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Private Equity and Venture Capital Glossary

Definition and Terms

Definition accredited investor
accredited investor - 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.

Definition acquisition
acquisition - Acquisition is the process through which one company takes over the controlling interest of another company. Acquisition includes obtaining supplies or services by contract or purchase order with appropriated or non-appropriated funds, for the use of Federal agencies through purchase or lease.

Definition add-on service
add-on service - 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.

Definition adventure capitalist
adventure capitalist - 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.

Definition angel investor
angel investor - Angel or Angel Investor is an individual who provides capital to one or more startup companies. Unlike a partner, the angel investor is rarely involved in management. Angel investors can usually add value through their contacts and expertise.

Definition annex fund
annex fund - annex funds are side funds that can provide an extra pool of money to supplement the original VC Funds.

Definition antidilution provisions
antidilution provisions - Antidilution Provisions are contractual measures that allow investors to keep a constant share of a firm's equity in light of subsequent equity issues. These may give investors preemptive rights to purchase new stock at the offering price. Examples include Broad-Based Weighted Average Ratchet, Narrow-Based Weighted Average Ratchet, and Full Ratchet Antidilution.

Definition benchmarks
benchmarks - Benchmarks are performance goals against which a company's success is measured. Benchmarks are often used by investors to help determine whether a company should receive additional funding or whether management should receive extra stock.

Definition blind pool
blind pool - Blind pool is a form of limited partnership which doesn't specify what investment opportunities the general partner plans to pursue.

Definition bridge loans
bridge loans - bridge loan is a short-term loan that is used until a person or company can arrange a more comprehensive longer-term financing. The need for a bridge loan arises when a company runs out of cash before it can obtain more capital investment through long-term debt or equity.

Definition buyout
buyout - Buyout is defined as the purchase of a company or a controlling interest of a corporation's shares or product line or some business. A leveraged buyout is accomplished with borrowed money or by issuing more stock.

Definition capitalization table
Capitalization table - A Cap Table (or capitalization table) is the document that shows who owns the company and what they paid to attain that ownership. In other words 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.

Definition capital expenditures

capital expenditures - Capital Expenditures is the money spent by a company to add or expand property, plant, and equipment assets, with the expectation that they will benefit the company over a long period of time (more than one year). Also called capital outlay.

Definition capital gain
capital gain - 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.

Definition capital types
capital types - There are Equity Loan, Financial Capital, First Round Funding, Human Capital, Later Stage Funding, Merger and Acquisition Funding, Mezzanine Funding, Natural Capital, Second Round Funding and Seed/Startup Funding (see details).

Definition capital under management
capital under management - Capital under management is the amount of capital available to a management team for venture investments.

Definition civilian unemployment rate
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.

Definition closing
closing - Closing is the final event to complete the investment, at which time all the legal documents are signed and the funds are transferred.

Definition convertible
convertible - 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.

Definition corporate venture capital
corporate venture capital - Corporate venture capital is a subsidiary of a large corporation which makes venture capital investments.

Definition corporate venturing
corporate venturing - Corporate Venturing is a practice of a large company, taking a minority equity position in a smaller company in a related field.

Definition deal flow
deal flow - Deal flow (dealflow) is the rate at which investment offers are presented to funding institutions.

Definition debt financing
debt financing - Debt Financing means when a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise to repay principal and interest on the debt.

Definition direct financing
direct financing - Direct financing is a financing without the use of underwriting. Direct financing is often done by investment bankers.

Definition double dip
double dip - Participating preferred stock which entitles a holder to a liquidation preference and also to participate in the residual value.

Definition drive-by deal
drive-by deal - 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.

Definition due diligence
due diligence - Due diligence is the process of investigation and evaluation, performed by investors, into the details of a potential investment, such as an examination of operations and management and the verification of material facts.

Definition equity financing
equity financing - Equity financing is a term used for company's issuance of shares of common or preferred stock to raise money. Equity financing is commonly done when its per share prices are high-the most money that can be raised for the smallest number of shares.

Definition equity offerings
equity offerings - Equity Offerings is raising funds by offering ownership in a corporation through the issuing of shares of a corporation's common or preferred stock.

Definition exit
exit - Exit is the sale or exchange of a significant amount of company ownership for cash, debt, or equity of another company.

Definition exit route
exit route - Exit Route is the method by which an investor would realize an investment.

Definition exit strategy
exit strategy - 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.

Definition financier
financier - Financier is a person or financial institution engaged in the lending and management of money and makes a living participating in commercial financing activities.

Definition first-round financing
first-round financing - First-round financing is the first investment in a company made by external investors.

Definition first stage capital
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.

Definition follow-on
follow-on - 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.

Definition full ratchet
full ratchet - 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.

