Venture Capital and Private Equity Glossary of Terms

This venture capital and private equity glossary of terms will help you understand this important method of business financing.

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"A" Round : A financing event whereby venture capitalists invest in a company that was previously financed by founders and/or angels. The "A" is from Series "A" Preferred stock. See "B" round.

"B" Round: A financing event whereby professional investors such as venture capitalists are sufficiently interested in a company to provide additional funds after the "A" round of financing. Subsequent rounds are called "C", "D", and so on.

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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.

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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 person’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.

ACRS: Accelerated Cost Recovery System. The IRS approved method of calculating depreciation expense for tax purposes. Also known as Accelerated Depreciation.

Add-ons: Marketing term used to describe the extra charges and fees added to the basic price of a product.

ADR: 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.

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.

Affirmative Covenants: Terms contained in a shareholders' agreement where the company or management agree to carry out certain actions. Examples would be to prepare annual budgets and supply monthly accounts.

After-market Support: Term used to describe the activities of a broker or underwriter after a listing to ensure the share price remains steady or rises. This can vary from acting as a principal buying shares to demanding immediate payment of the underwriting fees.

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 Assets: This term describes non-traditional asset classes. They include private equity, venture capital, hedge funds and real estate. Alternative assets are generally more risky than traditional assets, but they should, in theory, generate higher returns for investors.

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

AMT: Alternative Minimum Tax. 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.

Angel: A wealthy individual who invests in entrepreneurial firms. Although angels perform many functions as venture capitalists, they invest their own capital rather than that of institutional or other individual investors.

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

Asset Consultant: Independent person or company who advises superannuation fund trustees on allocation of funds among various asset classes (listed equities, property, venture capital etc.), and who may provide additional expertise in the selection of fund managers for the various asset classes.

Asset Intensity: The value of assets required by a business to support $1 in sales. The figure is the reciprocal of asset turn and varies from say $2 for a capital intensive manufacturer to 15¢ for a retailer.

Asset Redeployment: Term used by new owners of a company to explain how they intend to improve the return on assets. For example, actions might include selling businesses which are not an intrinsic part of the operation, rationalizing product lines and so forth.

Asset Turn: The ratio obtained when the annual sales are divided by the assets of the company. The ratio can vary from one for a miner to say eight for a retailer.

Average IRR: The arithmetic mean of the internal rates of return.

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Balance Sheet: A condensed financial statement showing the nature and amount of a company's assets, liabilities, and capital on a given date.

Balanced: A venture fund investment strategy which includes investment in portfolio companies at a variety of stages of development (Seed, Early Stage, Later Stage).

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.

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.

Board Seats: Venture firms often acquire positions on the board of directors of their portfolio companies. A board seat gives a venture firm a means of monitoring and managing a company they invest in.

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.

Bootstrapping: To slow down the rate of growth of the company and fund the working capital increase from retained earnings.

Break-even Analysis: Financial tool which is used to establish if the gross profit of a business will exceed the fixed costs.

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. In some cases, lenders will provide buyout firms and venture capital firms with bridge loans so that they can begin investing before closing their funds. 

Broad-Based Weighted Average Ratchet: A type of anti-dilution mechanism. A weighted average ratchet adjusts downward the price per share of the preferred stock of investor A due to the issuance of new preferred shares to new investor B at a price lower than the price investor A originally received. Investor A's preferred stock is re-priced to a weighed average of investor A's price and investor B's price. A broad-based ratchet uses all common stock outstanding on a fully diluted basis (including all convertible securities, warrants and options) in the denominator of the formula for determining the new weighed average price. Compare Narrow-Based Weighted Average ratchet.

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. The rate at which a company requires additional cash to keep going. Usually measured in monthly expenses less turnover. Example is 'company xyz has a burn rate of $45,000 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 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, most probably the most important element of the document due to the time constraints of venture capital funds and angels.

Buy-in Price: Price at which an investor purchases new shares for transactions where the cash remains with the company.

Buy-out Price: Price at which an investor purchases old shares for transactions where the cash goes with the seller.

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

Call Option: The right to buy a security at a given price (or range) within a specific time period. A contract whereby the holder of an option has the right to buy, from the grantor, shares at a specific price (strike price) at some time in the future.

Capital (or Assets) Under Management: The amount of capital available to a fund management team for venture investments.

Capital Call: 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.

Capital Employed: the sum of equity and long-term debt used by a company to purchase long-term assets and for working capital.

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 Intensity: The amount of capital needed to be employed by a business to support $1 of sales. The reciprocal of capital turn.

Capital Structure: The composition of a company's source of funds, especially long-term funds.

Capital Takedown (also Capital Calls or Drawdowns): The process by which the general partner of a fund requests the capital committed by the limited partners for investments. Most general partners today call down capital only as they require it, rather than in pre-set amounts according to a rigid timetable.

Capital Turn: The ratio obtained by dividing the annual sales of a company by the capital employed.

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.

Carried Interest (also Carry): The general partner’s share of the profits generated through a private equity fund, typically 20-25%. Carried interest is designed to be the general partner’s chief incentive for strong performance. The term originated in the early days of VC, when general partners put up nothing in return for 20% of the profits; thus the limited partners "carried the interest" of the general partners. Carried interest is usually not paid until limited partners receive their original investment back. Limited partners may also require some level of preferred return before the carried interest is calculated (the “hurdle rate”).

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

Captive Funds: Venture capital funds that are usually part of a bank, using a bank's retained earnings to invest in equity of private companies.

Carried Interest: The portion of any gains realized by the fund to which the fund managers or general partners 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.

Catch-up: 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.

Chapter 11: The part of the Bankruptcy Code that provides for reorganization of a bankrupt company's assets.

Chapter 7: The part of the Bankruptcy Code that provides for liquidation of a company's assets.

Clawback: 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. Click here for more detail

Closed-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. Also, funds with a limited life span, for example ten years for funds to be invested and realized.

Closing: 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.

Co-investment: The syndication of a private equity financing round or an investment by individuals (usually general or limited partners) alongside a private equity fund in a financing round. By having co-investment rights, a limited partner in a fund can invest directly in a company also backed by the fund managers itself. In this way, the limited partner ends up with two separate stakes in the company; one, indirectly, through the private equity fund to which the limited partner has contributed; another, through its direct investment. Some private equity firms offer co-investment rights to encourage limited partners to invest in their funds.

