Read on for a Start-up and Venture capital glossary.
An accredited investor is a wealthy investor who meets certain SEC requirements for net worth and income as they relate to some restricted offerings. Accredited investors include institutional investors, company directors and executive officers, high net worth individuals, and certain other entities. Some limited partnerships and angel investor networks accept only accredited investors.
When one company buys controlling stake in another company. Can be friendly (agreed upon) or hostile (no agreement).
Add-on Services are the services provided by a venture capitalist that are not monetary in nature, such as helping to assemble a management team and helping to prepare the company for an IPO.
Adventure capitalist is an entrepreneur who helps other entrepreneurs financially and often plays an active role in the company’s operations such as by occupying a seat on the board of directors, etc.
A philosophy of software development that promotes incremental development and emphasizes adaptability and collaboration.
Individual who provides a small amount of capital to a startup for a stake in the company. Typically precedes a Seed Round and usually happens when the startup is in its infancy.
Business to business. This describes a business that is targeting another business with its product or services. B2B technology is also sometimes referred to as enterprise technology. This is different from B2C which stands for business to consumer, and involves selling products or services directly to individual customers.
The process by which a startup company measures their current success. An investor measures a company’s growth by determining whether or not they have met certain benchmarks. For example, company A has met the benchmark of having X amount of recurring revenue after 2 years in the market.
Blind pool is a form of limited partnership which doesn’t specify what investment opportunities the general partner plans to pursue.
Board of directors
A group of influential individuals, elected by stockholders, chosen to oversee the affairs of a company. A board typically includes investors and mentors. Not all startups have a board, but investors typically require a board seat in exchange for an investment in a company.
A company is bootstrapped when it is funded by an entrepreneur’s personal resources or the company’s own revenue. Evolved from the phrase “pulling oneself up by one’s bootstraps.”
Also known as a swing loan. Short-term loan to bridge the gap between major financing.
A common exit strategy. The purchase of a company’s shares that gives the purchaser controlling interest in the company.
Monetary assets currently available for use. Entrepreneurs raise capital to start a company and continue raising capital to grow the company.
Capital gain is the gain to investor from selling a stock, bond or mutual fund at a higher price than the purchase price. The capital gain is usually the amount realized (net sales price) less your investment (adjusted tax basis) in the property. A capital gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes.
Capital Under Management
The amount of capital, or financial assets, that a venture capital firm is currently managing and investing.
Refers to a “cap” placed on investor notes in a round of financing. Entrepreneurs and investors agree to place a cap on the valuation of the company where notes turn to equity. This means investors will own a certain percentage of a company relative to that cap when the company raises another round of funding. Uncapped rounds are generally more favorable to an entrepreneur/startup.
Civilian Unemployment Rate
Civilian unemployment rate is calculated by the number of unemployed people divided by the total size of the labor force and is expressed as a percentage. People who are jobless, looking for jobs, and available for work are considered unemployed. The labor force is defined as people who are either employed or unemployed.
Closing is the final event to complete the investment, at which time all the legal documents are signed and the funds are transferred.
Convertibles are the corporate securities, usually preferred shares or bonds, that can be exchanged for a set number of another form, usually common share, at a pre-stated price. Convertibles are appropriate for investors who want higher income than is available from common stock, together with greater appreciation potential than regular bonds offer. From the issuer’s standpoint, the convertible feature is usually designed as a sweetener, to enhance the marketability of the stock or preferred.
This is when a company borrows money with the intent that the debt accrued will later be converted to equity in the company at a later valuation. This allows companies to delay valuation while raising funding in it’s early stages. This is typically done in the early stages of a company’s life, when a valuation is more difficult to complete and investing carries higher risk.
Corporate venturing is a practice of a large company, taking a minority equity position in a smaller company in a related field.
Corporate Venture Capital
Corporate venture capital is a subsidiary of a large corporation which makes venture capital investments.
Deal flow (dealflow) is the rate at which investment offers are presented to funding institutions.
This is when a company raises money by selling bond, bills, or notes to an investor with the promise that the debt will be repaid with interest. It is typically performed by late-stage companies.
Direct financing is a financing without the use of underwriting. Direct financing is often done by investment bankers.
