A Round Financing – “A” Round Financing – The first major round of business financing by private equity investors or venture capitalists. In private equity investing, an “A” round, or Series A financing, is usually in the form of Preference Shares. An “A” round by external investors generally takes place after the founders have used their seed money to provide a “proof of concept” demonstrating that their business concept is a viable and eventually profitable one.
Accelerator – (also known as an Incubator) An organised group or organisation that assists young high growth start-ups. Start-ups are admitted in cohorts and work to develop their business and pitch using the accelerator’s resources, office space and mentorship. Accelerators ordinarily last 3-6 months often ending with a demo day in which start-ups pitch to investors. Accelerators may also provide seed level funding in return for equity in the star-ups.
Accounting Reference Date – The date to which the company’s accounts will be drawn up each year (the company’s financial year end).
Acqui-hire – One company’s acquisition of another for the primary purpose of hiring its employees, rather than for the intrinsic value of the business itself.
Acquisition – A process under which a company acquires the controlling interest of another company. Can be friendly (agreed upon) or hostile (no agreement).
Add-on Service – Add-on Services are the services provided by a venture capitalist that are not monetary in nature, such as helping to assemble a management team and helping to prepare the company for an IPO.
Adjustment Condition – An adjustment condition occurs if the company does not close on an equity investment in the company for a minimum of $xxx, net of brokerage fees, on or before a series of other predetermined events, i.e. delivery of term sheet to preferred sharesholders.
Administration – A statutory procedure providing a possible alternative to the liquidation or receivership of a company whereby the company may be reorganised or the assets realised. During the period of administration the company is protected from its creditors whilst the administrator runs the company. At the end of the period of administration the company will hopefully have been rescued or the assets of the company will have been sold by the administrator.
Administrative receivership – A term for receivership. If a company is no longer financially viable, an administrative receiver may be appointed to run the company, probably with a view to selling it as a going concern. The company is then said to be in administrative receivership or, more commonly, in receivership.
Adventure Capitalist – An adventure capitalist is an entrepreneur who helps other entrepreneurs financially and often plays an active role in the company’s operations such as by occupying a seat on the board of directors, etc.
Advisor – An individual providing business connections, guidance, advice and support to the entrepreneur as they develop and grow their start-up.
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.
Agile – A philosophy of software development that promotes incremental development and emphasises adaptability and collaboration.
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.
Alpha Test – Internal testing, of a pre-production model, typically on a controlled basis, with the objective of identifying functional deficiencies and design flaws.
Alternative Investments – Investments in a non-traditional asset class. Traditional assets are usually sharess in listed companies, bonds and cash. Alternative investments include, for example, real estate and derivatives, and any asset classes that are speculative or very high-risk.
Amortization – An accounting procedure that gradually reduces the book value of an intangible asset through periodic charges to income.
Angel Financing – Seed capital raised from independent investors, for start-up companies. Angel investors who provide such financing are usually not family members or friends of the business’ founders.
Angel Fund – A formal or informal assemblage of active angel investors who cooperate in some part of the investment process. Key characteristics of an angel group are: control by member angels (who manage the entity or have control over the entity’s managers), and collaboration by member angels in the investment process.
Angel Groups – Organisations, funds and networks formed for the specific purpose facilitating angel investments in start-up companies.
Angel Investing – Investing with own money in early stage companies in exchange for ownership equity. An angel typically invests $15-$100K per deal in anywhere between 10 and 30+ deals.
Angel Investments – High-risk investments made by business angels, who provide seed financing for high growth start-ups and also support them with know-how, experience and personal networks.
Angel investor – typically a high net worth individual who provides a small amount of capital to a high growth start-up for a stake in the company. Usually happens when the start-up is in its infancy.
Angel Round – A round of investment into a start-up company from angel investors not previously affiliated with the founder. Typically the first money invested in a company after the founder’s own money, and the founder’s friends and family.
Annex Fund – Annex funds are side funds that can provide an extra pool of money to supplement the original VC Funds.
Annual Recurring Revenue – The recurring subscription-based revenue which software as a service/platform as a service, (SaaS/PaaS) based companies receive annually; also known as the run rate. Synonym: ARR
Anti-Dilution – A clause that protects the investor to prevent a subsequent issue of the equity from being made at a lower price than the investor originally paid. This protects the original investment or value from being diluted. Types of commonly-used anti-dilution protection include full ratchet and weighted average. An anti-dilution clause is often included in the shareholders agreement or investment terms.
Anti-Dilution Provisions – contractual measures which allow investors to keep a constant share of a firm’s equity, protecting them from the dilution of their investment resulting from the later issue of shares or other shares at a lower price than the investor originally paid. These may give investors pre-emptive rights to purchase new shares at the offering price. Examples include:
· Typical – Provides for protection in the event of a shares split, shares dividend or similar recapitalisation.
· Full Ratchet – Complete preservation of percentage ownership in all circumstances including protection in the event of a subsequent sale or merger.