Definition fully diluted basis
Fully diluted basis - Fully diluted basis is a methodology for calculating any per share ratios whereby the denominator is the total number of shares issued by the company on the assumption that all warrants, options and preferred stocks are exercised.

Definition fundless equity sponsor
Fundless equity sponsor - Fundless equity sponsors are sourcing and vetting deals without any committed capital, lining up financial sponsors on a deal-by-deal basis.

Definition fund of funds
fund of funds - Fund of Funds is a mutual fund which invests in other mutual funds. Fund of Funds is an investment vehicle designed to invest in a diversified group of investment funds.

Definition growth capital
growth capital - Growth Capital is a much more flexible type of financing than credit lines for equipment and soft cost purchases. The dollars borrowed under a growth capital line of credit can be used for any corporate purposes.
Growth capital is a good way to extend a company's runway between rounds of financing.

Definition ground floor
ground floor - Ground floor is a term used for the first stage of a new venture or investment opportunity.

Definition incubator
incubator - Incubator is a company or facility designed to foster entrepreneurship and help startup companies, usually technology-related, to grow through the use of shared resources, management expertise and intellectual capital.

Definition institutional investors
institutional investors - 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.

Definition investment banks
investment banks - 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.

Definition invisible venture capital
invisible venture capital - Invisible venture capital is a venture capital from angel investors.

Definition IPO - initial public offering
IPO - initial public offering - Initial Public Offering or IPO is the first sale of stock by a private company to the public. IPOs are often smaller, younger companies seeking capital to expand their business.

Definition IRR
IRR - 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.

Definition lead investor
lead investor - Lead investor is a company's principal provider of capital, such as the entity which originates and structures a syndicated deal.

Definition leveraged buy-out - LBO
leveraged buy-out - LBO - Leveraged Buy-out or LBO is an acquisition of a business using mostly debt and a small amount of equity. The debt is secured by the assets of the business. In LBO, the acquiring company uses its own assets as collateral for the loan in hopes that the future cash flows will cover the loan payments.

Definition limited partnership
limited partnership - 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.

Definition liquidation
liquidation - Liquidation is the sale of the assets of a portfolio company to one or more acquirers when venture capital investors receive some of the proceeds of the sale.

Definition liquidation preference
liquidation preference - Liquidity preference is the right to receive a specific value for the stock if the business is liquidated. This is usually designated as a multiple of the Issue Price, for example 2X or 3X, and there may be multiple layers of Liquidation Preferences as different groups of investors buy shares in different series.

Definition liquidity event
liquidity event - Liquidity event is the way in which an investor plans to close out an investment. Liquidity event is also known as exit strategy.

Definition lock-up period
lock-up period - 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.

Definition management buy-in - MBI
management buy-in - 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.

Definition management buy-out - MBO
management buy-out - MBO - 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.

Definition master limited partnership
master limited partnership - 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.

Definition mezzanine debt
mezzanine debt - 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.

Definition mezzanine financing
mezzanine financing - Mezzanine Financing is a late-stage venture capital, usually the final round of financing prior to an IPO. Mezzanine Financing is for a company expecting to go public usually within 6 to 12 months, usually so structured to be repaid from proceeds of a public offerings, or to establish floor price for public offer.

Definition mezzanine level
mezzanine level - 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.

Definition minority enterprise small business investment companies - MESBICS
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. They provide debt and equity capital to new, small independent businesses. Criteria for investment and size and type of investment vary from one firm to another.

Definition owner-employee
owner-employee - 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.

Definition pari passu
pari passu - Pari-passu is a latin term that means "of equal step" or "without partiality". Pari-passu is often seen in venture capital term sheets, indicating that one series of equity will have the same rights and privileges as another series of equity.

Definition performance based vesting
performance based vesting - Under performance-based vesting, options Vest only if specified performance criteria are met. For example, options may vest if annual earnings per share exceed a certain target by a specified date.

Definition PIPE or Private Investment in Public Equity
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.

Definition pipeline
pipeline - Pipeline is the flow of upcoming underwriting deals.

Definition pitch
pitch - Pitch is the set of activities intended to persuade someone to buy a product or take a specific course of action.

Definition portfolio company
portfolio company - A portfolio company is a company or entity in which a venture capital firm or buyout firm invests. All of the companies currently backed by a private equity firm can be spoken of as the firmís portfolio.

Definition post-money valuation
post-money valuation - Post-Money Valuation is 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.

Definition pre-money valuation
Pre-money valuation - Pre-Money Valuation is 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.

Definition prepaid warrant
Prepaid Warrant - Prepaid Warrant is a warrant issued by an issuer entitling the holder to exercise into a specified number of different securities, for no additional financial consideration, during a specified time period.

Definition private equity
private equity - 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.

Definition private limited partnership
private limited partnership - Private limited partnership is a limited partnership having no more than 35 limited partners and thus able to avoid SEC registration.

