Glossary (A - Ma)

Glossary (A - Ma)

Glossary (A - Ma)

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See Glossary (Me - Z) for additional terms.

401 (K) Plan

A type of qualified retirement plan in which employees make salary reduced, pre-tax contributions to an employee trust. In many cases, the employer will match employee contributions up to a specified level.

Accelerated Cost Recovery System(ACRS)

The IRS approved method of calculating depreciation expense for tax purposes. Also known as Accelerated Depreciation.

Accomplishments

	What the company has accomplished to date.
	See Creating Your Pitch: Accomplishments, Use of Funds, and Milestones.

Accredited Investor

Defined by Rule 501 of Regulation D, an individual (i.e. non-corporate) "accredited investor" is a either a natural person who has individual net worth, or joint net worth with the personâ€™s spouse, that exceeds $1 million at the time of the purchase OR a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year. For the complete definition of accredited investor, see the SEC website.

Accrued Interest

The interest due on preferred stock or a bond since the last interest payment was made.

Acquisition

	A larger company purchases another company with cash or stock as payment. This is a common exit strategy for start-up companies and the time at which the investors are repaid their initial investment and a return on that investment.
	See "Mergers/Acquisitions"

Advisory Board

A group of external advisors to a private equity group or portfolio company. Advice provided varies from overall strategy to portfolio valuation. Less formal than a Board of Directors.

Allocation

The amount of securities assigned to an investor, broker, or underwriter in an offering. An allocation can be equal to or less than the amount indicated by the investor during the subscription process depending on market demand for the securities.

Alternative Minimum Tax (AMT)

A tax designed to prevent wealthy investors from using tax shelters to avoid income tax. The calculation of the AMT takes into account tax preference items.

American Depositary Receipt (ADR's)

A security issued by a U.S. bank in place of the foreign shares held in trust by that bank, thereby facilitating the trading of foreign shares in U.S. markets.

Amortization

An Accounting procedure that gradually reduces the book value of an intangible asset through periodic charges to income.

Angel Financing

Capital raised for a private company from independently wealthy investors. This capital is generally used as seed financing.

Balance sheet

	A condensed financial statement showing the nature and amount of a company's assets, liabilities, and capital on a given date.
	Basic equation is assets = liabilities + net worth (i.e., shareholders' equity).
	See Creating Your Pitch: Business Model and Financial Projections.

Bankruptcy

An inability to pay debts. Chapter 11 of the bankruptcy code deals with reorganization, which allows the debtor to remain in business and negotiate for a restructuring of debt.

Barriers to entry

	Factors influencing the ability to get into a business including economies of scale, product differentiation, capital requirements, cost disadvantages independent of size, access to distribution channels, and government policy.
	See Creating Your Pitch: Competition.

Bear Hug

An offer made directly to the Board of Directors of a target company. Usually made to increase the pressure on the target with the threat that a tender offer may follow.

Best Efforts

An offering in which he investment banker agrees to distribute as much of the offering as possible, and return and unsold shares to the issuer.

Blue Sky Laws

A common term that refers to laws passed by various states to protect the public against securities fraud. The term originated when a judge ruled that a stock had as much value as a patch of blue sky.

Bond

Specific type of debt instrument most commonly sold by government entities.

Book Value

Book value of a stock is determined from a company's balance sheet by adding all current and fixed assets and then deducting all debts, other liabilities and the liquidation price of any preferred issues. The sum arrived at is divided by the number of common shares outstanding and the result is book value per common share.

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.

Burn Out / Cram Down

Extraordinary dilution, by reason of a round of financing, of a non-participating investor's percentage ownership in the issuer.

Burn Rate

The rate at which a company expends net cash over a certain period, usually a month.

Business Development Company (BDC)

A vehicle established by Congress to allow smaller, retail investors to participate in and benefit from investing in small private businesses as well as the revitalization of larger private companies.

Business Judgment Rule

The legal principle that assumes the board of directors is acting in the best interests of the shareholders unless it can be clearly established that it is not. If the board was found to violate the business judgment rule, it would be in violation of its fiduciary duties to the shareholders.

Business plan

	A well researched and ever changing document that provides direction and focus for both the day-to-day operations and the future growth of the business. A good business plan will include components covering management, the product and/or service, a marketing plan, financials, operations and control systems, and a growth plan and exit strategy.
	A document that describes the entrepreneur's idea, the market problem, proposed solution, business and revenue models, marketing strategy, technology, company profile, competitive landscape, as well as financial data for coming years. The business plan opens with a brief executive summary, the most important element of the document due to the time constraints of venture capital funds and angels.
	See Business Plan Guide.