Also known as disruptive innovation. An innovation or technology is disruptive when it “disrupts” an existing market by doing things such as: challenging the prices in the market, displacing an old technology, or changing the market audience.
Drive-by deal is a slang often use when referring to a deal in which a venture capitalist invests in a startup with the goal of a quick exit strategy. The VC takes little to no role in the management and monitoring of the startup.
An analysis an investor makes of all the facts and figures of a potential investment. Can include an investigation of financial records and a measure of potential ROI.
The term enterprise typically refers to a company or business (i.e. an enterprise tech startup is a company that is building technology for businesses).
An individual who starts a business venture, assuming all potential risk and reward for his or herself.
Entrepreneur in residence (EIR)
A seasoned entrepreneur who is employed by a Venture Capital Firm to help the firm vet potential investments and mentor the firm’s portfolio companies.
The act of raising capital by selling off shares of a company. An IPO is technically a form of equity financing.
Equity offerings is raising funds by offering ownership in a corporation through the issuing of shares of a corporation’s common or preferred stock.
This is how startup founders get rich. It’s the method by which an investor and/or entrepreneur intends to “exit” their investment in a company. Commons options are an IPO or buyout from another company. Entrepreneurs and VCs often develop an “exit strategy” while the company is still growing.
An exit route is the method by which an investor would realise an investment.
An exit strategy is the way in which a venture capitalist or business owner intends to use to get out of an investment that he/she has made. Exit Strategy is also called liquidity event.
A financier is a person or financial institution engaged in the lending and management of money and makes a living participating in commercial financing activities.
First-round financing is the first investment in a company made by external investors.
First Stage Capital
First Stage Capital is the money provided to entrepreneur who has a proven product, to start commercial production and marketing, not covering market expansion, de-risking, acquisition costs.
A follow-on is 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 investment.
Full ratchet is an investor protection provision which specifies that options and convertible securities may be exercised relative to the lowest price at which securities were issued since the issuance of the option or convertible security. The full ratchet guarantee prevents dilution, since the proportionate ownership would stay the same as when the investment was initially made.
Fund of funds
A mutual fund that invests in other mutual funds.
A reference to the beginning of a venture, or the earliest point of a startup. Generally considered an advantage to invest at this level.
An organization that helps develop early stage companies, usually in exchange for equity in the company. Companies in incubators get help for things like building their management teams, strategizing their growth, etc.
Institutional Investors 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 like endowment funds, foundations, etc.
Investment Bank is a financial intermediary that performs a variety of services which includes underwriting, acting as an intermediary between an issuer of securities and the investing public, facilitating mergers and other corporate reorganizations, and also acting as a broker for institutional clients.
Invisible Venture Capital
Invisible venture capital is a venture capital from angel investors.
Initial public offering. The first time shares of stock in a company are offered on a securities exchange or to the general public. At this point, a private company turns into a public company (and is no longer a start-up).
Internal Rate of Return or IRR is often used in capital budgeting, it’s the interest rate that makes net present value of all cash flow equal zero. Essentially, IRR is the return that a company would earn if they expanded or invested in themselves, rather than investing that money abroad.
A venture capital firm or individual investor that organizes a specific round of funding for a company. The lead investor usually invests the most capital in that round. Also known as “leading the round.”
When a company is purchased with a strategic combination of equity and borrowed money. The target company’s assets or revenue is used as “leverage” to pay back the borrowed capital.
Limited partnership is a business organization with one or more general partners, who manage the business and assume legal debts and obligations and one or more limited partners, who are liable only to the extent of their investments. Limited partnership is the legal structure used by most venture and private equity funds. Limited partners also enjoy rights to the partnership’s cash flow, but are not liable for company obligations.
The process of dissolving a company by selling off all of its assets (making them liquid).
Liquidity preference is the right to receive a specific value for the stock if the business is liquidated.
Liquidity event is the way in which an investor plans to close out an investment. Liquidity event is also known as exit strategy.
A lock-up period is the period an investor must wait before selling or trading company shares subsequent to an exit, usually in an initial public offering the lock-up period is determined by the underwriters.
MBI: Management Buy-in or MBI is the purchase of a business by an outside team of managers who have found financial backers and plan to manage the business actively themselves.
Management buy-out or MBO is the term used for the funds provided to enable operating management to acquire a product line or business, which may be at any stage of development, from either a public or private company.
