Glossary

A corporation that limits its ownership structure to 100. An S corporation does not pay taxes, rather, similar to a partnership, its owners pay taxes on their proportion of the corporation's profits at their individual tax rates.

a software application, hosted centrally, where users are charged a subscription. (See also: PaaS)

Small Business Investment Company. A company licensed by the Small Business Administration to receive government leverage in order to raise capital to use in venture investing.

Small Business Innovation Research Program. See Small Business Innovation Development Act of 1982.

Partnerships that specialize in purchasing the portfolios of investee company invesments of an existing venture firm. This type of partnership provides some liquidity for the original investors. These secondary partnerships, expecting a large return, invest in what they consider to be undervalued companies. The big difference is that they are buying their interests in a fund after the fund has been at least partially deployed in underlying portfolio companies. Unlike fund of fund managers, which generally invest in blind pools, secondary buyers can evaluate the underlying companies that they are indirectly investing in.

The market for the sale of 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

The sale of private or restricted holdings in a portfolio company to other investors. See secondary market definition.

The federal law covering new issues of securities. It provides for full disclosure of pertinent information relating to the new issue and also contains antifraud provisions.

The federal law that established the Securities and Exchange Commission. The act outlaws misrepresentation, manipulation and other abusive practices in the issuance of securities.

The SEC is an independent, nonpartisan, quasi-judicial regulatory agency that is responsible for administering the federal securities laws. These laws protect investors in securities markets and ensure that investors have access to all material information concerning publicly traded securities. Additionally, the SEC regulates firms that trade securities, people who provide investment advice, and investment companies.

The first round of capital for a start-up business. Seed money usually takes the structure of a loan or an investment in preferred stock or convertible bonds, although sometimes it is common stock. Seed money provides startup companies with the capital required for their initial development and growth. Angel investors and early-stage venture capital funds often provide seed money.

An initial state of a company's growth characterized by a founding management team, business plan development, prototype development, and beta testing.

A series of preferred stock has a "senior" liquidation preference when it is entitled to receive its liquidation preference before another series of preferred stock. (All series of preferred stock will, of course, be "senior" to the common stock simply by virtue of having a liquidation preference.) For example, if the Series B has a $30 million senior liquidation preference and the Series A has a $25 million liquidation preference and the company is sold for $40 million, the Series B will receive $30 million and the Series A will receive $10 million.

Securities that have a preferential claim over common stock on a company's earnings and in the case of liquidation. Generally, preferred stock and bonds are considered senior securities.

a company’s first “grown up” round of funding (even if they’ve raised seed/angel/friends and family, etc.). It gets this name because of the kind of preferred stock that investors get.

The first round of stock offered during the seed or early stage round by a portfolio company to the venture investor or fund. This 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.

(and beyond) - additional rounds of funding that let a company keep raising money to make bigger moves. Of course they’re going to need to be hitting key benchmarks (market penetration, revenue, etc.) to prove that they deserve this extra cash.

major company actions are often put to a vote and everyone who has preferred stock gets to vote for or against it. The more shares one has, the more votes they get (holders of common stock don’t get to vote).

these shares are in play; they’ve been authorized, issued, and purchased. They’re out in the world, people own them, and they can make stuff happen. (Contrast with Treasury Stock.)

A corporation with no assets and no business. Typically, shell corporations are designed for the purpose of going public and later acquiring existing businesses. Also known as Specified Purpose Acquisition Companies (SPACs).

if a previous investor chooses not to invest in the next round (follow-on), it is a bad signal to other investors because someone with more intimate knowledge of the company than most has opted not to deepen their investment.

Provides loans to small business investment companies (SBICs) that supply venture capital and financing to small businesses.

The Small Business Innovation Research (SBIR) program is a set-aside program (2.5% of an agency's extramural budget) for domestic small business concerns to engage in Research/Research and Development (R/R&D) that has the potential for commercialization. The SBIR program was established under the Small Business Innovation Development Act of 1982 (P.L. 97-219), reauthorized until September 30, 2000 by the Small Business Research and Development Enhancement Act (P.L. 102-564), and reauthorized again until September 30, 2008 by the Small Business Reauthorization Act of 2000 (P.L. 106-554).

A special company, usually outside the United States, established by a company to meet a specific financial problem, often to pay lower taxes (e.g., a re-invoicing subsidiary or offshore insurance company).

A division or subsidiary of a company that becomes an independent business. Typically, private equity investors will provide the necessary capital to allow the division to "spin out" on its own; the parent company may retain a minority stake.

This is an anti-takeover measure in which the election of the directors is split in separate periods so that only a percentage (e.g. one-third) of the total number of directors come up for election in a given year. It is designed to make taking control of the board of directors more difficult.

A method of voting for members of the Board of Directors of a corporation. Under this method, a shareholder receives one vote for each share and may cast those votes for each of the directorships. For example: An individual owning 100 shares of stock of a corporation that is electing six directors could cast 100 votes for each of the six candidates. This method tends to favor the larger shareholders.

1) The right to purchase or sell a stock at a specified price within a stated period. Options are a popular investment medium, offering an opportunity to hedge positions in other securities, to speculate on stocks with relatively little investment, and to capitalize on changes in the market value of options contracts themselves through a variety of options strategies. 2) A widely used form of employee incentive and compensation. The employee is given an option to purchase its shares at a certain price (at or below the market price at the time the option is granted) for a specified period of years.

Corporate or individual investors that add value to investments they make through industry and personal ties that can assist companies in raising additional capital as well as provide assistance in the marketing and sales process.

The application submitted by an investor wishing to join a limited partnership. All prospective investors must be approved by the General Partner prior to admission to becoming a partner.

Ownership of shares in a company resulting from work rather than investment of capital--usually founders receive "sweat equity".

Underwriters or broker/dealers who sell a security as a group. (See Allocation)

A number of investors offering funds together as a group on a particular deal. A lead investor often coordinates such deals and represents the group's members. Within the last few years, syndication among angel investors (an angel alliance) has become more common, enabling them to fund larger deals closer to those typifying a small venture capital fund.