Call Option

The right to buy a security at a given price (or range) within a specific time period.

Capital Gains

The difference between an asset's purchase price and selling price, when the selling price is greater. Long-term capital gains (on assets held for a year or longer) are taxed at a lower rate than ordinary income.

Capital (or Assets) Under Management

The amount of capital available to a fund management team for venture investments.

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.

Capitalize

To record an outlay as an asset (as opposed to an Expense), which is subject to depreciation or amortization.

Carried Interest

The portion of any gains realized by the fund to which the fund managers are entitled, generally without having to contribute capital to the fund. Carried interest payments are customary in the venture capital industry, in order to create a significant economic incentive for venture capital fund managers to achieve capital gains.

Cash Position


	The amount of cash available to a company at a given point in time. Claim Dilution A reduction in the likelihood that one or more of the firm's claimants will be fully repaid, including time value of money considerations.

Chapter 11

	The part of the Bankruptcy Code that provides for reorganization of a bankrupt company's assets.
	See "Bankruptcy"

Chapter 7

	The part of the Bankruptcy Code that provides for liquidation of a company's assets.
	See "Bankruptcy"

Clawback

A clawback obligation represents the general partnerâ€™s promise that, over the life of the fund, the managers will not receive a greater share of the fundâ€™s distributions than they bargained for. Generally, this means that the general partner may not keep distributions representing more than a specified percentage (e.g., 20%) of the fundâ€™s cumulative profits, if any. When triggered, the clawback will require that the general partner return to the fundâ€™s limited partners an amount equal to what is determined to be "excess" distributions.

Close-end Fund

A type of fund that has a fixed number of shares outstanding, which are offered during an initial subscription period, similar to an initial public offering. After the subscription period is closed, the shares are traded on an exchange between investors, like a regular stock. The market price of a closed-end fund fluctuates in response to investor demand as well as changes in the values of its holdings or its Net Asset Value. Unlike open-end mutual funds, closed-end funds do not stand ready to issue and redeem shares on a continuous basis.

Closing

	The final segment of an investment presentation.
	An investment event occurring after the required legal documents are implemented between the investor and a company and after the capital is transferred in exchange for company ownership or debt obligation.
	See Creating Your Pitch: Closing.

Co-investment


	The syndication of a private equity financing round or an investment by an individuals (usually general partners) alongside a private equity fund in a financing round.

Collar Agreement

Agreed upon adjustments in the number of shares offered in a stock-for-stock exchange to account for price fluctuations before the completion of the deal.

Committed Capital

The total dollar amount of capital pledged to a private equity fund.

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.

Competition

	Any rivalry between two competitors; or When two or more parties acting independently try to secure the business of a third party by offering the best terms available.
	See Creating Your Pitch: Competition.

Competitive advantage

	Anything a company does that gives it a better chance of making money than other companies competing with it.
	See Creating Your Pitch: Competition.

Compound Annual Growth Rate (CAGR)

The year over year growth rate applied to an investment or other aspect of a firm using a base amount.

Conversion Ratio

The number of shares of stock into which a convertible security may be converted. The conversion ration equals the par value of the convertible security divided by the conversion price.

Convertible [Note] [Debenture]

Debt instrument that automatically or voluntarily converts to some other security, either debt or equity.

Convertible Preferred Stock

Preferred stock that may be converted into common stock or another class of preferred stock, either voluntarily or mandatorily.

Convertible Security

	A bond, debenture or preferred stock that is exchangeable for another type of security (usually common stock) at a pre-stated price. Convertibles are appropriate for investors who want higher income, or liquidation preference protection, than is available from common stock, together with greater appreciation potential than regular bonds offer.
	See "Commonstock", "Dilution", "Preferred Stock"

Corporate Charter

The document prepared when a corporation is formed. The Charter sets forth the objectives and goals of the corporation, as well as a complete statement of what the corporation can and cannot do while pursuing these goals.

Corporate Resolution

A document stating that the corporation's board of directors has authorized a particular individual to act on behalf of the corporation.

Corporate Venturing

Venture capital provided by [in-house investment funds of] large corporations to further their own strategic interests.

Corporation


	A legal, taxable entity chartered by a state or the federal government. Ownership of a corporation is held by the stockholders.

Covenant


	A protective clause in an agreement.

Cumulative Preferred Stock

A stock having a provision that if one or more dividend payments are omitted, the omitted dividends (arrearage) must be paid before dividends may be paid on the company's common stock.