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.

Cold Call Presentation: Selling term used to describe the first meeting between a buyer and seller where the initial contact has been at most a telephone call arranging a meeting.

Collateral: A physical asset that a borrower owns and puts forward as security in case they default on their loan.

Commitment: A limited partner's obligation to provide a certain amount of capital to a fund. Committed funds or raised funds: 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.

Committed Capital: The total dollar amount of capital pledged to a private equity fund. Pledges of capital to a venture capital fund. This money is typically not received at once, but drawn down over three to five years, starting in the year the fund is formed.

Common Shares: The equity typically held by management and founders. Typically, at the time of an initial public offering, all equity is converted into common stock.

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.

Consolidation: A private equity investment strategy that involves merging several small firms together and taking advantage economies of scale or scope. This is also an investment strategy (or a leveraged rollup) 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.

Contribution Rate: Accounting term expressed as a percentage calculated by subtracting the variable costs from sales. The contribution rate then describes what percentage of each sales dollar is available to cover fixed costs.

Contributing Shares: Shares on which only part of the capital amount and any premium has been paid. Often useful in tranching structures.

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 Equity or Debt (Notes): A security that can be converted under certain conditions into another security (often into common stock). The convertible shares often have special rights that the common stock does not have.

Convertible Preference Shares: Preference shares which may be converted to ordinary shares at the option of the holder.

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 Common Stock, Dilution, and 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 Venture Capital: An initiative by a corporation to invest either in young firms outside the corporation or units formerly part of the corporation. These are often organized as corporate subsidiaries, not as limited partnerships.

Corporate Venturing: Venture capital provided by in-house investment funds of large corporations to further their own strategic interests. Investment vehicles that seek to find qualified investment opportunities that are congruent with the parent company’s strategic technology or that provide synergy or cost savings. Corporate venturing programs may be loosely organized programs affiliated with existing business development programs or may be self-contained entities with a strategic charter and mission to make investments congruent with the parent’s strategic mission.

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

Cost of Goods Sold: Accounting term defined by the equation: opening stock plus purchases plus expenses related to purchases less closing stock.

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 Statutory Voting.

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Deal Flow: The measure of the number of potential investments and proposals that a venture capital fund reviews in any given period.

Debt: Capital supplied for which there is a fixed income, fixed repayment period, and fixed repayment schedule.

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 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.

Development Capital: Capital required by an established company to fund the expansion of the business.

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

Dilution of Equity: Stock market term used to describe the situation whereby the issue of new shares results in the original shareholders owning a smaller share of the company.

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).

Disbursement: The investments by funds into their portfolio companies.

Disclosure Document: A booklet outlining the risk factors associated with an investment.

D/PI (Distributions to Paid-in Capital): The amount a partnership has distributed to its investors relative to the total capital contribution to the fund.

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

Divestment: The disposal of a business or business segment.

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.

Dividend Yield: Stock market term which expresses, as percentage return, the annual dividend per share divided by the latest market price.

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 research, analyze and assess the desirability, value, and potential of an investment opportunity.

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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.

Early stage Capital: Finance for companies to initiate commercial manufacturing and sales.

Earn Out: Part of the price of a transaction, which is conditional on the performance of the company following the deal.

EBIT: Earnings before interest and tax.

EBITDA: "Earnings Before Interest, Taxes, Depreciation and Amortization": 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.

Economies of Scale: Economic principle that as the volume of production increases, the cost of producing each unit decreases. Used to describe the cost benefits that accrue from increasing size such as volume discounts on purchases or spreading fixed costs over an increasingly larger production base.

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.

Entitlement Issue: See non-renounceable rights issue.

Equity: The proportion of a company that shareholders own. Sometimes described as shareholders' funds.

Equity Hybrid: A security that combines the characteristics of debt and equity such as a convertible note.

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. Also, shares or call options offered to lenders, underwriters, promoters or management as additional consideration for services rendered.

Equity Sweetener: Effectively the same as equity kicker but generally used when referring to free options granted to subscribers to a new issue of shares.

ERISA: Acronym for 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 "benefit plan investors" 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 partner's interest.

Escrow Provisions: Legal term used to describe undertaking given by present shareholders not to sell shares unless certain conditions are met.

Evergreen Fund: A fund in which returns generated on investments are automatically returned to the general pool, with the aim of keeping a continuous supply of capital on hand for investments.

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.

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

Exit Mechanism: Venture capital term used to describe the method by which a venture capitalist will eventually sell out of an investment.

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.

Expansion Financing: This is capital provided for growth and expansion of an established company. Funds may be used to finance increased production capacity, market or product development and/or provide additional working capital. Capital provided for turnaround situations is also included in this category, as is the refinancing of bank debt.

Exporting: This is the process of sending a product or service offshore (to foreign countries).

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Factoring: Occurs when a company either purchases your accounts receivable or loans you funds against your accounts receivable. This can improve your company's liquidity.

Final Regulation: An ERISA term, it is the United States Department of Labor's Final Regulation relating to the definition of "plan assets" in (29 C.F.R. §2510.3-101).

Financing Gap: Venture capital term used in leveraged buy-outs to describe the difference between the purchase price of a company and the debt raised on the assets and cash flow of the company.

Finder: A person who helps to arrange a transaction.

Fire Sale: Finance term used to describe the situation when a company is formed to sell off assets cheaply because of lack of cash.

First Closing: The initial closing of a fund.

First Fund: An initial fund raised by a venture capital organization.

First Stage (Round): The First round of financing following a company's startup phase that involves an institutional VC fund. The round is usually a step-up in valuation, total size (usually not less than $5 M) and per share price for companies' whose product(s) are either in development or commercially available. Note that first-round funding does not necessarily mean that the company has received no previous outside backing. The term “first round” is still appropriate if previous backing consisted of, say, $500,000 from an angel investor. A first round typically is the first round involving participation by a venture capital firm.

Fixed Costs: Those costs such as rent that do not vary according to changes in sales levels.

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.

Float: In a public market context, the percentage of the company's shares that is in the hands of outside investors, as opposed to being held by corporate insiders.