· Modified Ratchet – Only provides for “ratcheting” in limited circumstances as when new subsequent specified offerings are made at prices lower than per share investment price (“down rounds”) or employee equity offerings.
Assets – This word refers to all financial resources that a corporation owns. Current assets can be any form of currency, including traded inventory, investments, and cheques. Fixed assets (capital assets) consist of material goods and equipment of a company, such as the land which the company sits on, the company building, and technological machinery. Intangible assets include intellectual property such as copyrights, patents, etc.
Automatic Conversion – Under certain circumstances, such as the company going public or a majority of Series X shareholders voting to convert, all Series X shares will be converted 1:1 into common shares.
B2B – Business to business. This describes a business that is targeting another business with its product or services. B2B technology is also sometimes referred to as enterprise technology. This is different from B2C which stands for business to consumer, and involves selling products or services directly to individual customers.
Bad Leaver Provisions – A provision within a Shareholders Agreement, Constitution or other agreement that classifies a shareholder leaving a company as a ‘Bad Leaver’. A Bad Leaver will generally mean an individual leaving through dismissal or within a time period fixed at the time of the investment. A Bad Leaver will usually receive only the nominal value of their shareholding rather than the ‘fair value’. Good Leaver/ Bad Leaver provisions can be used to incentivise key management to remain with the company. See also: Good Leaver Provisions.
Balance Sheet – A condensed financial statement showing the nature and amount of a company’s assets, liabilities, and capital on a given date.
Bankruptcy – An inability to pay debts.
Benchmark – Performance goals against which a company’s success is measured. An investor measures a company’s growth by determining whether or not they have met certain benchmarks. For example, company A has met the benchmark of having X amount of recurring revenue after 2 years in the market.
Benchmarking – The process of comparing a company’s performance, costs, products or strategies to those of leading firms, peers or to standards within the industry. Also used for the valuation of early-stage companies by comparing them to known examples.
Berkus Method – A method for valuing pre-revenue start-ups. According to Berkus, the value depends on 5 main drivers: soundness of idea, quality of management team, quality of board, prototype and product sales.
BHAG or Big Hairy Audacious Goal – The giant sweeping vision of a start-up founder to change the world.
Black Swan – An unpredictable event typically with extreme consequences. A typically American term and referencing the fact black swans are rarely seen in the USA.
Blind Pool – A blind pool is a form of limited partnership that doesn’t specify what investment opportunities the general partner plans to pursue.
Board of Directors – A group of people elected by the company’s shareholders (often to the terms of the negotiated Shareholders Agreement) responsible for overseeing the affairs of a company and on whom rest a raft of legal responsibilities to the shareholders.
Bond – Specific type of debt instrument most commonly sold by government entities.
Bonds – An interest-bearing debt instrument that governments and businesses use to borrow funds. Bonds are an alternative to bank loans and can be secured or non-secured, listed or non-listed.
Book Value – Book value of a shares 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.
Bootstrapped – A company is bootstrapped or bootstrapping when it is funded by an entrepreneur’s personal resources or the company’s own revenue. Evolved from the phrase “pulling oneself up by one’s bootstraps.”
Bridge Financing – A limited amount of equity or short-term debt, often in the form of debt convertible into equity issued during the next round of financing, meant to “bridge” a company to the next round of financing.
Bridge Loan – A short-term loan (up to one year) that a company uses in between times when financing is needed. For start-ups, this type of loan is intended to fund the company to an anticipated future event e.g., long-term financing.
Brokers – Licensed individuals or firms which charge a fee to raise capital for start-up companies from private investors and funds.
Burn Out – also referred to as a Cram Down is extraordinary dilution, by reason of a round of financing, which current investors are compelled to accept or wear an even greater loss.
Burn Rate – The rate at which a company expends net cash over a certain period, usually referred to as the monthly burn rate.
Business angel – An individual who invests sums in a high growth businesses, for equity. An angel will often be appointed to sit on the Board of the company as a non-executive or executive director and will seek to add value to the company through expertise and experience rather than simply funding.
Business Model Canvas – A business-plan template often used by start-up companies. It is a short and visual alternative to the traditional business plan and can be specifically geared towards start-ups. Specific variants include the Business Model Canvas, the Lean Canvas, and the Start-up Canvas.
Business Plan – A plan which sets out the key facts about the company, the aims of the company, the strategic plan for achieving these aims and the financial forecasts of the company. The Business Plan will be a key document for any company seeking funding and will be the document upon which angels and other investors base their decision to invest or to consider investing, in a company.
Buyout – A common exit strategy, a buyout is defined as the purchase of a company or a controlling interest of a corporation’s shares, product line or business. A leveraged buyout is accomplished with borrowed money or by issuing more shares.