Definition private placement
private placement - 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.

Definition pro forma

pro forma - Description of financial statements that have one or more assumptions or hypothetical conditions built into the data. A financial projection based on assumptions. Also, refers to a statement of income and balance sheets that exclude non-recurring items.

Definition raising capital
raising capital - Raising Capital refers to obtaining capital from investors or venture capital sources.

Definition recapitalization
recapitalization - Recapitalization is a financing technique used by companies to defend against hostile takeovers. By recapitalization, a company restructures it's debt and equity mixture without affecting the total amount of balance sheet equity.

Definition realized investment
realized investment refers to returns on private equity investments and typically done through Initial Public Offering (IPO), Merger or Acquisition (M&A) or Recapitalization.

Definition resyndication limited partnership
resyndication limited partnership - 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.

Definition retained earnings
Retained earnings are the corporate profits that are neither paid out in cash dividends to stockholders nor used to increase capital stock, but are reinvested in the company. It is calculated by adding company's net income to beginning retained earnings and subtracting any dividends paid to shareholders.

Definition return on investment - ROI
return on investment - ROI - Return On Investment or ROI is the profit or loss resulting from an investment transaction, usually expressed as an annual percentage return. ROI is a return ratio that compares the net benefits of a project verses its total costs.

Definition reverse vesting

reverse vesting - Reverse Vesting is an increasingly common Vesting schedule in stock option plans offered by pre-IPO companies. Under this arrangement, an option holder is allowed to exercise options immediately they are granted. For each option exercised, the option holder receives a share of Restricted stock, which itself is subject to vesting requirements. The restricted stock may be forfeited if the vesting requirements are not met..

Definition risk
risk - 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.

Definition risk capital
risk capital - Risk capital are funds made available for startup firms and small businesses with exceptional growth potential.

Definition risk premium
risk premium - A risk premium is the minimum difference a person requires to be willing to take an uncertain bet, between the expected value of the bet and the certain value that he is indifferent to.

Definition round of funding
round of funding - Round of funding is the stage of financing a start-up company is in. The usual progression is from startup to first round to mezzanine to pre-IPO.

Definition royalty based financing
Royalty Based Financing presumes a fundamental trade-off between the investor and the business owner. In lieu of an equity ownership stake given to the investor, business owners agree to return to the investor the original principal plus either a predetermined multiple of the original investment (fixed dollar payback) or payment of the royalty until a fixed period of time has elapsed (fixed time payback). In some cases the royalty is based on a percentage of sales of a specific product or set of products.

Definition small business investment companies - SBIC
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.

Definition secondary public offering
secondary public offering - Secondary Public Offering refers to a public offering subsequent to an initial public offering. A secondary public offering can be either an issuer offering or an offering by a group that has purchased the issuer's securities in the public markets.

Definition secondary purchase
secondary purchase - Secondary Purchase is purchase of stock in a company from a shareholder rather than purchasing stock directly from the company.

Definition second stage capital
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.

Definition seed capital
seed capital - 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.

Definition series a preferred stock
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.

Definition silent partner
silent partner - 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 partner".

Definition startup
startup - Startup is a new business venture in its earliest stage of development.

Definition syndication
syndication - 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.

Definition term sheet
term sheet - Term sheet is a non-binding agreement setting forth the basic terms and conditions under which an investment will be made. The term sheet is a template that is used to develop more detailed legal documents.

Definition third stage capital
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.

Definition tranche financing
tranche - is the French word meaning "slice" or "portion". In the world of investing, it is used to describe a security that can be split up into smaller pieces and subsequently sold to investors.

Definition turnaround
turnaround - Turnaround is the term used when the poor performance of a company or the business experiences a positive reversal.

Definition underwriter
underwriter - 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.

Definition up round financing
Up round financing - Up Round Financing refers to a round of financing in which a company's worth increased since its prior valuation.

Definition venture
venture - Venture is often use for referring to a risky start-up or enterprise company.

Definition venture capital
venture capital - Venture Capital is the money and resources made available to startup firms and small businesses with exceptional growth potential. Most venture capital money comes from an organized group of wealthy investors.

Definition venture capital firm
venture capital firm - Venture Capital Firm is an investment company that invests its shareholders' money in startups and other risky but potentially very profitable ventures.

Definition venture capital funds
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.

Definition venture capitalist
venture capitalist - Venture Capitalist is a term used of an investor who provides capital to either start-up ventures or support small companies who wish to expand but do not have access to public funding.

Definition venture capital limited partnership
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.

Definition vesting schedule
vesting schedule - A Vesting Schedule determines when you may exercise your stock options or when the forfeiture restrictions lapse on restricted stock.

Definition vulture capitalist
vulture capitalist - 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.




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