Flotation: To obtain a quotation or IPO on a stock exchange, such as the NZSE, Australian Stock Exchange or the NASDAQ.

Floor: Stock market term used to describe the situation where a buyer has a permanent order in to buy shares at a certain price.

Follow-on Fund: A fund that is subsequent to a venture capital organization's first fund.

Follow-on funding : Companies often require several rounds of funding. If a private equity firm has invested in a particular company in the past, and then provides additional funding at a later stage, this is known as 'follow-on funding'.

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 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 Antidilution: 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: A pool of capital raised periodically by a venture capital organization. Usually in the form of limited partnerships, venture capital funds typically have a ten-year life, though extensions of several years are often possible.

Fund Age: The age of a fund (in years) from its first takedown to the time an IRR is calculated.

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 of funds: A fund set up to distribute investments among a selection of private equity fund managers, who in turn invest the capital directly. Fund of funds are specialist private equity investors and have existing relationships with firms. They may be able to provide investors with a route to investing in particular funds that would otherwise be closed to them. Investing in fund of funds can also help spread the risk of investing in private equity because they invest the capital in a variety of funds.

Fund Raising: The process through which a firm solicits financial commitments from limited partners for a private equity fund. Firms typically set a target when they begin raising the fund, and ultimately announce that the fund has closed at such-and-such amount, meaning that no additional capital will be accepted.

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

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GAAP: 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.

Gatekeeper : Specialist advisers who assist institutional investors in their private equity allocation decisions. Institutional investors with little experience of the asset class or those with limited resources often use them to help manage their private equity allocation. Gatekeepers usually offer tailored services according to their clients' needs, including private equity fund sourcing and due diligence through to complete discretionary mandates.

GDR's: Global Depositary Receipt (GDR's). Receipts for shares in a foreign based corporation traded in capital markets around the world. While ADR's permit foreign corporations to offer shares to American citizens, GDR's allow companies in Europe, Asia and the US to offer shares in many markets around the world.

Gearing, Debt/Equity or Leverage: Is the amount of debt financing compared to equity financing in a company. If the company has low levels of debt compared to equity it has a low gearing ratio. Conversely, a high debt to equity ratio would be a highly geared company. Gearing can also be referred to as financial leverage.

General Partner Contribution: The amount of capital that the fund manager contributes to its own fund in the same way that a limited partner does. This is an important way in which limited partners can ensure that their interests are aligned with those of the general partner. The U.S. Department of Treasury recently removed the legal requirement of the general partner to contribute at least 1 percent of fund capital. However, a 1 percent general partner contribution remains common, particularly among venture capital funds.

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.

Golden Share: A share whose vote must be included in any motion passed by the shareholders.

Green Field Company: A start-up company

Gross Profit: Sales less cost of goods sold.

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Hands-off: A relationship involving less frequent contact and only participation and influence in major strategic decisions.

Hands-on: A relationship involving close regular contact and significant influence and participation in management decisions.

Hockey stick projections: The general shape and form of a chart showing revenue, customers, cash, or some other financial or operational measure that increases dramatically at some point in the future. Entrepreneurs often develop business plans with hockey stick charts to impress potential investors.

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.

Horizon return: An IRR calculation between points in time where the beginning point is variable and the end point is fixed. An example would be the 3, 5, and 10-year returns ending 12/31/99, with 12/31/99 as the end point.

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. Also, the minimum return to investors to be achieved before a carry is permitted.

Hurt Money: Cash invested or exposure made by an entrepreneur to the business. The greater the proportion that the hurt money represents of the entrepreneur's personal wealth the more convincing the argument to the investor.

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Identifiable Intangibles: Intangible assets for which it is possible to set a valuation, such as future income tax benefit.

Implementation Plan: Plan defining the steps and activities required to achieve goals.

In The Money: Any option or warrant that would have a positive value if it was immediately exercised.

Incubator: An entity designed to nurture business concepts or new technologies to the point that they become attractive to venture capitalists. An incubator typically provides both physical space and some or all of the services—legal, managerial, and/or technical—needed for a business concept to be developed. Incubators often are backed by venture firms, which use them to generate early-stage investment opportunities.

Independent Funds: Venture capital funds raised from more than one source and run independently.

Initial Public Offering (IPO): 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. This is normally done through an investment bank (an underwriter). 

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

Intangible Assets: Assets owned or generated by a company that are not easily sold, except with the company as a whole, and that are usually not easily measurable.

Intellectual Property: Legal term used to describe the patents, licenses, copyrights, trademarks and designs owned by a company.

Interest Cover: Pre-interest cash flow divided by interest payments.

Interim Return: The final rate of return of a private equity investment can, by definition, only be calculated when all investments are sold and the fund is wound up. Most return calculations therefore produce interim IRRs, which are close to the final rate of return after approximately three to six years. This convergence period is usually shorter for buy-out funds than for early stage and development funds.

Internal Rate of Return (IRR): The basis by which returns to the investor are forecast or measured. Effectively it is the compound rate of return over the life of the investment and combines capital gain with income earned either in the form of dividends or interest. It is greatly affected by the timing of the exit.

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

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.

IRR: Internal Rate of Return. 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.

ISO: Incentive Stock Option. Plan which qualifying options are free of tax at the date of grant and the date of exercise. Profits on shares sold after being held at least 2 years from the date of grant or 1 year from the date of exercise are subject to favorable capital gains tax rate.

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.

- J -

J-Curve Effect: The curve realized by plotting the returns generated by a private equity fund against time (from inception to termination). The common practice of paying the management fee and start-up costs out of the first draw-down does not produce an equivalent book value. As a result, a private equity fund will initially show a negative return. When the first realizations are made, the fund returns start to rise quite steeply. After about three to five years, the interim IRR will give a reasonable indication of the definitive IRR. This period is generally shorter for buyout funds than for early-stage and expansion funds.

Joint Ventures: This is an agreement involving two or more organizations that arrange to produce a product or service jointly.

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

- L -

Lagging: A technique used by firms to change the pattern of international payments in order to manage their foreign currency exposure. For example, if an exporter will not benefit by accelerating conversion of export receipts in foreign currency, he will lag payments.

