“A” round – a financing event whereby angel groups and / or venture capitalists become involved in a fast growth company that was previously financed by founders and their friends and families.
AFIC – Association Francaise des Investisseurs en Capital, the French trade association for private equity professionals, including venture capital and buy-out firms.
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 venture capital, leveraged buyouts, hedge funds, 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 the objective of diversifying 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.
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 an adjustment that maintains the same percentage ownership is called a Full ratchet. The most commonly used adjustment provides partial protection and is called Weighted average anti-dilution.
Asset based lending (ABL) – a form of funding secured against assets of the business; typically, inventory, accounts receivable, and fixed assets. It can be a useful source of finance to bridge a funding gap in a proposed transaction, as well as an effective method of managing working capital. ABL includes invoice discounting and factoring.
Auction – a process run by the vendors of a company, or by an advisor on their behalf, to create optimal shareholder value by marketing the company widely. Such processes can have many interested parties and multiple rounds of bidding.
“B” round – a financing event whereby investors such as venture capitalists and organized angel groups 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&P 500 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.
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 who 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 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 as shown on its balance sheet. This is defined as 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.
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% to 25% discount from the price of the preferred stock in the next financing round. See Mezzanine and Wipeout bridge.
Broad-based weighted average anti-dilution – A weighted average anti-dilution method 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 weighted average of investor A’s price and investor B’s price. A broad-based anti-dilution method 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 anti-dilution.
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 available cash 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, exit strategy, and financials (including cash flow projections). For most venture capital funds fewer than 10 of every 100 business plans received eventually receive funding.
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.
BVCA – British Venture Capital Association, the trade association for private equity in the UK, including both venture capital and buyout activity.
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 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 gap – the difficulty faced by some entrepreneurs in 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 rate ("cap rate") – a ratio of a real estate property's net operating income to its current market value. Capitalization rates can vary from year to year as the level of income generated by the property fluctuates.
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.
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 stock.
Carried interest – the share in the capital gains of a venture capital fund which is allocated to the general partner. 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 typically receive a 20% carried interest, although some successful firms receive 25% to 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 – the act of investing by two or more entities in the same target company, usually involving a leveraged buyout transaction.
Co-investment – the direct investment by a limited partner alongside a general partner in a portfolio company.
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.
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 private or publicly traded company with similar characteristics to a private or public company that is being valued. For example, a telecommunications equipment manufacturer whose market value is 2 times revenues, or who was sold for 2 times revenue, 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.
Completion accounts – accounting statements of the target in a transaction, prepared on an agreed basis (which may deviate from GAAP) on the date of completion of the transaction.
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.
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 1800’s.
Convertible debt – a loan which allows the lender to exchange the debt for common shares in a company at a preset conversion ratio. Also known as a “convertible note.”
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 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. This is also referred to as an interest coverage ratio.
Cram down round – a financing round whereby previous investors, the founders and management suffer significant dilution. Usually as a result of a washout round, the new investor gains majority ownership and control of the company. Also known as a Washout round.
Cross guarantee – a commitment given by one or more companies in a group in support of another group company, often to assist another company in the same group to raise financing.
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.