Master Limited Partnership
A master limited partnership or MLP is a limited partnership that is publicly traded. MLP combines the tax benefits of a limited partnership with the liquidity of publicly traded securities.
Mezzanine debts are debts that incorporates equity-based options, such as warrants, with a lower-priority debt. Mezzanine debt is actually closer to equity than debt, in that the debt is usually only of importance in the event of bankruptcy. Mezzanine debt is often used to finance acquisitions and buyouts, where it can be used to prioritize new owners ahead of existing owners in the event that a bankruptcy occurs.
A form of hybrid capital typically used to fund adolescent and mature cash flow positive companies. It is a form of debt financing, but it also includes embedded equity instruments or options. Companies at this level, which are no longer considered startups but have yet to go public, are typically referred to as “mezzanine level” companies.
Mezzanine level is a term used to describe a company which is somewhere between startup and IPO. Venture capital committed at mezzanine level usually has less risk but less potential appreciation than at the startup level, and more risk but more potential appreciation than in an IPO.
Minority Enterprise Small Business Investment Companies (MESBICS)
Minority Enterprise Small Business Investment Companies or MESBICS are government-chartered venture firms that can invest only in companies that are at least 51 percent owned by members of a minority group or persons recognized by the rules that govern MESBICs to be “economically
Non-disclosure agreement. An agreement between two parties to protect sensitive or confidential information, such as trade secrets, from being shared with outside parties.
Owner-employee is a sole proprietor or any individual who has ownership of at least one-fifth of the capital and/or profits associated with a given venture.
Pari-passu is a latin term that means “of”.
PIPE or Private Investment in Public Equity
PIPE or Private Investment in Public Equity is a term used when a private investment or mutual fund buys common stock for a company at a discount to the current market value per share.
Pipeline is the flow of upcoming underwriting deals.
Pitch is the set of activities intended to persuade someone to buy a product or take a specific course of action.
The act of a startup quickly changing direction with its business strategy. For example, an enterprise server startup pivoting to become an enterprise cloud company.
A company that a specific Venture Capital firm has invested in is considered a “portfolio company” of that firm.
A stock that carries a fixed dividend that is to be paid out before dividends carried by common stock.
Private equities are equity securities of unlisted companies. Private equities are generally illiquid and thought of as a long-term investment. Private equity investments are not subject to the same high level of government regulation as stock offerings to the general public. Private equity is also far less liquid than publicly traded stock.
Private Limited Partnership
Private limited partnership is a limited partnership having no more than 35 limited partners and thus able to avoid SEC registration.
Private placement is a term used specifically to denote a private investment in a company that is publicly held. Private equity firms that invest in publicly traded companies sometimes use the acronym PIPEs to describe the activity. Private placements do not have to be registered with organizations such as the SEC because no public offering is involved.
Proof of concept
A demonstration of the feasibility of a concept or idea that a startup is based on. Many VCs require proof of concept if you wish to pitch to them.
Pro rata rights
Also known as supra pro rata rights. Pro rata is from the Latin ‘in proportion.’ A VC with supra pro rata rights gives him or her the option of increasing his or her ownership of a company in subsequent rounds of funding.
Raising Capital refers to obtaining capital from investors or venture capital sources.
A corporate reorganisation of a company’s capital structure, changing the mix of equity and debt. A company will usually recapitalize to prepare for an exit, lower taxes, or defend against a takeover.
Resyndication Limited Partnership
A Resyndication Limited Partnership is a limited partnership in which existing properties are sold to new limited partners, so that they can receive the tax advantages that are no longer available to the old partners.
Risk is the quantifiable likelihood of loss or less-than-expected returns. Risk includes the possibility of losing some or all of the original investment. Risk is usually measured using the historical returns or average returns for a specific investment.
Risk capital are funds made available for startup firms and small businesses with exceptional growth potential.
This is the much-talked-about “return on investment.” It’s the money an investor gets back as a percentage of the money he or she has invested in a venture. For example, if a VC invests $2 million for a 20 percent share in a company and that company is bought out for $40 million, the VC’s return is $8 million.
Startups raise capital from VC firms in individual rounds, depending on the stage of the company. The first round is usually a Seed round followed by Series A, B, and C rounds if necessary. In rare cases rounds can go as far as Series F, as was the case with Box.net.