Cumulative Voting Rights

When shareholders have the right to pool their votes to concentrate them on an election of one or more directors rather than apply their votes to the election of all directors. For example, if the company has 12 openings to the Board of Directors, in statutory voting, a shareholder with 10 shares casts 10 votes for each opening (10x12= 120 votes). Under the cumulative voting method however, the shareholder may opt to cast all 120 votes for one nominee (or any other distribution he might choose).

Compare to "Statutory Voting"

Debenture

A debt instrument; basically the same as a Promissory Note

Debt

Any obligation by one person to pay another. May be a primary (direct) obligation as in a Note, or a secondary (contingent) obligation as in a guaranty.

Debt Instrument

Any instrument evidencing the obligation of the maker to pay the holder of the debt instrument. Includes "Bond", "Debenture", "Note"

Deficiency Letter

A letter sent by the SEC to the issuer of a new issue regarding omissions of material fact in the registration statement.

Demand Registration

Resale registration that gives the investor the right to require the Company to file a Registration Statement registering the resale of the securities issued to the investor in a private offering.

Demand Rights

Contemplate that the company must initiate and pursue the registration of a public offering including, although not necessarily limited to, the shares proffered by the requesting shareholder(s).

Depreciation

An expense recorded to reduce the value of a long-term tangible asset. Since it is a non-cash expense, it increases free cash flow while decreasing the amount of a company's reported earnings.

Differentiation

	The process of making one thing or process different from another.
	See Creating Your Pitch: Competition.

Dilution

A reduction in the percentage ownership of a given shareholder in a company caused by the issuance of new shares.

Dilution Protection

Mainly applies to convertible securities. Standard provision whereby the conversion ratio is changed accordingly in the case of a stock dividend or extraordinary distribution to avoid dilution of a convertible bondholder's potential equity position. Adjustment usually requires a split or stock dividend in excess of 5% or issuance of stock below book value. Share Purchase Agreements also typically contain anti-dilution provisions to protect investors in the event that a future round of financing occurs at a valuation that is below the valuation of the current round.

Director

Person elected by shareholders to serve on the board of directors. The directors appoint the president, vice president and all other operating officers, and decide when dividends should be paid (among other matters).

Disclosure Document

A booklet outlining the risk factors associated with an investment.

Diversification

The process of spreading investments among various different types of securities and various companies in different fields.

Dividend

The payments designated by the Board of Directors to be distributed pro-rata among the shares outstanding. On preferred shares, it is generally a fixed amount. On common shares, the dividend varies with the fortune of the company and the amount of cash on hand and may be omitted if business is poor or if the Directors determine to withhold earnings to invest in capital expenditures or research and development.

Domain expertise

Detailed sector knowledge and experience.

Drag-Along Rights

A majority shareholders' right, obligating shareholders whose shares are bound into the shareholders' agreement to sell their shares into an offer the majority wishes to execute.

Due Diligence

A process undertaken by potential investors -- individuals or institutions -- to analyze and assess the desirability, value, and potential of an investment opportunity.

Early Stage

A state of a company that typically has completed its seed stage and has a founding or core senior management team, has proven its concept or completed its beta test, has minimal revenues, and no positive earnings or cash flows.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

	A measure of cash profitability typically applied to companies that have been subject to a leveraged buyout (LBO). EBITDA is operating profit before depreciation, as well as operating revenue minus cost of sales, operating expenses, and selling, general, and administrative expenses.
	A measure of cash flow calculated as: = Revenue - Expenses (excluding tax, interest, depreciation and amortization) EBITDA looks at the cash flow of a company. By not including interest, taxes, depreciation and amortization, we can clearly see the amount of money a company brings in. This is especially useful when one company is considering a takeover of another because the EBITDA would cover any loan payments needed to finance the takeover.
	See Creating Your Pitch: Business Model and Financial Projections.

Economies of Scale

Economic principle that as the volume of production increases, the cost of producing each unit decreases.

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.

Employee Stock Option Plan (ESOP)

A plan established by a company whereby a certain number of shares is reserved for purchase and issuance to key employees. Such shares usually vest over a certain period of time to serve as an incentive for employees to build long term value for the company.

Employee Stock Ownership Plan

A trust fund established by a company to purchase stock on behalf of employees.

Equity

Ownership in the capital of a Company. In corporations it is called â€œstockâ€; in limited partnerships or LLCs it is called â€œinterestsâ€ or â€œunitsâ€.

