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S corporation – an ownership structure that limits its number of owners to 100. An S corporation does not pay taxes, rather its owners pay taxes on their proportion of the corporation’s profits at their individual tax rates. Scalability – a characteristic of a new business concept that entails the growth of sales and revenues with a much slower growth of organizational complexity and expenses. Venture capitalists look for scalability in the startups they select to finance. Scale-down – a schedule for phased decreases in management fees for general partners in a limited partnership as the fund reduces its investment activities toward the end of its term. Scale-up – the process of a company growing quickly while maintaining operational and financial controls in place. Also, a schedule for phased increases in management fees for general partners in a limited partnership as the fund increases its investment activities over time. SEC – see Securities and Exchange Commission. Secondary market – a market for the sale of limited partnership interests in private equity funds. Sometimes limited partners chose to sell their interest in a partnership, typically to raise cash or because they cannot meet their obligation to invest more capital according to the takedown schedule. Certain investment companies specialize in buying these partnership interests at a discount. Secondary shares – shares sold by a shareholder (not by the corporation). Secured debt – debt that has seniority in case the borrowing company defaults or is dissolved and its assets sold to pay creditors. Security – a document that represents an interest in a company. Shares of stock, notes and bonds are examples of securities. Securities and Exchange Commission (SEC) – the regulatory body that enforces federal securities laws such as the Securities Act of 1933 and the Securities Exchange Act of 1934. Seed capital – investment provided by angels, friends and family to the founders of a startup in seed stage. Seed stage – the state of a company when it has just been incorporated and its founders are developing their product or service. Senior debt – a loan that has a higher priority in case of a liquidation of the asset or company. Seniority – higher priority. Series A preferred stock – preferred stock issued by a fast growth company in exchange for capital from investors in the “A” round of financing. This preferred stock is usually convertible to common shares upon the IPO or sale of the company. Sharpe Ratio – a method of calculating the risk-adjusted return of an investment. The Sharpe Ratio is calculated by subtracting the risk-free rate from the return on a specific investment for a time period (usually one year) and then dividing the resulting figure by the standard deviation of the historical (annual) returns for that investment. The higher the Sharpe Ratio, the better. Small Business Investment Company (SBIC) – a company licensed by the Small Spin out – a division of an established company that becomes an independent entity. Also known as a spin-off. Stock – a share of ownership in a corporation. Stock option – a right to purchase or sell a share of stock at a specific price within a specific period of time. Stock purchase options are commonly used as long term incentive compensation for employees and management of fast growth companies. Strategic investor – a relatively large corporation that agrees to invest in a young company in order to have access to a proprietary technology, product or service. By having this access, the corporation can potentially achieve its strategic goals. Subordinated debt – a loan that has a lower priority than a senior loan in case of a liquidation of the asset or company. Also known as “junior debt”. Sweat equity – ownership of shares in a company resulting from work rather than investment of capital. Syndicate – a group of investors that agree to participate in a round of funding for a company. Alternatively, a syndicate can refer to a group of investment banks that agree to participate in the sale of stock to the public as part of an IPO. Syndication – the process of arranging a syndicate. Tag-along right – the right of a minority investor to receive the same benefits as a majority investor. Usually applies to a sale of securities by investors. Also known as Takedown – a schedule of the transfer of capital in phases in order to complete a commitment of funds. Typically, a takedown is used by a general partner of a private equity fund to plan the transfer of capital from the limited partners. Takeover – the transfer of control of a company. Ten bagger – an investment that returns 10 times the initial capital. Tender offer – an offer to public shareholders of a company to purchase their shares. Term loan – a bank loan for a specific period of time, usually up to ten years in leveraged buyout structures. Term sheet – a document confirming the intent of an investor to participate in a round of financing for a company. By signing this document, the subject company agrees to begin the legal and due diligence process prior to the closing of the transaction. Also known as “Letter of Intent”. Trade secret – something that is not generally known, is kept in secrecy and gives its owners a competitive business advantage. Tranche – a portion of a set of securities. Each tranche may have different rights or risk characteristics. Turnaround – a process resulting in a substantial increase in a company’s revenues, profits and reputation. Two x – an expression referring to 2 times the original amount. For example, a preferred stock may have a “two x” liquidation preference, so in case of liquidation of the company, the preferred stock investor would receive twice his or her original investment. Under water option – an option is said to be under water if the current fair market value of a stock is less than the option exercise price. Underwriter – an investment bank that chooses to be responsible for the process of selling new securities to the public. An underwriter usually chooses to work with a syndicate of investment banks in order to maximize the distribution of the securities. Unsecured debt – debt which does not have any priority in case of dissolution of the company and sale of its assets. Venture capital – a segment of the private equity industry which focuses on investing in new companies with high growth rates. Venture capital method – a valuation method whereby an estimate of the future value of a company is discounted by a certain interest rate and adjusted for future anticipated dilution in order to determine the current value. Usually, discount rates for the venture capital method are considerably higher than public stock return rates, representing the fact that venture capitalists must achieve significant returns on investment in order to compensate for the risks they take in funding unproven companies. Vesting – a schedule by which employees gain ownership over time of a previously agreed upon amount of retirement funding or stock options. Vintage – the year that a private equity fund stops accepting new investors and begins to make investments on behalf of those investors. Voting rights – the rights of holders of preferred and common stock in a company to vote on certain acts affecting the company. These matters may include payment of dividends, issuance of a new class of stock, merger or liquidation. Warrant – a security which gives the holder the right to purchase shares in a company at a pre-determined price. A warrant is a long term option, usually valid for several years or indefinitely. Typically, warrants are issued concurrently with preferred stocks or bonds in order to increase the appeal of the stocks or bonds to potential investors. Washout 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. Weighted average cost of capital (WACC) – the average of the cost of equity and the after-tax cost of debt. This average is determined using weight factors based on the ratio of equity to debt plus equity and the ratio of debt to debt plus equity. Weighted average anti-dilution – an anti-dilution protection mechanism whereby the conversion rate of preferred stock is adjusted in order to reduce an investor’s loss due to an increase in the number of shares in a company. Without anti-dilution protection, an investor would suffer from a reduction of his or her percentage ownership. Usually as a result of the implementation of a weighted average anti-dilution, company management and employees who own a fixed amount of common shares suffer significant dilution, but not as badly as in the case of a full ratchet. Wipeout round – see Washout round. Wipeout bridge – a short term financing that has onerous features whereby if the company does not secure additional long term financing within a certain time frame, the bridge investor gains ownership control of the company. See Bridge financing. Write-down – a decrease in the reported value of an asset or a company. Write-off – a decrease in the reported value of an asset or a company to zero. Write-up – an increase in the reported value of an asset or a company. Zombie – a company that has received capital from investors but has only generated sufficient revenues and cash flow to maintain its operations without significant growth. Typically, a venture capitalist has to make a difficult decision as to whether to kill off a zombie or continue to invest funds in the hopes that the zombie will become a winner. |
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