum amount of cash that a partner is required to contribute under the terms
Burn Rate
The rate at which a company expends net cash over a certain period, usually a month.
Internal Rate of Return
The rate of return or profit that an investment is expected to earn.
going private
The repurchasing of all of a company's outstanding stock by employees or a private investor. As a result of such an initiative, the company stops being publicly traded. Sometimes, the company might have to take on significant debt to finance the change in ownership structure.
IPO (Initial Public Offering)
The sale or distribution of a stock of a portfolio company to the public for the first time. IPOs are often an opportunity for the existing investors (often venture capitalists) to receive significant returns on their original investment. During periods of market downturns or corrections the opposite is true.
exit
The sale or exchange of a significant amount of company ownership for cash, debt, or equity of another company.
Market Capitalization
The total dollar value of all outstanding shares. Computed as shares multiplied by current price per share. Prior to an IPO, market capitalization is arrived at by estimating a company's future growth and by comparing a company with similar public or private corporations.
Pre-money valuation
The total value of the company immediately prior to the latest round of financing
Post-Money Valuation
The valuation of a company immediately after the most recent round of financing. For example, a venture capitalist may invest $3.5 million in a company valued at $2 million "pre-money" (before the investment was made). As a result, the startup will have a post-money valuation of $5.5 million.
Pre-Money Valuation
The valuation of a company prior to a round of investment. This amount is determined by using various calculation models, such as discounted P/E ratios multiplied by periodic earnings or a multiple times a future cash flow discounted to a present cash value and a comparative analysis to comparable public and private companies.
Book Value
The value at which an asset is carried on a balance sheet (the cost of the item)
PPM
The way you buy stock
benchmarks
These are performance goals against which a company's success is measured. Often, they are used by investors to help determine whether a company will receive additional funding or whether management will receive extra stock. Sometimes management will agree to issue more stock to its investors if the company does not meet these, thus compensating the investor for the delay of his return.
bridge loans
These are short-term financing agreements that fund a company's operation until it can arrange a more comprehensive longer-term financing. The need for these arises when a company runs out of cash before it can obtain more capital investment though long-term debt or equity.
executive summary
This refers to a synopsis of the key points of a business plan.
Subordinated Debit
Unsecured debit, junior to senior debit (bank loan) and is senior to common stock and preferred. Gets paid last
capital gain
When an investor sells a stock, bond or mutual fund at a higher price than he or she paid for it.
closing
the final event to complete the investment, at which time all the legal documents are signed and the funds are transferred.
limited partnerships
the legal structure used by most venture and private equity funds. Usually fixed life investment vehicles. The general partner or management firm manages the partnership using policy laid down in a partnership agreement. The agreement also covers, terms, fees, structures and other items agreed between the limited partners and the general partner.
exit route
the method by which an investor will realize an investment.
General Partner (GP)
the party that manages a limited partnership and is liable for the debts of the company
lock-up period
the period an investor must wait before selling or trading company shares subsequent to an exit. Usually in an initial public offering this period is determined by the underwriters.
corporate venturing
the practice of a large company taking a minority equity position in a smaller company in a related field.
liquidation
the sale of the assets of a portfolio company to one or more acquirers when venture capital investors receive some of the proceeds of the sale.
Adjusted Book Value
used to compute net worth as the difference between total assets and total liabilities. adjusted value up to reflect market value