Glossary

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

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

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

Also known as a draw down - When a venture capital firm has decided where it would like to invest, it will approach its investors in order to "draw down" the money. The money will already have been pledged to the fund but this is the actual act of transferring the money so that it reaches the investment target.

the relationship between how many expenses are incurred by the company to how much money is used to manufacture a good or service. Basically, how far is an investor’s money going? It can also mean how efficiently the capital was used in terms of an exit. Ex.: raising $10M and exiting for $100M (10x) is more efficient than raising $20M and exiting for $150M (7.5x).

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.

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.

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

places a cap on the value of the company at which an investor’s debt converts to equity. Ex: a $500,000 investment translates to a 10% stake in a company with a cap of $5M.

Participation rights are described as "capped" when the participation rights of the preferred stock are limited so that the preferred stock stops participating in the proceeds of a sale (or other distribution) after it has received back a pre-determined dollar amount (caps typically range from three to five times the original amount invested). Building on the previous example, if the participation rights of the preferred stock were capped at a 3x multiple of their liquidation preference amount (which 3x includes the amount of liquidation preference), then the result would be that the preferred stock would receive only an additional $60 million in participation in step (2) above. Thus, the total amount received by the holders of preferred stock would be $90 million (down from $98 million without a cap) and the amount received by the holders of common stock would increase to $110 million (up from $102 million). Note: If the price paid for the company in this example were substantially higher (e.g., $275 million) then the holders of preferred stock would convert to common stock (thereby giving up their liquidation preference) in order to eliminate the 3x cap, because 40% of $275 million equals $110 million, which is $20 million more than the preferred would receive if they did not convert and were subject to the 3x cap.

A venture capital firm owned by a larger financial institution, such as a bank.

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.

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.

This is a common term of the private equity partnership agreement. Once the general partner provides its limited partners with their preferred return, if any, it then typically enters a catch-up period in which it receives the majority or all of the profits until the agreed upon profit-split, as determined by the carried interest, is reached.

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

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

A barrier against information flows between different divisions or operating groups within banks and securities firms. Examples include a policy barrier between the trust department from making investment decisions based on any substantive inside information that may come into the possession of other bank departments. The term also refers to barriers against information flows between corporate finance and equity research and trading operations.

A clawback obligation represents the general partner’s promise that, over the life of the fund, the managers will not receive a greater share of the fund’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 fund’s cumulative profits, if any. When triggered, the clawback will require that the general partner return to the fund’s limited partners an amount equal to what is determined to be "excess" distributions.

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.

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.

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.

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.

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

Capital committed by investors. Cash to the maximum of these commitments may be requested or drawn down by the private equity managers usually on a deal-by-deal basis. This amount is different from invested funds for three reasons. Firstly, most partnerships will initially invest only between 80% and 95% of committed funds (possibly even less). Second, it may be necessary in early years to deduct the annual management fee that is used to cover the cost of operation of a fund. Third, payback to investors usually begins before the final draw down of commitments has taken place. To the extent that capital invested does not equal capital committed, limited partners will have their private equity returns diluted by the much lower cash returns earned on the un-invested portion. Avoiding this situation is the main reason for the Partners Group over-commitment model, which aims to keep Partners Group products as close 100% invested as possible.

Common stock is the basic equity interest in a company. It is typically the type of stock held by founders and employees

The redemption of private or restricted holdings by the portfolio company itself. In essence the company is buying out the VC's interest.

Also called a leveraged rollup, this is an investment strategy in which a leveraged buyout (LBO) firm acquires a series of companies in the same or complementary fields, with the goal of becoming a dominant regional or nationwide player in that industry. In some cases, a holding company will be created to acquire the new companies. In other cases, an initial acquisition may serve as the platform through which the other acquisitions will be made.

turning preferred stock into common stock.

Almost all preferred stock issued in venture financings can be converted into common stock at the option of the holder of preferred stock. The typical initial conversion rate is one share of preferred stock converts into one share of common stock. However, the conversion rate can change for a number of reasons, such as stock splits or antidilution adjustments.

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.

this is a way to raise capital while delaying valuation: these notes convert into equity at a later date (usually a later round of funding) and the investors who invest at this time usually get a warrant (discount) on future stock as a reward for investing at this risky time.

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 Common Stock, Dilution, and Preferred Stock).

this is the ability for preferred stock to transform into common stock, usually at a 1:1 ratio.

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 reorganizations typically refer to either (a) the conversion of existing preferred stock into common stock, or into a new series of preferred stock with a substantially reduced liquidation preference amount and/or (b) a reverse stock split of outstanding stock. Corporate reorganizations are usually implemented to reset the economic interests of existing stockholders to current economic realities so as to facilitate the company's ability to attract additional investment and to provide appropriate incentive to the management team. The conversion of existing preferred stock into common or a new series of preferred stock has a significant economic effect, as those stockholders will often lose substantial liquidation preferences and other rights. A reverse stock split has no economic effect in and of itself, but is usually undertaken when a company's stock price has fallen significantly and the company wants to raise it to a more typical range.

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

corporate VCs are specialized subsidiaries within corporations with a mission to spread their cash around. Some investments are strategic (“Hey, we do similar things, let’s work together…”) or purely financial (“That idea isn’t really in our wheelhouse, but it looks like it’s going to make money, so we want in”), or a blend. Startups can also profit from the corporation’s experience and other resources (see value adds).

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

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

A protective clause in an agreement.

an investor who invests before, during, and after a company's IPO.

Holders of preferred stock having a cumulative dividend right are entitled to be paid, in addition to a liquidation preference, an amount equal to a certain percentage per year of the purchase price for the preferred stock (typically five to eight percent). For example, if the preferred stock purchase price was $20 million, and the stock had a 1x liquidation preference and a six percent cumulative dividend, and if the company was sold after three years, then the preferred stock holders would be entitled to $23.6 million before anything was paid on the common stock. In some circumstances cumulative dividends must be paid annually, but this is unusual in venture financed companies.

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.

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 Statutory Voting.