Buyout Financing – used in the context of angel investment, when an angel investor or entrepreneur wishes to raise capital for a buyout (or takeover) of a company or purchase a controlling interest of a company’s shares or product line. This term refers also to the funding requirement for the acquisition of a part of a business.
C-Corporation – A c-corp in US parlance is a legal structure, preferred by investors for start-up companies seeking funding in the US. Like Limited Liability Companies, C-Corporations protect shareholders from liability in the event of a legal issue or bankruptcy. Investors typically prefer that their start-up’s C-Corporation be registered in Delaware. However, Nevada and Wyoming are becoming increasingly popular.
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 – A contractual term/condition which gives a company the option of compelling the investor to sell their shares.
Call Option – The right to buy a security at a given price (or range) within a specific time period.
Cap – The maximum company valuation at which a convertible note will convert into a company’s shares.
Cap Table or Capitalisation Table – A table describing the capitalisation of a company. The cap table should describe the number, type and percentage of shares owned by each shareholder and show the effect of any dilution. The cap table is often segmented to show each of several funding rounds in the company and clearly differentiates preferred and common shareholders.
Capital – Financial capital is a term which often refers to the money exchanged between entrepreneurs and investors during a business deal. Entrepreneurs need to raise capital for their start-ups while investors can provide them with the needed capital (or funding). New business owners can use their financial capital to purchase real capital (or machinery or equipment) for their business.
Capital – Monetary assets currently available for use.
Capital Expenditures – Capital Expenditure is money spent by a company to add or expand property, plant and equipment with the expectation that this will benefit the company over a long period of time (more than one year). Synonym: Capital Outlay
Capital gain – The difference between the price paid for a capital asset (such as shares) and the price at which it is sold.
Capital Under Management – The amount of capital available to an Angel or VC Fund management team for venture investments. Synonym: Assets Under Management
Capitalise – To record an outlay as an asset (as opposed to an expense) which is then subject to depreciation or amortisation.
Capped Note – A specific kind of convertible debt. When convertible debt is converted into equity the conversion valuation is capped or sealed. This means investors will own a certain percentage of a company relative to that cap when the company raises another round of funding. This is considered a more favourable term to the investor than uncapped notes which have no such guarantees.
Carried Interest – Compensation for a fund manager in the form of a share of profit or sale of any individual investment. The purpose of the carried interest is to act as an incentive for the fund manager to improve the fund’s performance.
Cash Burn – see Burn Rate.
Cash flow – Cash Flow is the amount of cash actually held by a company taking into account the cash coming in and out of the company (i.e. receipts and expenditure). It should be distinguished from profit. A company can have a high profit margin but still fail due to problems with cash flow. If a Company has positive cash flow, it is more likely to have money available to expand its operation or to pay dividends to investors. Cash Flow should very carefully monitored by growing companies and an obsession for investor directors.
Cash Position – The amount of cash available to a company at a given point in time.
Change of Control – A process undergone by a company when control shifts from one party or group of shareholder to another, usually by means of purchase of the company. A Change of Control may trigger certain provisions in a Shareholders Agreement.
Churn rate – Sometimes called the attrition rate, this is the percentage of customers leaving a start-up in a specified period (usually monthly or annually). It is the opposite of a retention rate which measures the percentage of customers retained by the compay over a set time.
Claim Dilution – A reduction in the likelihood that one or more of the firm’s claimants will be fully repaid.
Classes of shares – It is possible and quite common practice to provide for different classes of shares within a company. Different classes of shares can have different rights attached to them and can therefore be treated differently. For example, one share class may be entitled to receive dividends while another share class is not. Whether or not different classes of shares are used will depend upon the company and what has been agreed between the founders and the investors.
Clawback – A venture capital term whereby the entrepreneur is allowed to increase their ownership percentage of the company, based on achieving mutually agreed objectives, after the closing of a round when the entrepreneur has been diluted more than anticipated by new investors. Not often used and often replaced by performance-based shares options.
Closing – The process whereby entrepreneurs and investors legally exchange all legal documentation and capital required to finalise and conclude the business deal.
Closing Conditions – Specific conditions precedent that have to be met before one or both parties to an agreement must honour their obligations in full. The parties concerned have no obligation to proceed with the agreement while closing conditions remain unsatisfied or incomplete.
Closing Date – The date when a transaction will be brought to completion.
Club Investments – Investments have done by an investment club or network, formed by a group of people for the purpose of pooling money and investing into high growth startup companies.
Co-investment – When an investor joins an investment in a company on the same terms but from a different network or investment entity, for example NZVIF Seed Co-Investment Fund co-invests with its SCIF partners.
Collar Agreement – Agreed-upon adjustments in the number of shares offered in a shares-for-shares exchange to account for price fluctuations before the completion of the deal.
Collateral – This word is used in a financial transaction between the lender and borrower. Often when entrepreneurs seek capital from a financial institution they use their assets as “collateral” or security for their loan. Should the borrower default on payments, the lending institution has the legal authority confiscate those assets.
