Glossary

cloud computing. The company gives the client the ability to develop, run, and manage a web application (without all the infrastructure that usually goes with that) and charge them.

The amount of committed capital a limited partner has actually transferred to a venture fund. Also known as the cumulative takedown amount.

At an equal rate or pace, without preference.

A preferred stock in which the holder is entitled to the stated dividend, and also to additional dividends on a specified basis upon payment of dividends to the common stockholders. The preferred stock entitles the owner to receive a predetermined sum of cash (usually the original investment plus accrued dividends) if the company is sold or has an IPO. The common stock represents additional continued ownership in the company.

this kind of stock lets the VC do a little double-dipping: basically, in the case of a liquidity event, they get some more money after their initial payout. Example: if a VC owns 20% PP stock in a company and it’s liquidated, they get paid out for their stock, then they get 20% of any leftover cash after all the other investors have been paid out.

Preferred stock is said to "participate" or to have "participation" rights when, after the holders of preferred stock receive their full liquidation preference amount, they are then entitled to share with the holders of common stock in the remaining amount being paid for the company (or otherwise distributed to stockholders). For example, if the company is sold for $200 million, the preferred stock has a liquidation preference of $30 million and the preferred stock represents 40% of the total number of outstanding shares of the company, then the $200 million would be distributed among stockholders as follows: (1) First $30 million - Paid to holders of preferred stock per their liquidation preference. (2) Remaining $170 million: • Preferred stock holders receive their 40% pro rata share ($68 million) per their participation rights. • Common stock holders receive remaining 60% ($102 million). Totals: Preferred stock holders - $98 million Common stock holders - $102 million

A nontaxable entity in which each partner shares in the profits, loses and liabilities of the partnership. Each partner is responsible for the taxes on its share of profits and loses.

The contract that specifies the compensation and conditions governing the relationship between investors (LP's) and the venture capitalists (GP's) for the duration of a private equity fund's life.

a round of financing where generally a small amount of money is raised from a large number of investors (commonly between 10 and 20).

Pay to play provisions impose penalties on investors for not investing their full pro rata share in the next round (typically only if the next round is a down round). The more severe version of these penalties is to provide that investors who do not invest their full pro rata amount will have their existing preferred stock converted into common stock, resulting in the loss of their liquidation preference and antidilution protection, among other rights. A less severe version is to convert the preferred stock into a different series of preferred (often referred to as "shadow preferred") that retains some or all of its liquidation preference, but loses anti-dilution protection, both for the subject financing, and going forward.

even though the pro-rata right guarantees investors the chance to maintain their ownership percentage, they still have to pay for it. This full-on requires a VC to keep investing in future rounds to keep from being diluted (see “follow on” and “signalling risk”).

Low priced issues, often highly speculative, selling at less than $5/share.

when a larger early-stage or multistage fund offers to do 80-100% of a company’s seed round

A situation when a securities underwriter allows existing holdings of shares in a corporation to be sold in combination with an offering of new public shares.

(Payment in Kind) PIK Debt are bonds that may pay bondholders compensation in a form other than cash.

a gutsy, heartfelt attempt to make a VC pry open its purse. The startup team will put together a comprehensive presentation (a “deck”) and reports to show the VC that they are a good investment. They’ll physically go to the VC’s offices and

Pooled Investment Vehicle. A legal entity that pools various investor's capital and deploys it according to a specific investment strategy.

when a business plan doesn’t work, the company changes things up.

A company that specializes in finding institutional investors that are willing and able to invest in a private equity fund or company issuing securities. Sometimes the "issuer" will hire a placement agent so the fund partners can focus on management issues rather than on raising capital. In the U.S., and these companies are regulated by the NASD and SEC.

The Securities and Exchange Commission online version of Plain English Handbook: How to Create Clear SEC Disclosure Documents

An investment that has a very healthy rate of return. The inverse of an old venture capital adage (see Lemons) claims that "plums ripen later than lemons."

A right issued by a corporation as a preventative anti-takeover measure. It allows right holders to purchase shares in either their company or in the combined target and bidder entity at a substantial discount, usually 50%. This discount may make the takeover prohibitively expensive.

A method of calculating an aggregate IRR by summing cash flows together to create a portfolio cash flow. The IRR is subsequently calculated on this portfolio cash flow.

Companies in which a given fund has invested.

The valuation of a company immediately after the most recent round of financing. For example, a venture capitalist may invest $3.5 million in a company valued at $2 million "pre-money" (before the investment was made). As a result, the startup will have a post-money valuation of $5.5 million.

The valuation of a company prior to a round of investment. This amount is determined by using various calculation models, such as discounted P/E ratios multiplied by periodic earnings or a multiple times a future cash flow discounted to a present cash value and a comparative analysis to comparable public and private companies.

A shareholder's right to acquire an amount of shares in a future offering at current prices per share paid by new investors, whereby his/her percentage ownership remains the same as before the offering.

Shares of a firm that encompass preferential rights over ordinary common shares, such as the first right to dividends and any capital payments.

board members hand-picked by the VC. What makes them special is that, in the case of a board vote, even if there is a majority board vote on an action, if a preferred director doesn’t vote for it, then it doesn’t get passed.

A dividend ordinarily accruing on preferred shares payable where declared and superior in right of payment to common dividends.

The minimum return to investors to be achieved before a carry is permitted. A hurdle rate of 10% means that the private equity fund needs to achieve a return of at least 10% per annum before the profits are shared according to the carried interest arrangement.

Preferred stock has various "preferences" over common stock. These preferences can include liquidation preferences, dividend rights, redemption rights, conversion rights and voting rights, as described in more detail below. Venture capitalists and other investors in private companies typically receive preferred stock for their investment.

stock in a company that has additional rights, most commonly voting rights. Can be converted into common stock.

Equity securities of companies that have not "gone public" (are not listed on a public exchange). Private equities are generally illiquid and thought of as a long-term investment. As they are not listed on an exchange, any investor wishing to sell securities in private companies must find a buyer in the absence of a marketplace. In addition, there are many transfer restrictions on private securities. Investors in private securities generally receive their return through one of three ways: an initial public offering, a sale or merger, or a re-capitalization.

Investments by a private equity fund in a publicly traded company, usually at a discount.

raising high volumes of money in the hundreds of millions of dollars (amounts that formerly would have been brought in through an IPO) while remaining private. Sometimes, early investors will sell shares into late-stage “private IPO” rounds. Not technically a “public offering,” but referred to as an IPO because of how much money they bring into a company.

Also known as a Reg. D offering. The sale of a security (or in some cases, a bond) directly to a limited number of investors. Avoids the need for S.E.C. registration if the securities are purchased for investment as opposed to being resold. The size of the issue is not limited, but its sale is limited to a maximum of thirty-five non-accredited investors.

Also known as an Offering Memorandum. A document that outlines the terms of securities to be offered in a private placement. Resembles a business plan in content and structure.

Private securities are securities that are not registered and do not trade on an exchange. The price per share is set through negotiation between the buyer and the seller or issuer.

A formal written offer to sell securities that provides an investor with the necessary information to make an informed decision. A prospectus explains a proposed or existing business enterprise and must disclose any material risks and information according to the securities laws. A prospectus must be filed with the SEC and be given to all potential investors. Companies offering securities, mutual funds, and offerings of other investment companies including Business Development Companies are required to issue prospectuses describing their history, investment philosophy or objectives, risk factors and financial statements. Investors should carefully read them prior to investing.

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