Later Stage (LS): A fund investment strategy involving financing for the expansion of a company that is producing, shipping and increasing its sales volume. Later stage funds often provide the financing to help a company achieve critical mass in order to position its next round of financing or initial public offering.

Lead Investor: The firm or individual that organizes a round of financing, and usually contributes the largest amount of capital to the deal.

Leveraged Buy-out or LBO: Purchase of a company where the purchaser uses a larger than normal amount of debt to finance the transaction. The purchase is leveraged through loan financing, rather than being paid for entirely with equity funding. The assets of the company being acquired are put up as collateral to secure the loan.

Learning Curve: An imaginary curve which describes the reduction in cost that occurs as a factory makes more and more of a particular product. Also used to describe the increase in skill of an employee over time.

Lead Investor: Also known as a bell cow investor. Member of a syndicate of private equity investors holding the largest stake, in charge of arranging the financing and most actively involved in the overall project

Letter of Intent: Document which is not legally binding but given by one party to another to show good faith and which describes the main agreed points of transaction.

Leveraged Buyout (LBO): A takeover of a company, using a combination of equity and borrowed funds. Generally, the target company's assets act as the collateral for the loans taken out by the acquiring group. The acquiring group then repays the loan from the cash flow of the acquired company. For example, a group of investors may borrow funds, using the assets of the company as collateral, in order to take over a company. Or the management of the company may use this vehicle as a means to regain control of the company by converting a company from public to private. In most LBOs, public shareholders receive a premium to the market price of the shares.

Leveraged Roll-up: See consolidation.

Limited Partner (LP): Institutions or individuals who contribute capital to a private equity fund. Limited partners typically are pension funds, private foundations, and university endowments. However, private equity firms themselves may serve as limited partners in other firms’ funds, as, for example, when a large buyout firm channels money to a fund managed by a venture capital firm. Limited Partner's have limited liability and usually have priority over General Partner's upon liquidation of the partnership.

Limited Partnerships: An organization comprised of a general partner, who manages a fund, and limited partners, who invest money but have limited liability and are not involved with the day-to-day management of the fund. In the typical venture capital fund, the general partner receives a management fee and a percentage of the profits (or carried interest). The limited partners, usually institutional investors, receive income, capital gains, and tax benefits. The usual minimum investment is 1% of total fund size, and the maximum is usually 10%. The majority of private equity funds include between 10 and 30 limited partners. A limited partnership usually has a life fixed initially at 10 years.

Liquidation: 1) The process of converting securities into cash. 2) The sale of the assets of a company to one or more acquirers in order to pay off debts. 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.

Liquidation Preference: The contractual right of an investor to priority in receiving the proceeds from the liquidation of a company. For example, a venture capital investor with a "2x liquidation preference" has the right to receive two times its original investment upon liquidation.

Liquidity: Refers to the ability of an organization to meet its liabilities. One liquidity ratio is `net working capital' which is the difference between current assets and current liabilities. This ratio roughly measures a company's potential reservoir of cash.

Liquidity Event: An event that allows a VC to realize a gain or loss on an investment. The ending of a private equity provider’s involvement in a business venture with a view to realizing an internal return on investment. Most common exit routes include Initial Public Offerings [IPOs], buy backs, trade sales and secondary buy outs. See also: Exit strategy.

Loan Capital: Loan capital ranks ahead of share capital for income and capital. Loans typically are entitled to interest and are usually, though not necessarily, repayable. Loans may be secured on the company's assets or may be unsecured. A secured loan will rank ahead of unsecured loans and certain other creditors of the company. A loan may be convertible into equity shares. Alternatively, it may have a warrant attached which gives the loan holder the option to subscribe for new equity shares on terms fixed in the warrant. They typically carry a higher rate of interest than the bank term loans and rank behind the bank for payment of interest and repayment of capital.

Lock-up: A provision in the underwriting agreement between an investment bank and existing shareholders that prohibits corporate insiders and private equity investors from selling at the time of the offering.

Lock-up Period: The period of time that certain stockholders have agreed to waive their right to sell their shares of a public company. Investment banks that underwrite initial public offerings generally insist upon lockups of at least 180 days from large shareholders (1% ownership or more) in order to allow an orderly market to develop in the shares. The shareholders that are subject to lockup usually include the management and directors of the company, strategic partners and such large investors. These shareholders have typically invested prior to the IPO at a significantly lower price to that offered to the public and therefore stand to gain considerable profits. If a shareholder attempts to sell shares that are subject to lockup during the lockup period, the transfer agent will not permit the sale to be completed.

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Management Buy-in: Usually a leveraged buy-out that is organized by new managers or a management team.

Management Buy-out (MBO): A private equity firm will often provide financing to enable current operating management to acquire or to buy at least 50 per cent of the business they manage. In return, the private equity firm usually receives a stake in the business. This is one of the least risky types of private equity investment because the company is already established and the managers running it know the business - and the market it operates in - extremely well. Usually a leveraged buy-out is organized by the existing management of the company.

Management Fee: Compensation for the management of a venture fund's activities and administration, paid from the fund to the general partner or investment advisor. It is typically 1.5 to 2.5 percent of committed capital or net asset value. The management fee is not intended to be the primary source of incentive compensation for the investment team. That is the job of the carried interest. Fees are generally paid quarterly.

Management Team: The persons or general partners who oversee the activities of a venture capital or private equity fund.

Market Capitalization: The total dollar value of all outstanding shares. Computed as shares multiplied by current price per share. Prior to an IPO, market capitalization is arrived at by estimating a company's future growth and by comparing a company with similar public or private corporations. (See also Pre-Money Valuation)

Merchant Banking: An activity that includes corporate finance activities, such as advice on complex financings, merger and acquisition advice (international or domestic), and at times direct equity investments in corporations by the banks.

Merger: Combination of two or more corporations in which greater efficiency is supposed to be achieved by the elimination of duplicate plant, equipment, and staff, and the reallocation of capital assets to increase sales and profits in the enlarged company.

Mezzanine Financing: Refers to the stage of venture financing for a company immediately prior to its IPO. Investors entering in this round have lower risk of loss than those investors who have invested in an earlier round. Mezzanine level financing can take the structure of preferred stock, convertible bonds or subordinated debt. If it employs subordinate debt, it usually has fewer privileges than bank debt but more privileges than equity and often has attached warrants.