Equity Kicker

Option for private equity investors to purchase shares at a discount. Typically associated with mezzanine financings where a small number of shares or warrants are added to what is primarily a debt financing.

ERISA

ERISA shall mean the United States Employee Retirement Income Security Act of 1974, as amended, including the regulations promulgated thereunder.

ERISA Significant Participation Test

A test that is satisfied if the General Partner determines in its reasonable discretion that Persons that are â€œbenefit plan investorsâ€ within the meaning of Section (f)(2) of the Final Regulation constitute or are expected to constitute at least 25 percent in interest of the Limited Partners. Note that the test is 25% of the interests of all the limited partners, which means 20% (+/-) in the partnership as a whole, taking into account the general partnerâ€™s interest.

Evergreen Promise

This occurs when the company agrees to pay an employee's salary for a number of years, regardless of when termination occurs, the day after he or she is employed or 10 years after.

Exchange Act

[â€œ34 Actâ€] Regulates periodic reporting by companies with publicly traded securities, companies with more than 500 shareholders, and brokers and dealers in securities.

Executive summary

A document which captures and presents succinctly the essence of the written plan. It is, in effect, a capsulized version of the entire plan. The executive summary is not simply a background statement, nor is it an introduction. It is the plan in miniature. Because many plan reviewers are inundated with proposals, they use the executive summary for a quick understanding of the total plan.

Exercise Price

The price at which an option or warrant can be exercised.

Exit

	The way a shareholder gets his/her money out of the venture; or The vehicle for selling the enterprise; or What venture capitalists look for when funding new ventures--their way to realize the dollar profits from the investment.
	See Creating Your Pitch: Exit Strategy.

Exit Strategy

A fund's intended method for liquidating its holdings while achieving the maximum possible return. These strategies depend on the exit climates including market conditions and industry trends. Exit strategies can include selling or distributing the portfolio company's shares after an initial public offering (IPO), a sale of the portfolio company or a recapitalization.

Final Regulation

An ERISA term, it is the United States Department of Laborâ€™s Final Regulation relating to the definition of â€œplan assetsâ€ in (29 C.F.R. Â§2510.3-101).

Finder

A person who helps to arrange a transaction

Flipping

The act of buying shares in an IPO and selling them immediately for a profit. Brokerage firms underwriting new stock issues tend to discourage flipping, and will often try to allocate shares to investors who intend to hold on to the shares for some time. However, the temptation to flip a new issue once it has risen in price sharply is too irresistible for many investors who have been allocated shares in a hot issue.

Form 10-K

This is the annual report that most reporting companies file with the Commission. It provides a comprehensive overview of the registrant's business. The report must be filed within 90 days after the end of the company's fiscal year.

Form 10-KSB

This is the annual report filed by reporting "small business issuers." It provides a comprehensive overview of the company's business, although its requirements call for slightly less detailed information than required by Form 10-K. The report must be filed within 90 days after the end of the company's fiscal year.

Form S-1

The form can be used to register securities for which no other form is authorized or prescribed, except securities of foreign governments or political sub-divisions thereof.

Form S-2

This is a simplified optional registration form that may be used by companies that have been required to report under the '34 Act for a minimum of three years and have timely filed all required reports during the 12 calendar months and any portion of the month immediately preceding the filing of the registration statement. Unlike Form S-1, it permits incorporation by reference from the company's annual report to stockholders (or annual report on Form 10-K) and periodic reports. Delivery of these incorporated documents as well as the prospectus to investors may be required.

Form S-4

Type of Registration Statement under which public company mergers and security exchange offers may be registered with the SEC.

Form SB-2

This form may be used by "small business issuers" to register securities to be sold for cash. This form requires less detailed information about the issuer's business than Form S-1.

Founders' Shares

Shares owned by a company's founders upon its establishment.

Free Cash Flow

The cash flow of a company available to service the capital structure of the firm. Typically measured as operating cash flow less capital expenditures and tax obligations.

Full Ratchet Anitdilution

The sale of a single share at a price less than the favored investors paid reduces the conversion price of the favored investors' convertible preferred stock "to the penny". For example, from $1.00 to 50 cents, regardless of the number of lower priced shares sold.

Fully Diluted Earnings Per Share

Earnings per share expressed as if all outstanding convertible securities and warrants have been exercised.

Fully Diluted Outstanding Shares

The number of shares representing total company ownership, including common shares and current conversion or exercised value of the preferred shares, options, warrants, and other convertible securities.