Committed Capital – The total dollar amount of capital pledged to a venture or private equity fund.
Common Shares – see Ordinary Shares.
Company – A legal entity with limited liability that has met the requirements of the Companies Act 1993, properly registered in accordance with the Companies Registration Act 1993.
Compelled or Compulsory Sale Rights – Where a venture capitalist or investor has the right to sell the company if an exit has not been achieved within a certain period of time from the initial investment.
Competition Risk – The risk of a loss of market share due to changes in the market or actions of competitors.
Completion Bible – A set of the relevant documents relating to a deal which are grouped together for ease of reference following completion and circulated to all the relevant parties.
Completion; Completion Date – The act or process of completing a transaction. In the context of a business angel investment at completion all of the investment documentation will be signed and investment funds paid to the company.
Conditions Precedent – Conditions contained in a Shareholders Agreement or other contract which must be met prior to the deal being completed. Common examples include the provision of information about the company’s trading and financial position or key person insurance being put in place.
Conditions Subsequent – Conditions contained in a Shareholders Agreement or other contract which must be met subsequent to the deal being completed, usually within a specified time frame. For example, if key person insurance cannot be obtained prior to completion it may be a Condition Subsequent that it is obtained within a certain period following Completion.
Confidentiality Agreement; Also known as a Non-Disclosure Agreement – An agreement outlining that information disclosed in the course of a transaction or due diligence will be kept confidential and used only for the purpose for which it is disclosed. Confidentiality provisions will often be contained in the Heads of Terms/Term Sheet rather than in a separate Confidentiality Agreement.
Constitution of a Company – The constitution sets out the internal structure of the company and how the company will be run. The Constitution regulates matters such as the transfer of shares, management by the Board and the procedure for general meetings of the company.
Contribution Agreement – This is a contractual agreement between parties who have provided warranties where they contractually agree how liability for those warranties will be shared between them. This is separate to any such liability agreed under the Shareholders Agreement.
Conversion Features – Rights to convert an existing type of investment into another. For example, a convertible bond gives the bond holder the right to convert the bond into shares (equity).
Conversion Ratio – The number of shares of shares into which a convertible security may be converted. The conversion ratio equals the par value of the convertible security divided by the conversion price.
Conversion Rights – Rights by which preferred shares “converts” into common shares. For example the company may want rights to force a conversion upon an IPO; upon hitting of certain sales or earnings’ targets, or upon a majority or supermajority vote of the preferred shares. Conversion rights may carry with them anti-dilution protections.
Convertible – Financial instruments (such as shares) which convert into other financial instruments, often ordinary shares. For example, a convertible loan note will convert into a certain number of ordinary shares in certain circumstances which are agreed when the investment is made.
Convertible debt – This is when a company borrows money on the understanding that the debt accrued will be converted to equity in the company at a later valuation. This allows companies to delay valuation while raising funding in its early stages. This is often done in the early stages of a company’s life, when a valuation is more difficult to complete and investing carries higher risk.
Convertible Note – A debt instrument that can be converted into another security, such as shares of common or preferred shares.
Convertible Preferred Shares – This is the most common security for venture capital investments. Holders of this class of shares have “preference” over the common shareholders in the event of a liquidation of the company. Preferred shareholders can receive dividends, exercise voting privileges and retain the option to convert to common shares.
Convertible Security – A bond, debenture or preferred shares that is exchangeable for another type of security (usually common shares) at a pre-stated price. Convertibles are appropriate for investors who want higher income, or liquidation-preference protection, than is available from common shares, together with greater appreciation potential than regular bonds offer. (See Common Shares, Dilution, and Preferred Shares).
Corporate Venture – An investment, generally from a large established company into an early stage or startup company, typically at an early stage for strategic reasons.
Corporate Venture Capital – Corporate venture capital is a subsidiary of a large corporation which makes venture capital investments.
Co-Sale Provisions or Rights – Allows investors to sell their shares of shares in the same proportions and for the same terms as the founders, managers, or other investors, should any of those parties receive an offer.
Covenant – A protective clause in an agreement whereby the contractor undertakes to do something in the future.
Cram Down – A round of financing at a valuation less than the previous round of investment. In this case, the earlier investors are said to have been “crammed down,” that is, to have suffered substantial dilution in ownership percentage at the expense of the current investors. (See also Down Round).
Crowdfunding – “Crowdfunding” is the process of raising financial support for a venture via smaller amounts from many investors (“the crowd”), rather than the alternative pattern of larger amounts from a smaller number of supporters. Charities and philanthropies have traditionally employed both fundraising strategies (soliciting both the general populace, or their own crowd, as well as fewer wealthier donors), while businesses have usually taken the route involving fewer and larger supporters. Today’s internet has vastly increased the ability of fundraisers to communicate information, solicit and receive financial support from anyone on-line
Crowdfunding Platforms – Online services and communities that make it possible to collect small financial contributions from a large group of people. This is an alternative to traditional loans or investment from friends and family, angel investors, and venture capital to finance production or services. Equity crowd funding platforms allow investors to have a small stake in those companies they provide capital for.