Software as a service. A software product that is hosted remotely, usually over the internet (a.k.a. “in the cloud”).
The seed round is the first official round of financing for a startup. At this point a company is usually raising funds for proof of concept and/or to build out a prototype and is referred to as a “seed stage” company.
Secondary Public Offering
When a company offers up new stock for sale to the public after an IPO. Often occurs when founders step down or desire to move into a lesser role within the company.
Secondary Purchase is purchase of stock in a company from a shareholder rather than purchasing stock directly from the company.
Second Stage Capital
Second Stage Capital is the capital provided to expand marketing and meet growing working capital need of an enterprise that has commenced production but does not have positive cash flows sufficient to take care of its growing needs.
The market that a startup companies product or service fits into. Examples include: consumer technology, cleantech, biotech, and enterprise technology. Venture Capitalists tend to have experience investing in specific related sectors and thus tend not to invest outside of their area of expertise.
Seed Capital is the money used to purchase equity-based interest in a new or existing company. This seed capital is usually quite small because the venture is still in the idea or conceptual stage.
Refers to the specific round of financing a company is raising. For example, company X is raising their Series A round.
Series A Preferred Stock
Series A Preferred Stock is the first round of stock offered during the seed or early stage round by a portfolio company to the venture capitalist. Series A preferred 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.
Small Business Investment Companies
SBIC: Small Business Investment Companies or SBIC are lending and investment firms that are licensed and regulated by the Small Business Administration . The licensing enables them to borrow from the federal government to supplement the private funds of their investors. SBICs prefer investments between $100,000 to $250,000 and have much more generous underwriting guidelines than a venture capital firm.
The stage of development a startup company is in. There is no explicit rule for what defines each stage of a company, but startups tend to be categorized as seed stage, early stage, mid-stage, and late stage. Most VCs firms only invest in companies in one or two stages. Some firms, however, manage multiple funds geared toward different stage companies.
A silent partner is an investor who does not have any management responsibilities but provides capital and shares liability for any losses experienced by the entity. Silent partners are liable for in any losses up to the amount of their invested capital and participate in any tax and cash flow benefits. Silent partner is also known as a “sleeping”.
A start-up company is a company in the early stages of operations. Startups are usually seeking to solve a problem of fill a need, but there is no hard-and-fast rule for what makes a start-up. A company is considered a startup until they stop referring to themselves as a start-up.
Syndication is the process whereby a group of venture capitalists will each put in a portion of the amount of money needed to finance a small business.
A non-binding agreement that outlines the major aspects of an investment to be made in a company. A term sheet sets the groundwork for building out detailed legal documents.
Third Stage Capital
Third Stage Capital is the capital provided to an enterprise that has established commercial production and basic marketing set-up, typically for market expansion, acquisitions, product development, etc.
Turnaround is the term used when the poor performance of a company or the business experiences a positive reversal.
Underwriter is an investment banking firm committing successful distribution of a public issue, failing which the firm would take the securities being offered into its own books. An underwriter may also be a company that backs the issue of a contract, agreeing to accept responsibility for fulfilling the contract in return for a premium.
The process by which a company’s worth or value is determined. An analyst will look at capital structure, management team, and revenue or potential revenue, among other things.
Money provided by venture capital firms to small, high-risk, startup companies with major growth potential.
An individual investor, working for a venture capital firm, that chooses to invest in specific companies. Venture capitalists typically have a focused market or sector that they know well and invest in.
Venture Capital Funds
Venture capital funds pool and manage money from investors seeking private equity stakes in small and medium-size enterprises with strong growth potential.
Venture Capital Limited Partnership
Venture Capital Limited Partnership is a limited partnership which is formed to invest in small startup businesses with exceptional growth potential.
When an employee of a company gains rights to stock options and contributions provided by the employer. The rights typically gain value (vest) over time until they reach their full value after a pre-determined amount of time. For example, if an employee was offered 200 stock unites over 10 years, 20 units would vest each year. This gives employees an incentive to perform well and stay with the company for a longer period of time.
Vulture Capitalist is a slang word for a venture capitalist who deprives an inventor of control over their own innovations and most of the money they should have made from the invention.