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"A" round — a financing event whereby venture capitalists become involved in a fast-growth company that was previously financed by founders and/or angels.
Accredited investor — a person or legal entity, such as a company or trust fund, that meets certain net worth and income qualifications
and is considered to be sufficiently sophisticated to make investment decisions in complex situations. Regulation D
of the Securities Act of 1933 exempts accredited investors from protection under the Securities Act. Typical qualifications
for a person are: $1 million net worth and annual income exceeding $200,000 individually or $300,000 with a spouse. Directors and executive officers are considered to be accredited investors. After-tax operating income — see Net operating income after taxes. Airball — a loan whose value exceeds the value of the collateral. Alpha — a term derived from statistics and finance theory that is used to describe the return produced by a fund manager in excess of the return of a benchmark index. Manager returns and benchmark returns are measured net of the risk-free rate. In addition, manager returns are adjusted for the risk of the manager's portfolio relative to the risk of the benchmark index. Alpha is a proxy for manager skill. Alternative asset class — a class of investments that includes private equity, real estate, and oil and gas, but excludes publicly traded securities. Pension plans, college endowments, and other relatively large institutional investors typically allocate a certain percentage of their investments to alternative assets with an objective to diversify their portfolios. Angel — a wealthy individual that invests in companies in relatively early stages of development. Usually angels invest less than $1 million per startup. The typical angel-financed startup is in concept or product development phase. Anti-dilution — a contract clause that protects an investor from a substantial reduction in percentage ownership in a company due to the issuance by the company of additional shares to other entities. The mechanism for making adjustments is called a Ratchet. "B" round — a financing event whereby professional investors such as venture capitalists are sufficiently interested in a company to provide additional funds after the "A" round of financing. Subsequent rounds are called "C", "D", and so on. Balloon payment — a relatively large principal payment due at a specific time as required by a lender. Basis point ("bp") — one one-hundredth (1/100) of a percentage unit. For example, 50 basis points equals one half of one percent. Banks quote variable loan rates in terms of an index plus a margin and the margin is often described in basis points, such as LIBOR plus 400 basis points (or, as the experts say, "beeps"). Best efforts offering — a commitment by a syndicate of investment banks to use best efforts to ensure the sale to investors of a company's offering of securities. In a best efforts offering, the syndicate avoids any firm commitment for a specific number of shares or bonds. Beta — a measure of volatility of a public stock relative to an index or a composite of all stocks in a market or geographical region. A beta of more than one indicates the stock has higher volatility than the index (or composite) and a beta of one indicates volatility equivalent to the index (or composite). For example, the price of a stock with a beta of 1.5 will change by 1.5% if the index value changes by 1%. Typically, the S&P500 index is used in calculating the beta of a stock. Beta Product — a product that is being tested by potential customers prior to being formally launched into the marketplace. Blow-out round — see Cram-down round Blue sky — regulations in individual states regarding the sale of securities and mutual funds. These laws are intended to protect investors from purposely fraudulent transactions. Board of directors — a group of individuals, typically composed of managers, investors, and experts, which have a fiduciary responsibility for the well being and proper guidance of a corporation. The board is elected by the shareholders. Boat anchor — a person, project or activity that hinders the growth of a company. Book — see Private placement memorandum. Book runner — the lead bank that manages the transaction process for an equity or debt financing, including documentation, syndication, pricing, allocation and closing. Book value — the book value of a company is the value of the common stock (total assets minus liabilities minus preferred stock minus intangible assets). The book value of an asset of a company is typically based on its original cost minus accumulated depreciation. Bootstrapping — the actions of a startup to minimize expenses and build cash flow, thereby reducing or eliminating the need for outside investors. Bp — see Basis point. Bridge financing — temporary funding that will eventually be replaced by permanent capital from equity investors or debt lenders. In venture capital, a bridge is usually a short term note (6 to 12 months) that converts to preferred stock. Typically, the bridge lender has the right to convert the note to preferred stock at a price that is a 20% discount from the price of the preferred stock in the next financing round. See Wipeout bridge and Hamburger Helper bridge. Broad-based weighted average ratchet — a type of anti-dilution mechanism.
A weighted average ratchet adjusts downward the price per share of the preferred stock of investor A due to the
issuance of new preferred shares to new investor B at a price lower than the price investor A originally received.