Minimum: The lowest return level for a group of funds.

Monopolistic Competition: Industry structure where there are many small suppliers each of which has a monopoly position in the area it serves.

Mutual Fund: A mutual fund, or an open-end fund, sells as many shares as investor demand requires. As money flows in, the fund grows. If money flows out of the fund the number of the fund's outstanding shares drops. Open-end funds are sometimes closed to new investors, but existing investors can still continue to invest money in the fund. In order to sell shares an investor usually sells the shares back to the fund. If an investor wishes to buy additional shares in a mutual fund, the investor must buy newly issued shares directly from the fund. (See Closed-end Funds)

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Narrow-based weighted average ratchet: A type of anti-dilution mechanism. A weighted average ratchet adjusts downward the price per share of the preferred stock of investor A due to the issuance of new preferred shares to new investor B at a price lower than the price investor A originally received. Investor A's preferred stock is repriced to a weighed average of investor A's price and investor B's price. A narrow-based ratchet uses only common stock outstanding in the denominator of the formula for determining the new weighed average price. Compare Broad-Based Weighted Average Ratchet and Chapter 2.9.4.d.ii of the Encyclopedia for specific examples.

NASD: The National Association of Securities Dealers. An mandatory association of brokers and dealers in the over the counter securities business. Created by the Maloney Act of 1938, an amendment to the Securities Act of 1934.

NASDAQ: An automated information network which provides brokers and dealers with price quotations on securities traded over the counter.

NDA (Non-disclosure agreement): An agreement issued by entrepreneurs to potential investors to protect the privacy of their ideas when disclosing those ideas to third parties.

Negative Pledge: Lending agreement where the borrower covenants are not to exceed certain limits, such as gearing levels.

Net Asset Value (NAV): The value of an investor’s holdings in that fund at any given time. Each company is valued at an agreed-upon value between the venture firms when invested in by the venture fund or funds. Venture investors try to conservatively value their investments using guidelines or standard industry practices and by terms outlined in the prospectus of the fund. The venture investor is usually conservative in the valuation of companies.

Net Financing Cost: Also called the cost of carry or, simply, carry, the difference between the cost of financing the purchase of an asset and the asset's cash yield. Positive carry means that the yield earned is greater than the financing cost; negative carry means that the financing cost exceeds the yield earned.

Net Income: The net earnings of a corporation after deducting all costs of selling, depreciation, interest expense and taxes.

Net Present Value: An approach used in capital budgeting where the present value of cash inflow is subtracted from the present value of cash outflows. NPV compares the value of a dollar today versus the value of that same dollar in the future after taking inflation and return into account.

Net Profit: Sales, less all expenses which may or may not include corporate tax.

Net Tangible Assets: The difference between tangible assets (e.g. stock, debtors, land etc.) and liabilities in the balance sheet.

Net Worth: The difference between the assets and liabilities of a company on its balance sheet. Net worth is equal to shareholders' funds.

New Issue: A stock or bond offered to the public for the first time. New issues may be initial public offerings by previously private companies or additional stock or bond issues by companies already public. New public offerings are registered with the Securities and Exchange Commission. (See Securities and Exchange Commission and Registration).

Newco: The typical label for any newly organized company, particularly in the context of a leveraged buyout.

No Shop, No Solicitation Clauses: A no shop, no solicitation, or exclusivity, clause requires the company to negotiate exclusively with the investor, and not solicit an investment proposal from anyone else for a set period of time after the term sheet is signed. The key provision is the length of time set for the exclusivity period.

Non-Accredited: An investor not considered accredited for a Regulation D offering. (Accredited Investor)

Non-Compete Clause: An agreement often signed by employees and management whereby they agree not to work for competitor companies or form a new competitor company within a certain time period after termination of employment. Governed by state law.

Non-Price Competition: Competition among suppliers using such items as warranty periods, credit terms and after sales service.

Non-Renounceable Rights Issue: Rights issue where the shareholders may either take up rights or let them lapse. The shareholders are not allowed to sell the rights to another party. Also known as an entitlement issue.

NYSE: The New York Stock Exchange. Founded in 1792, the largest organized securities market in the United States. The Exchange itself does not buy, sell, own or set prices of stocks traded there. The prices are determined by public supply and demand. Also known as the Big Board.

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Oligopolistic Structure: Industry structure where a few suppliers dominate the market. Open-ended funds Funds with no set time span imposed.

Open-end Fund: An open-end fund, or a mutual fund, generally sells as many shares as investor demand requires. As money flows in, the fund grows. If money flows out of the fund the number of the fund's outstanding shares drops. Open-end funds are sometimes closed to new investors, but existing investors can still continue to invest money in the fund. In order to sell shares an investor generally sells the shares back to the fund. If an investor wishes to buy additional shares in a mutual fund, the investor generally buys newly issued shares directly from the fund.

Option Pool: The number of shares set aside for future issuance to employees of a private company.

Options: The right, but not the obligation, to buy or sell a security at a set price (or range of prices) in a given period.

Ordinary Shares: These are equity shares that are entitled to all income and capital after the rights of all other classes of capital and creditors have been satisfied. Ordinary shares have votes. In a venture capital deal these are the shares typically held by the management and family shareholders rather than the venture capital firm.

Original Issue Discount: OID. A discount from par value of a bond or debt-like instrument. In structuring a private equity transaction, the use of a preferred stock with liquidation preference or other clauses that guarantee a fixed payment in the future can potentially create adverse tax consequences. The IRS views this cash flow stream as, in essence, a zero coupon bond upon which tax payments are due yearly based on "phantom income" imputed from the difference between the original investment and "guaranteed" eventual payout. Although complex, the solution is to include enough clauses in the investment agreements to create the possibility of a material change in the cash flows of owners of the preferred stock under different scenarios of events such as a buyout, dissolution or IPO.

OTC: Over-the-Counter. A market for securities made up of dealers who may or may not be members of a formal securities exchange. The over-the-counter market is conducted over the telephone and is a negotiated market rather than an auction market such as the NYSE.

Outstanding Stock: The amount of common shares of a corporation which are in the hands of investors. It is equal to the amount of issued shares less treasury stock.