Cumulative Preference shares – The holders of preference shares have preferential rights in relation to the payment of dividends and/or on a return of capital. If dividends on Cumulative Preference Shares are not paid, they accumulate until they are paid entitling the holders of such shares to dividends which have not been paid in previous financial years.
Cumulative preferred shares – A share 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 shares.
Cumulative Voting – Right which gives the minority investor extra voting power by allowing for the spread of votes over many candidates or the concentration of votes, usually to elect a director.
Customer Acquisition Cost (CAC) – Calculated by dividing total sales and marketing cost by the number of customers acquired in that period.
Customer Development – A framework for the purpose of validating the market for a product or service and building the right one for customers. The concept is an addition to the framework of product development. The four stages defined by customer development are customer discovery, customer validation, customer creation, and company building.
Customer Lifetime Value (CLV) – Sometimes referred to as life-time value (LTV). This is the total amount of value that a customer brings in while they remain a customer, taking into account things like number of repeat orders and churn. Note that some experts define the “value” as revenue, and some as profit, so make sure to clarify how this is computed.
D&O Insurance – Insurance obtained by companies to cover the costs of legal expenses associated with claims against its’ board members and protect them from lawsuits. – Synonym: Directors’ and Officers’ Insurance
Daily Active Users – Distinct website users who engage with a site’s offerings or services in a given day.
Damages – A sum of money claimed or awarded in compensation for loss.
Data Room – A secure location where confidential data and information about a target company is made available to potential investors or acquirers during a due diligence process. This used to be a physical room but these days is a virtual space online.
Dead Pool – Where companies that die go.
Deal Flow – Deal flow (dealflow) is the rate at which investment offers are presented to funding institutions or in our case angel funds or networks.
Deal Lead – The investor or investment organisation taking primary responsibility for organising an investment round in a company. The deal lead often finds the company, negotiates the terms of the investment, invests the largest amount, and serves as the primary liaison between the company and the other investors. But not always so it pays to check what precisely a deal lead’s role is and will be. Synonym: lead investor.
Deal Screening – The process of investors to quickly reduce the (usually very large) number of received investment opportunities (deal flow) down to the few most promising ones which warrant further effort. This should be guided by the criteria of a suitable investment strategy prepared in advance.
Deal Structure – An agreement made between the investor and the company defining the terms and structure of a transaction and the rights and obligations of the parties involved. The process by which one arrives at the final terms and conditions of the investment.
Deed of Adherence – A contractual document used where a third party becomes a shareholder in a company and is required to become a party to an existing shareholders agreement before obtaining their shares.
Demo Day – Where the graduating class of an accelerator is given a chance to pitch to investors.
Depreciation – This term refers to the gradual loss in value of currency, shares, and material goods. For example, biotechnology can “depreciate” over the course of four years.
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 (also referred to as Growth Capital) – Funds received by way of equity for the specific purposes of growing the company (as will usually be set out in a Business Plan). Dilution is caused by the issue of more shares in the company which results the percentage of the existing shareholders being lowered.
Development Risk – Any risk to the effectiveness or efficiency of the creation of a new product or service, for example, technical infeasibility or major delays.
Dilution – The reduction in percentage ownership of the company that investors suffer due to subsequent funding rounds. Issuing more shares of a company dilutes the value of holdings of existing shareholders.
Dilution Protection – Mainly applies to convertible securities. This is usually a standard provision in the shareholders agreement whereby the conversion ratio is changed accordingly in the case of a shares dividend or extraordinary distribution to avoid dilution of a convertible shareholder’s potential equity position. Adjustment usually requires a split or share dividend in excess of 5% or issuance of shares 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.
Direct Investments – Acquisition of controlling interests or significant minority interests which typically still permit some active control over future decisions.
Director – A person elected by shareholders to serve on the board of directors.
Directors Resolution – A document stating that the company’s board of directors has authorised a particular individual to act on behalf of the corporation.
Disclosure Document – A booklet outlining the risk factors associated with an investment.
Disclosure Letter – A letter from the current shareholders of a company or their solicitors to an investor making disclosures against the Warranties contained in the Shareholders Agreement in order to minimise their liability in respect of a breach of Warranty. See also: Warranty Limitations.
Discounted Convertible Note – A loan that converts into the same equity security being purchased in a future investment round, but at a discounted price representing a risk premium for early investment.
Disruption – Also known as disruptive innovation. An innovation or technology that fundamentally changes the way an existing market segment works by doing things such as: challenging the prices in the market, displacing an old technology, changing or creating new markets, or changing value networks, for example through an unexpected but vastly superior business model.
Diversification – The process of spreading investments among various types of securities and various companies in different fields.