Investor A's preferred stock is repriced to a weighed average of investor A's price and investor B's price. A
broad-based ratchet uses all common stock outstanding on a fully diluted basis (including all convertible
securities, warrants and options) in the denominator of the formula for determining the new weighted average price. See Narrow-based weighted average ratchet. Bullet payment — a payment of all principal due at a time specified by a bank or a bond issuer. Burn rate — the rate at which a startup with little or no revenue uses cash savings to cover expenses. Usually expressed on a monthly or weekly basis. Business Development Company (BDC) — a publicly traded company that invests in private companies and is required by law to provide meaningful support and assistance to its portfolio companies. Business plan — a document that describes a new concept for a business opportunity. A business plan typically includes the following sections: executive summary, market need, solution, technology, competition, marketing, management, operations and financials. Buyout — a sector of the private equity industry. Also, the purchase of a controlling interest of a company by an outside investor (in a leveraged buyout) or a management team (in a management buyout). Buy-sell agreement — a contract that sets forth the conditions under which a shareholder must first offer his or her shares for sale to the other shareholders before being allowed to sell to entities outside the company. C corporation — an ownership structure that allows any number of individuals or companies to own shares. A C corporation is a stand-alone legal entity, so it offers some protection to its owners, managers and investors from liability resulting from its actions. Call date — when a bond issuer has the right to retire part or all of a bond issuance at a specific price. Call premium — the premium above par value that an issuer is willing to pay as part of the redemption of a bond issue prior to maturity. Call price — the price an issuer agrees to pay to bondholders to redeem all or part of a bond issuance. Call protection — a provision in the terms of a bond specifying the period of time during which the bond cannot be called by the issuer. Capital Asset Pricing Model (CAPM) — a method of estimating the cost of equity capital of a company. The cost of equity capital is equal to the return of a risk-free investment plus a premium that reflects the risk of the company's equity. Capital call — when a private equity fund manager (usually a "general partner" in a partnership) requests that an investor in the fund (a "limited partner") provide additional capital. Usually a limited partner will agree to a maximum investment amount and the general partner will make a series of capital calls over time to the limited partner as opportunities arise to finance startups and buyouts. Capital gap — the difficulty faced by entrepreneurs trying to raise between $2 million and $5 million. Friends, family and angel investors are typically good sources for financing rounds of less than $2 million, while many venture capital funds have become so large that they are only interested in investing amounts greater than $5 million. Capitalization table — a table showing the owners of a company's shares and their ownership percentages as well as the debt holders. It also lists the forms of ownership, such as common stock, preferred stock, warrants, options, senior debt, and subordinated debt. Capital gains — a tax classification of investment earnings resulting from the purchase and sale of assets. Typically, an investor prefers that investment earnings be classified as long term capital gains (held for a year or longer), which are taxed at a lower rate than ordinary income. Capital stock — a description of stock that applies when there is only one class of shares. This class is known as common stock. Capped participating preferred stock — preferred stock whose participating feature is limited so that an investor cannot receive more than a specified amount. See Participating preferred. Carried interest — a share in the profits of a private equity fund. Typically, a fund must return the capital given to it by limited partners plus any preferential rate of return before the general partner can share in the profits of the fund. The general partner will then receive a 20% carried interest, although some successful firms receive 25%-30%. Also known as "carry" or "promote." Catch-up — a clause in the agreement between the general partner and the limited partners of a private equity fund. Once the limited partners have received a certain portion of their expected return, the general partner can then receive a majority of profits until the previously agreed upon profit split is reached. Change of control bonus — a bonus of cash or stock given by private equity investors to members of a management group if they successfully negotiate a sale of the company for a price greater than a specified amount. Clawback — a clause in the agreement between the general partner and the limited partners of a private equity fund. The clawback gives limited partners the right to reclaim a portion of disbursements to a general partner for profitable investments based on significant losses from later investments in a portfolio. Closing — the conclusion of a financing round whereby all necessary legal documents are signed and capital has been transferred. Club deal — see Co-investment. Co-investment — either a) the right of a limited partner to invest with a general partner in portfolio companies, or b) the act of investing by two or more entities in the same target company (also known as a Club deal). Collateral — hard assets of the borrower, such as real estate or equipment, for which a lender has a legal interest until a loan obligation is fully paid off. Commitment — an obligation, typically the maximum amount that a limited partner agrees to invest in a fund. Common stock — a type of security representing ownership rights in a company. Usually, company founders, management and employees own common stock while investors own preferred stock. In the event of a liquidation of the company, the claims of secured and unsecured creditors, bondholders and preferred stockholders take precedence over common stockholders. See Preferred stock. Comparable — a publicly traded company with similar characteristics to a private company that is being valued. For example, a telecommunications equipment manufacturer whose market value is 2 times revenues can be used to estimate the value of a similar and relatively new company with a new product in the same industry. See Liquidity discount. Control — the authority of an individual or entity that owns more than 50% of equity in a company or owns the largest block of shares compared to other shareholders. Consolidation — see Rollup. Conversion — the right of an investor or lender to force a company to replace the investor's preferred shares or the lender's debt with common shares at a preset conversion ratio. A conversion feature was first used in railroad bonds in the 1800s. Convertible debt — a loan which allows the lender to exchange the debt for common shares in a company at a preset conversion ratio. Convertible preferred stock — a type of stock that gives an owner the right to convert to common shares of stock. Usually, preferred stock has certain rights that common stock doesn't have, such as decision-making management control, a promised return on investment (dividend), or senior priority in receiving proceeds from a sale or liquidation of the company. Typically, convertible preferred stock automatically converts to common stock if the company makes an initial public offering (IPO). Convertible preferred is the most common tool for private equity funds to invest in companies. Convertible security — a security that gives its owner the right to exchange the security for common shares in a company at a preset conversion ratio. The security is typically preferred stock, warrants or debt. Co-sale right — a contractual right of an investor to sell some of the investor's stock along with the founder's or majority shareholder's stock if either the founder or majority shareholder elects to sell stock to a third-party. Also known as Tag-along right. Cost of capital — see Weighted average cost of capital. Cost of revenue — the expenses generated by the core operations of a company. Covenant — a legal promise to do or not do a certain thing. For example, in a financing arrangement, company management may agree to a negative covenant, whereby it promises not to incur additional debt. The penalties for violation of a covenant may vary from repairing the mistake to losing control of the company. Coverage ratio — describes a company's ability to pay debt from cash flow or profits. Typical measures are EBITDA/Interest, (EBITDA minus Capital Expenditures)/Interest, and EBIT/Interest. Cram down round — a financing event upon which new investors with substantial capital are able to demand and receive contractual terms that effectively cause the issuance of sufficient new shares by the startup company to significantly reduce ("dilute") the ownership percentage of previous investors. Cumulative dividends — the owner of preferred stock with cumulative dividends has the right to receive accrued (previously unpaid) dividends in full before dividends are paid to any other classes of stock. Current ratio — the ratio of current assets to current liabilities. |
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