Over-Subscription: Occurs when demand for shares exceeds the supply or number of shares offered for sale. As a result, the underwriters or investment bankers must allocate the shares among investors. In private placements, this occurs when a deal is in great demand because of the company's growth prospects.

Over-Subscription Privilege: In a rights issue, arrangement by which shareholders are given the right to apply for any shares that are not purchased.

Owner's Equity: The residual of assets less external liabilities.

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Pari Passu: At an equal rate or pace, without preference.

Participating Preferred: 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.

Partnership: 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.

Partnership agreement: 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.

P/E Ratio or Price/Earnings Ratio: The ratio of share price to earnings (net profit after tax) per share.

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

Piggyback Registration: 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.

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

PIPEs: An acronym for “private investing in public equities.”

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

Placement Agent: 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., these companies are regulated by the NASD and SEC.

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

Poison Pill: A right issued by a corporation as a preventative antitakeover measure. It allows rightholders 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.

Portfolio Companies: Companies in which a given fund or private equity firm has invested. All of the companies currently backed by a private equity firm can be spoken of as the firm’s portfolio.

Portfolio Diversification: Investment strategy where the portfolio manager spreads investments across many industries and thus tries to diminish the risk of a single industry depression reducing the portfolio return.

Positioning Strategy: Marketing term used to define a strategy where a company tries to distinguish itself from its competitors by focusing on some market segment.

Post-Money Valuation: 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.

Pre-Funding Valuation: The valuation of the company prior to funding calculated by subtracting the cash that remains within the company from the post-funding valuation.

Pre-Money Valuation: 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.

Preemptive Right: 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.

Preference Shares: These are non-equity shares. They rank ahead of all classes of ordinary shares for income and capital. Their income rights are defined and they are usually entitled to a fixed dividend (e.g. 10% fixed). The shares may be redeemable on fixed dates or they may be irredeemable. Sometimes they may be redeemable at a fixed premium (e.g. at 120% of cost). They may be convertible into a class of ordinary shares.

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

Preferred Ordinary Shares: These may be known as "A" ordinary shares, cumulative convertible participating preferred ordinary shares or cumulative preferred ordinary shares. These are equity shares with preferred rights. Typically they will rank ahead of the ordinary shares for income and capital. Once the preferred ordinary share capital has been repaid, the two classes would then rank pari passu in sharing any surplus capital. Their income rights may be defined; they may be entitled to a fixed dividend (a percentage linked to the subscription price, e.g. 8% fixed) and/or they may have a right to defined share of the company profits - known as a participating dividend (e.g. 5% of profits before tax). Preferred ordinary shares have votes.

Preferred Return (also Hurdle Rate): 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: This is one of the most common classes of shares for private equity and venture firms to hold. Preferred stock pays dividends at a set rate, and holders get paid before common stock holders in the event of liquidation. Convertible preferred stock is convertible into common stock at a pre-determined price per share. Preferred stockholders may also have additional rights, such as the ability to block mergers or displace management.

Premium: A publicly traded private equity investment whose market price is trading above the NAV.

Price Taker: Marketing term used to describe a supplier of goods whose price is set independently by the market.

Price-to-Book Value Ratio: The ratio of the share price to the net worth per share.

Price-to-Revenue Ratio: The ratio of the share price to the company revenues per share.

Private Equity: 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. The term generally used in Europe to cover the industry as a whole, both buyouts and venture capital.

Private Equity Funds: Pools of capital managed by private equity firms who raise funds from external sources, such as pension funds, insurance companies and others.

Private Investment in Public Equities (PIPES): Investments by a private equity fund in a publicly traded company, usually at a discount.

Private Placement : 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. A private placement does not require registration with the SEC and is not offered to the public.

Private Placement Memorandum : 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: 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.

Product Differentiation: Marketing term used to describe strategy of defining new or current product features or benefits that distinguish it from the competition.

Pro-Forma Accounts: Balance sheets and profit and loss statements for future years prepared in the same format as the current accounts.

Prospectus: The prospectus provides a wide variety of summary data about the firm.

Prospectus: A formally written, condensed, and widely disseminated version of the registration statement. It 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.

Put option: The right to sell a security at a given price (or range) within a given time period. This is a contract whereby the holder of the option has the right to sell to the grantor shares at a specific price (strike price) at some time in the future.

- Q -

QPAM: Qualified professional asset manager as defined by ERISA.

- R -

Range of IRRs: A scale that presents the low and high internal rates of return for a given year.

Ratchets: A structure whereby the eventual equity allocations between the groups of shareholders depend on either the future performance of the company or the rate of return achieved by the venture capital firm. This allows management shareholders to increase their stake if the company performs particularly well.

Recapitalization: The reorganization of a company's capital structure. A company may seek to save on taxes by replacing preferred stock with bonds in order to gain interest deductibility. Recapitalization can be an alternative exit strategy for venture capitalists and leveraged buyout sponsors. (See Exit Strategy and Leveraged Buyout)

Reconfirmation: The act a broker/dealer makes with an investor to confirm a transaction.

Red Herring: The common name for a preliminary prospectus, due to the red SEC required legend on the cover. (See Prospectus)

Redeemable Preferred Stock: Redeemable preferred stock, also known as exploding preferred, at the holder's option after (typically) five years, which in turn gives the holders (potentially converting to creditors) leverage to induce the company to arrange a liquidity event. The threat of creditor status can move the founders off the dime if a liquidity event is not occurring with sufficient rapidity.

Redeemable Preference Shares: Preference shares which, at a stated maturity date, will be redeemed by the issuing company.

Redemption Rights: An investor could redeem the preference shares in the event the company’s shares are not listed or the company is not sold within a specified period of time.

Refinancing: The purchase of the venture capital investors' or others' shareholdings by another investment institution.

Registration: The SEC's review process of all securities intended to be sold to the public. The SEC requires that a registration statement be filed in conjunction with any public securities offering. This document includes operational and financial information about the company, the management and the purpose of the offering. The registration statement and the prospectus are often referred to interchangeably. Technically, the SEC does not "approve" the disclosures in prospectuses.

Registration Rights: The right to require that a company register restricted shares. Demand Registered Rights enable the shareholder to request registration at any time, while Piggy Back Registration Rights enable the shareholder to request that the company register his or her shares when the company files a registration statement (for a public offering with the SEC).