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 Preference – Preferred share holders receive dividends before common share holders. Dividends can be cumulative or non-cumulative.
Dividends – The distribution of earnings (profits) to shareholders. Generally, they are discretionary on the part of the company and aren’t paid unless contracted for or after the company has gone public. Dividends can be paid either in cash or in kind, i.e. additional shares of shares.
· Cumulative – Missed dividend payments that continue to accrue.
· Non-cumulative – Missed dividend payments that do not accrue.
· Participating – Dividends which share (participate) with common shares.
· Non-participating – Dividends which do not share with common shares.
Double Bottom Line – In Impact Investing, the goal of measuring a company by its positive societal impact in addition to its financial returns.
Double Dip – Participating preferred shares which entitles a holder to a liquidation preference and also to participate in the residual value.
Down Round – A situation where a company is financed by new investors at a lower valuation compared to earlier rounds.
Drag-along Rights – Majority shareholders can force minority shareholders to join in the sale of a company. Minority shareholders will receive the same price, terms, and conditions. See also: Tag-Along Rights.
Drip Feed – When investors fund a start-up a little bit at a time instead of in a lump sum. Often accompanies a milestone setting arrangement.
Drive-by Deal – A drive-by deal is slang term often used when referring to a deal in which a venture capitalist invests in a start-up with the goal of a quick exit strategy. The VC takes little to no role in the management and monitoring of the start-up.
Dry Powder – Money held in reserve by a venture fund or angel investor in order to be able to make additional investments in a company.
Due Diligence – A comprehensive appraisal an investor or due diligence team makes to assess the desirability of a potential investment. Started only after the investor has a serious interest in the investment (because of the amount of work involved) and to be finished before the transaction is completed. The risk management exercise involves investigations into all aspects of the company including: market structure, competition and strategy; technology assessment; management team; operating plan; financial review; and legal review.
Due Diligence Team – The team of people involved in due diligence. Often a team of 4-6 who met with each other, the entrepreneur and other key parties.
Early Exit – An approach to angel investing popularised by author Basil Peters, in which the goal of an investment is the sale of a company within a few years without requiring additional large investments from VCs, thereby providing high relative returns without requiring companies to be home runs.
Early Stage Company – This term generally refers to a young enterprise that is three years old or younger. This is the stage in a company’s development where the key focus is market development. The business is focused on sales and marketing and proving business viability.
Earn out – An arrangement where part of the purchase price on the sale of a business is calculated by reference to the future performance of the business often used to incentivise owner-managers who continue to work in the business following the sale.
EBITDA – Earnings Before Interest, Taxes, Depreciation, and Amortisation. A measure of cash flow calculated as: Revenue – Expenses (excluding tax, interest, depreciation, and amortisation). EBITDA looks at the cash flow of a company. By not including interest, taxes, depreciation, and amortisation, 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.
Elevator Pitch – This term refers to an entrepreneur’s brief verbal summary of their business proposal. The name “elevator pitch” was designated because the entrepreneur’s spoken presentation is often the duration of a quick elevator ride. During an elevator pitch, the entrepreneur concisely outlines their business proposal, marketing strategy, and competitive tactic to potential investors. Prospective business owners are strongly encouraged to polish this pitch, since it can mean the difference between raising desired capital and completely leaving their business ideas behind.
Eligible Investor Certificate – An Eligible Investor certificate is a written assurance provided by the investor to the Investee Company that they qualify as a Wholesale Investor under the Eligible Investor criteria of the Financial Markets Conduct Act 2013.
This certificate must clearly state how you, the investor, consider you qualify as an eligible investor, and must be certified as such by a New Zealand authorised financial adviser, a qualified statutory accountant, or a lawyer.
To be an eligible person, you must have acquired and disposed of financial products in the past and have gained experience for such activities such that allows you to assess the merits of a transaction (including value and risk), your own information needs in respect of a transaction, and the adequacy of the information provided about a transaction.
Employee Share Option Plan – see ESOP.
Employee Share Scheme – see ESOP.
Employment Agreement – This is the agreement that sets out the terms upon which an employee is employed by the company. This will include important provisions such as hours of work, pay and holiday entitlement. Such an agreement is sometimes referred to as a Service Agreement when referring to directors of the Company.
Enterprise – The term enterprise typically refers to a company or business (i.e. an enterprise tech start-up is a company that is building technology for businesses).
Entrepreneur – A person who organises and operates a business or businesses, taking on greater than normal financial risks to do so. Entrepreneurs are the founders of start-ups and are the people angel investors support.
Entrepreneur in Residence (EIR) – A term used mainly in the venture capital industry but also in incubators and accelerators. It refers to an experienced entrepreneur with a lot of know-how in a particular area. An entrepreneur in residence can fulfill different roles such as looking for new entrepreneurial ventures, assisting in the evaluation of potential investments, and acting as a mentor for portfolio companies.