Fund Focus

The indicated area of specialization of a venture capital fund usually expressed as Balanced, Seed and Early Stage, Later Stage, Mezzanine or Leveraged Buyout (LBO).

Fund Size

The total amount of capital committed by the investors of a venture capital fund.

Generally Accepted Accounting Principles

The common set of accounting principles, standards and procedures. GAAP is a combination of authoritative standards set by standard-setting bodies as well as accepted ways of doing accounting.

General Partner (GP)

	The partner in a limited partnership responsible for all management decisions of the partnership. The GP has a fiduciary responsibility to act for the benefit of the limited partners (LPs), and is fully liable for its actions.
	See "Limited Partnership (LP)"

Golden Handcuffs

This occurs when an employee is required to relinquish unvested stock when terminating his employment contract early.

Golden Parachute

Employment contract of upper management that provides a large payout upon the occurrence of certain control transactions, such as a certain percentage share purchase by an outside entity or when there is a tender offer for a certain percentage of a company's shares. Discussed in more detail at The Executive Employment Agreement

Gross profit

	Net revenues (sales) minus cost of goods sold.
	See Creating Your Pitch: Business Model and Financial Projections.

Holding Company

A corporation that owns the securities of another, in most cases with voting control.

Holding Period

The amount of time an investor has held an investment. The period begins on the date of purchase and ends on the date of sale, and determines whether a gain or loss is considered short-term or long-term, for capital gains tax purposes.

Hot Issue

A newly issued stock that is in great public demand. Technically, it is when the secondary market price on the effective date is above the new issue offering price. Hot issues usually experience a dramatic rise in price at their initial public offering because the market demand outweighs the supply.

Hurdle Rate

The internal rate of return that a fund must achieve before its general partners or managers may receive an increased interest in the proceeds of the fund. Often, if the expected rate of return on an investment is below the hurdle rate, the project is not undertaken.

Income statement

	A financial statement that shows the amount of income earned by a business over a specific accounting period. All costs (expenses) are subtracted from the gross revenues (sales) to determine net income, which outlines the profit-and-loss financial statement (P & L).
	See Creating Your Pitch: Business Model and Financial Projections.

Initial Public Offering (IPO)

	A company's first sale of stock to the public. Often used when a small company seeks outside equity financing for expansion.
	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.
	See Creating Your Pitch: Exit Strategy.

Institutional Investors

Organizations that professionally invest, including insurance companies, depository institutions, pension funds, investment companies, mutual funds, and endowment funds.

Investment Company Act of 1940

Investment Company Act shall mean the Investment Company Act of 1940, as amended, including the rules and regulations promulgated thereunder.

Investment Letter

A letter signed by an investor purchasing unregistered long securities under Regulation D, in which the investor attests to the long-term investment nature of the purchase. These securities must be held for a minimum of 1 year before they can be sold.

IRA Rollover

The reinvestment of assets received as a lump-sum distribution from a qualified tax-deferred retirement plan. Reinvestment may be the entire lump sum or a portion thereof. If reinvestment is done within 60 days, there are no tax consequences.

Internal Rate of Return (IRR)

A typical measure of how VC Funds measure performance. IRR is a technically a discount rate: the rate at which the present value of a series of investments is equal to the present value of the returns on those investments.

Issued Shares

The amount of common shares that a corporation has sold (issued).

Issuer

Refers to the organization issuing or proposing to issue a security.

Kentucky Windage

In hunting, the modified aim required to compensate for wind or target movement. Used herein to describe the process by which an investor must increase the percentage he needs today so that he will end up with a desired target percentage ownership in the future, after adjusting for future dilative financing rounds.

Key Employees

Professional management attracted by the founder to run the company. Key employees are typically retained with warrants and ownership of the company.

Later Stage

A fund investment strategy involving financing for the expansion of a company that is producing, shipping and increasing its sales volume.

Lead Investor

Leveraged Buyout (LBO)

Limited Partner (LP)

Limited Partnership

Liquidation

Liquidity Event

Margin(s)

	Also called markup; the amount the entrepreneur adds to a product's cost to obtain its selling price.
	See Creating Your Pitch: Business Model and Financial Projections.

Lock-up Period

Management

	A group of individuals who combine their talents to run an enterprise. These talents create a fully integrated system and often include: Driving Force, Creator/Innovator, Sales, Production, Engineering, Marketing, Finance.
	See Creating Your Pitch: Management Team.

Market

	The actual and/or potential buyers of a product or service; or A place where exchanges between buyers and sellers occur.
	See Creating Your Pitch: Market.
See Glossary (Me - Z) for additional terms.

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