Regulation A: SEC provision for simplified registration for small issues of securities. A Reg. A issue may require a shorter prospectus and carries lesser liability for directors and officers for misleading statements. The conditional small issues securities exemption of the Securities Act of 1933 is allowed if the offering is a maximum of $5,000,000 U.S. Dollars.

Regulation C: The regulation that outlines registration requirements for Securities Act of 1933.

Regulation D: Regulation D, is the rule (Reg. D is a "regulation" comprising a series of "rules") that allow for the issuance and sale of securities to purchasers if they qualify as accredited investors.

Regulation D Offering: (See Private Placement)

Regulation S: The rules relating to Offers and Sales made outside the US without SEC Registration, including securities issued under Rule 144a..

Regulation S-B : Reg. S-B of the Securities Act of 1933 governs the Integrated Disclosure System for Small Business Issuers.

Regulation S-K : The Standard Instructions for Filing Forms Under Securities Act of 1933, Securities Exchange Act of 1934 and Energy Policy and Conservation Act of 1975.

Regulation S-X: The regulation that governs the requirements for financial statements under the Securities Act of 1933, and the Securities Exchange Act of 1934.

Restricted Securities: Public securities that are not freely tradable due to SEC regulations. (See Securities and Exchange Commission)

Restricted Shares: Shares acquired in a private placement are considered restricted shares and may not be sold in a public offering absent registration, or after an appropriate holding period has expired. Non-affiliates must wait one year after purchasing the shares, after which time they may sell less than 1% of their outstanding shares each quarter. For affiliates, there is a two-year holding period.

Revalued Asset: Asset assigned some value other than the book value (cost price less any depreciation). Revaluations may be either downwards (investments devalued to market price) or upwards (e.g. real estate or directors' revaluation of license agreements).

Revlon Duties: The legal principle that actions, such as anti-takeover measures, that promote the value of an auction process are allowable, whereas those that thwart the value of an auction process are not allowed. The duty is triggered when a company is in play as a target acquisition.

Ride: Venture capital term used to describe the potential percentage of profits or equity ownership available if a deal works out as planned.

Right of First Refusal: The right of first refusal gives the holder the right to meet any other offer before the proposed contract is accepted.

Rights Issue: An issue of new shares on a proportional basis to existing shareholders usually at a discount to market price to raise additional shareholders' funds. The shareholder may allow the offer to lapse or if the issue is renounceable sell or transfer the rights to another party.

Rights Offering: Issuance of "rights" to current shareholders allowing them to purchase additional shares, usually at a discount to market price. Shareholders who do not exercise these rights are usually diluted by the offering. Rights are often transferable, allowing the holder to sell them on the open market to others who may wish to exercise them. Rights offerings are particularly common to closed-end funds, which cannot otherwise issue additional ordinary shares.

Risk: The chance of loss on an investment due to many factors including inflation, interest rates, default, politics, foreign exchange, call provisions, etc. In Private Equity, risks are outlined in the Risk Factors section of the Placement Memorandum.

Road Show Presentation: Series of presentations made to institutional and large private investors to sell a new issue.

Rule 144A: A safe harbor exemption from the registration requirements of Section 5 of the 1933 Act for resales of certain restricted securities to qualified institutional buyers, which are commonly referred to as "QIBs." In particular, Rule 144A affords safe harbor treatment for re-offers or resale's to QIBs - by persons other than issuers - of securities of domestic and foreign issuers that are not listed on a U.S. securities exchange or quoted on a U.S. automated inter-dealer quotation system. Rule 144A provides that reoffers and resales in compliance with the rule are not "distributions" and that the reseller is therefore not an "underwriter" within the meaning of Section 2(a)(11) of the 1933 Act. If the reseller is not the issuer or a dealer, it can rely on the exemption provided by Section 4(1) of the 1933 Act. If the reseller is a dealer, it can rely on the exemption provided by Section 4(3) of the 1933 Act.

Rule 147: Provides an exemption from the registration requirements of the Securities Act of 1933 for intrastate offerings, if certain requirements are met. One requirement is that 100% of the purchasers must be from within one state.

Rule 501: Rule 501 of Regulation D defines Accredited Investor.

Rule 505: Rule 505 of Regulation D is an exemption for limited offers and sales of securities not exceeding $5,000,000.

Rule 506: Rule 506 of Regulation D is considered a "safe harbor" for the private offering exemption of Section 4(2) of the Securities Act of 1933. Companies using the Rule 506 exemption can raise an unlimited amount of money if they meet certain exemptions.

Running Yield: The return on an investment expressed as cash earned over cash invested. No account is taken of potential capital gain or redemption.

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S Corporation: 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.

SBIC : 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.

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

Second-Line Stock: Shares of listed companies that do not rank a blue chip or first-line companies.

Secondary Sale: The sale of private or restricted holdings in a portfolio company to other investors.

Secondary Market: 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.

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

Secured Debt: Loan, where the lender, in the event of a failure to meet either an interest or principal payment, gains title to an asset.

Secured Lending: Making loans only to parties who can provide an asset as security in the event of non-payment of interest or principal.

Securities Act of 1933: 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.

Securities Act of 1934: The federal law that established the Securities and Exchange Commission. The act outlaws misrepresentation, manipulation and other abusive practices in the issuance of securities.

Securities and Exchange Commission : 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.

Seed Capital: Financing allowing the development of a business concept.

Seed Money: 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.

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

Seller's Note: Sometimes known as vendor finance where the seller of the asset accepts some part of the payment on deferred terms.

Senior Securities: 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.

Sensitivity Analysis: Financial analysis where variables such as selling price are adjusted upwards and downwards by some factor (say twenty per cent) to establish the effect on profits.

Series A Preferred Stock: 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.

Shelf Company: A company which has been created but never traded.

Shell Corporation: 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).

Shortfall: The difference in a fundraising between the expected amount and amount actually raised which in turn must be provided by the underwriters.

Small Business Administration (SBA): Provides loans to small business investment companies (SBICs) that supply venture capital and financing to small businesses.

Small Business Innovation Development Act of 1982: 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).