Equity – Ownership interest in a company, usually in the form of shares or shares options. Equity should be distinguished from debt and is a source of funding for a company whereby an investor will receive shares for its investment in the company. An equity investment is generally seen to be a ‘higher risk/higher reward’ type of funding for a company.
Equity Financing – Investment in exchange for company ownership (equity).
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.
Equity Offerings – Equity Offerings is raising funds by offering ownership in a corporation through the issuing of shares of a corporation’s common or preferred shares.
Equity Seed Round – When an entrepreneur first sells a part of his or her business – and therefore a proportional part of the good things (like profits) and the not-so-good things (like losses) – to an investor. Equity investments, unlike loans, do not need to be paid back.
Escape Velocity – The moment a company reaches growth momentum that puts it ahead of the competition.
Escrow – When a third party holds value during a transaction, releasing it only when a specified condition has been fulfilled.
ESOP – Employee share option plan is an arrangement a company may have to grant employees an option to buy shares in the company. Used as a way to incentivise employees without using a start-up company’s precious cash. More commonly referred to as an employee share scheme in New Zealand.
Exclusivity Agreement (also known as LockOut Agreement) – Exclusivity will often be requested by investors. Under an Exclusivity Agreement, the company and/or its shareholders undertake not to negotiate or solicit investment from any other third party for a specified period of time. This allows the investor to undertake due diligence and negotiate the terms of the investment with the comfort that the company and/or its shareholders will not seek investment elsewhere.
Executive Summary – This outline is a very important component of a company’s business plan. It concisely summarises the proposed business idea(s) and the fundamental objectives of the company. Upon review, the investor(s) should have a precise understanding of the prospective company’s mission. The executive summary is the most informative part of a business plan for the investor(s) and plays an influential role in determining if the company is viable enough for investment.
Executives – Those members of the Board working in the day to day running of the Company.
Exercise Price – The price at which an option or warrant can be exercised.
Exit – Exit is the sale or exchange of a significant amount of company ownership for cash, debt, or equity of another company. An exit for an investor it the realisation of their investment in an investee company. The usual routes for an exit are a management buyout, sale to a strategic buyer, the sale to a financial buyer, or an initial public offering; other possibilities include a repurchase or simply liquidation.
Exit Strategy – A detailed conscious plan on the part of a startup a company that results in liquidity of the company’s shares, often in the form of an acquisition by another company or a public offering.
Expansion Stage Company – This term generally refers to a company that is three years old or more. During this period of development, a company may already have been successful commercialising many of their products and services but may not generate the desired profit. An enterprise that is in its expansion stage may resort to seeking additional sources of capital to minimize the risk of failure. Many venture capitalists invest during this stage of a company’s development.
Factoring (also known as Debt Factoring) – A method used by companies to improve their cash flow and to manage debts. The company assigns its invoices to a debt factoring company in return for cash (to assist with working capital and cash flow). In return the debt factoring company charges a fee on the sums provided to the company and for collecting the sums due.
Family Office – A company or structure that is established to manage the investments of a single wealthy person or family.
Fees – Some investors/investor groups charge fees in connection with negotiating deals, monitoring investments and may also charge fees for the services of investor directors. This will vary between investors and also depending upon the regulatory rules in the relevant jurisdiction. IMPORTANT NOTE: It should be noted that charging fees can mean that an investor has to comply with regulations and statutory provisions so full advice should be taken in the relevant jurisdiction.
Fiduciary Responsibility – Refers to the legal responsibility (often times of a board member) to act absolutely in the best interest of another party.
Financial Exits – Exit form where a company is sold to a financial investor, like a private equity fund who is interested mainly in the return on investment.
Financier – Financier is a person or financial institution engaged in the lending and management of money and makes a living participating in commercial financing activities.
Financing Rounds – An attempt by a company to raise capital. Common terms include seed for the very first round, Series A/B/C etc. for successively larger rounds, terms describing the types of investors involved (e.g. angel rounds or venture capital rounds), terms describing the purpose of the round (e.g. growth or expansion capital for strategically increasing capacity, bridge loans for the short periods of time), and terms describing the character of the investment instruments used (e.g. mezzanine can be a hybrid between debt and equity).
Finder – A person who helps to arrange a transaction.
First Close – An early close of part of a round of financing upon the agreement of all parties where the round remains open until the full amount being sought is raised.
First Refusal Rights – A negotiated obligation of the company or existing investors to offer shares to the company or other existing investors at fair market value or a previously negotiated price, prior to selling shares to new investors.
First Stage Capital – First stage capital is the money provided to entrepreneur who has a proven product, to start commercial production and marketing. It generally does not cover market expansion, de-risking, acquisition costs.
First Tranche – See Tranche.
First-round Financing – First-round financing is the first investment in a company made by external investors.
Fixed Assets – Assets which are fixed and which provide capacity to earn revenue (for example, land, machinery, equipment and buildings).