Small Business Investment Company (SBIC): A licensed member of a U.S. Small Business Administration program that entitles an investment firm to obtain matching federal loans for its private equity investments. Typically, a firm will have access to $2 in credit for every $1 that it invests in a company. If an SBIC raises $20 million, it will have access to up to $40 million in low interest loans, drawn down on a deal-by-deal basis.

Spin Out: 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.

Stag Profits: Profits made by someone who subscribes to a new issue and sells on the first day of trading.

Staggered Board: 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.

Start-up Capital: Financing allowing product development and initial marketing.

Statutory Voting: 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. Compare Cumulative Voting.

Stock Options: 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.

Strategic Investors: 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 aim may be to gain access to a particular product or technology that the start-up company is developing, or to support young companies that could become customers for the corporation’s products.

Strike Price: The price of the underlying share at which a call or put option is exercisable.

Subordinated Debt: A loan which ranks behind other debts if a company is wound up. Subordinated loans, if provided by a venture capitalist, would either command a higher interest rate or have call options attached.

Subscription Agreement: 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 as a partner.

Suppliers' Credit: Often overlooked form of financing provided by creditors when they offer extended payment terms.

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

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

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Tag-Along Rights / Rights of Co-Sale: A minority shareholder protection affording the right to include their shares in any sale of control and at the offered price.

Takedown Schedule: Formalized plan stated in the offering memorandum providing for the actual transfer of funds from the limited partners' to the general partners' control.

Taking a Bath: Slang term used by an investor who has seen a significant reduction in value of an investment or an underwriter with a significant shortfall.

Tax-free reorganizations: Types of business combinations in which shareholders do not incur tax liabilities. There are four types-A, B, C, and D reorganizations. They differ in various ways in the amount of stock/cash that can be offered. See Internal Revenue Code Section 368.

Technology Parks: Industrial areas located next to universities or other research establishments which are designed to attract advanced technology companies.

Tender offer: An offer to purchase stock made directly to the shareholders. One of the more common ways hostile takeovers are implemented.

Term Sheet: A summary of the terms the investor is prepared to accept. A non-binding outline of the principal points which the Stock Purchase Agreement and related agreements will cover in detail. It may include details of the investment itself, investor control of the company, representations & warranties about the company, the rights & restrictions of shareholders and the preferred exit strategy.

Time Value of Money: The basic principle that money can earn interest, therefore something that is worth $1 today will be worth more in the future if invested. This is also referred to as future value.

Trial Close: Selling term used to describe when a salesperson asks for the order not expecting success but hoping to unearth further objections from the prospect.

Tranching: Investment made in stages; each stage being dependent on achievement of targets.

Treasury Stock: Stock issued by a company but later reacquired. It may be held in the company's treasury indefinitely, reissued to the public, or retired. Treasury stock receives no dividends and does not carry voting power while held by the company.

Turnaround: Financing provided to a company at a time of operational or financial difficulty with the intention of improving the company's performance.

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ULPA: Uniform Limited Partnership Act, see also the RULPA, Revised Uniform Limited Partnership Act U.L.P.A. § 101 et seq. (1976), as amended in 1985 (R.U.L.P.A.).

Under-Capitalization: Situation for a company where insufficient equity has been supplied by the shareholders or retained in the company to support the activities of the business.

Unsecured Lending: Lending where the borrower has not provided any assets in the event of non-payment of interest or principal.

Uprates: Marketing term used to describe upward revision in pricing schedules.

Upper Quartile: The point at which 25% of all returns in a group are greater and 75% are lower.

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Variable Cost: Costs such as materials and manufacturing labor that vary with the level of sales.

Venture Capital: Risk investment in unlisted companies with high growth potential. Venture capital can be broadly subdivided into seed or start-up capital, second round finance for young companies (used to expand the range of products) and development finance for established companies (used to develop an alternative product or expand through acquisition).

Venture Capital Financing: An investment in a startup business that is perceived to have excellent growth prospects but does not have access to capital markets. Type of financing sought by early-stage companies seeking to grow rapidly.

Vintage Year: The year in which the venture firm began making investments. Often, those funds with "vintage years" at the top of the market will have lower than average returns because portfolio company valuations were high, e.g. an Internet Fund started in vintage year 1998.

Voting Right: The common stockholders' right to vote their stock in the affairs of the company. Preferred stock usually has the right to vote when preferred dividends are in default for a specified amount of time. The right to vote may be delegated by the stockholder to another person.

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Warrant: A type of security that entitles the holder to buy a proportionate amount of common stock or preferred stock at a specified price for a period of years. Warrants are usually issued together with a loan, a bond or preferred stock --and act as sweeteners, to enhance the marketability of the accompanying securities. They are also known as stock-purchase warrants and subscription warrants.

Warranties: Terms in shareholders' agreement whereby the promoter or vendor guarantee the past and present operating condition of a company. Examples include operating in a legal fashion; no bad debts or stock etc. Breach of warranty gives the investor the right to claim damages but does not destroy the contract.

Wash-Out Round: A financing round whereby previous investors, the founders, and management suffer significant dilution. Usually as a result of a washout round, the new investor gains majority ownership and control of the company. Also known as burn-out or cram-down rounds.

Weighted Average Antidilution: The investor's conversion price is reduced, and thus the number of common shares received on conversion increased, in the case of a down round; it takes into account both: (a) the reduced price and, (b) how many shares (or rights) are issued in the dilutive financing. See Broad-Based Ratchet and Narrow-Based Ratchet definitions.

Williams Act of 1968: An amendment of the Securities and Exchange Act of 1934 that regulates tender offers and other takeover related actions such as larger share purchases.

Working Capital: Capital employed by the company to fund the excess of current assets (stock, debtors etc) over current liabilities (creditors, leave provisions, bank overdraft etc).

Workout: A negotiated agreement between the debtors and its creditors outside the bankruptcy process.

Write-down: A reduction in the book value of an investment.

Write-off: The act of changing the value of an asset to an expense or a loss. A write-off is used to reduce or eliminate the value an asset and reduce profits.

Write-up/Write-down: An upward or downward adjustment of the book value of an asset for accounting and reporting purposes. These adjustments are estimates and tend to be subjective; although they are usually based on events affecting the invested company or its securities beneficially or detrimentally.

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 Yield: Income payable by an invested company to an investor.

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