Flat Round – An investment round in which the pre-money valuation of a start-ups’ round is the same as its post-money valuation from the previous round.
Flipping – The act of buying shares in an IPO and selling them immediately for a profit. Brokerage firms underwriting new shares 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. In NZ, “flipping” can offer be a reference to moving the company legally to another jurisdiction eg, flipping to the US.
Floating Charge – A charge taken by a lender over all the assets or a class of assets owned by a company. A Floating Charge will crystallise upon default at which stage it is converted to a fixed charge over the assets held by the company at that time.
Float – When a company is admitted to a recognised public stock exchange. Floating is an example of an exit for an investor.
FMV (fair market value) – An acceptable selling price to an independent third party.
Follow-on Investing (Follow-up Investing) – This word refers to the event whereby investors reinvest in a company sometime during its development. Follow-on investments occur both when a company is not performing successfully as planned and when it is meeting milestones.
Follow-on Rounds – Any financing rounds after the first one.
Forced Buyback – Redemption of convertible debt, convertible preferred shares or common shares on pre-specified terms in situations where the company’s value has not appreciated according to the agreed upon plan.
Founder Vesting – A term imposed on founders of seed and early stage deals in which the founder’s ownership is subject to a vesting schedule where all their shares are given up at the outset of the investment and linearly vest back to the founder over, typically, four years. The first twelve months ownership is often “cliff” vested after the first year with monthly vesting thereafter. For more mature companies, vesting credit can be applied at the time of investment. The purpose of this term is to protect investors from an early, unplanned exit by the founder and to provide investors with the equity necessary to attract a new management team.
Founders – The founding shareholders of the company.
Founder’s Agreement – A formal written agreement among the founders of a start-up which documents the founders’ agreement to ownership, roles and responsibilities, company governance/decision-making and operations. Issues such as founder contributions, vesting and exit/departure are also typically included in these agreements. Founders’ agreements are typically shorter, less technical agreements between the founders that are to be developed further into operating agreements or corporate by-laws, as the concept and structure of the company develops. Operating agreements and corporate by-laws generally contain all of the same provisions typically included in a founder’s agreement.
Founder’s Shares – The common shares owned by one or more of the company’s founders, typically received when the company was incorporated and not purchased for cash. – Synonym: Founder’s Equity
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.
Freemium – Business model by which a basic version of a service or product is offered for free but if users want to use enhanced features, they have to upgrade to a paid version.
Friends, Family and Fools Round (FFF Round) – An investment in a company that often follows the founder’s own investment, from people who are investing primarily because of their relationship with the founder rather than their knowledge of the business.
Full Ratchet (when used in relation to anti-dilution) – An investor protection provision used when referring to anti-dilution provisions and how the anti-dilution is to be structured. Full ratchet means that if the company issues shares at a price lower to that paid by the original investors, then the price paid by the investors is effectively lowered to the price of the new shares being issued.
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.
Fully Diluted Share Capital – The share capital of the company when all of the proposed investment monies have been invested or options exercised.
Fund of funds – A mutual fund that invests in other mutual funds.
Fund Size – The total amount of capital committed by the investors of a venture capital fund.
Funding – Financing the activities of the company through equity investment or other instruments such as convertible notes.
Funding Platform – Any online website used to facilitate investments in private companies.
Fundless Equity Sponsors – Fundless equity sponsors are sourcing and vetting deals without any committed capital, lining up financial sponsors on a deal-by-deal basis.
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.
Gearing (also known as Leverage) – A term used to describe the ratio of debt to equity of a company. There is no statutory definition of Gearing so the exact terms upon which Gearing has been calculated should always be confirmed. In general, the higher the gearing, the more vulnerable the company is to market changes.
General Partner – (GP) The partner in a limited partnership responsible for all management decisions of the partnership. The GP has a fiduciary responsibility to act for the benefit of the limited partners (LPs) and is fully liable for its actions.
General Solicitation – When a private company publicly seeks investors in connection with an equity offering.
Golden Handcuffs – This occurs when an employee is required to relinquish unvested shares when terminating his employment contract early.
Golden Parachute – Employment contract for 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 Rule – The investor with the gold, makes the rules. (The same meaning as “those who bring the money drive the bus”; i.e., forget whatever any previous contracts say, if you need money and only one source is willing to supply it, you’ll take the money on their terms, full stop.)
Good Leaver Provisions – A provision within the Shareholders Agreement, Constitution (or Articles) or any other agreement that classifies a shareholder leaving a company as a ‘Good Leaver’. A Good Leaver will usually mean an individual leaving employment through disability, death or retirement. A Good Leaver will usually receive a fair value for their shares and will receive most (if not all) of their contractual benefits. Good Leaver/Bad Leaver provisions can be used to incentivise key management to remain with the company. See also: Bad Leaver provisions.
Governing Law – This is the law of the relevant jurisdiction and it is important to be clear on which law governs any contract or investment.
Grant – Money provided by a government agency or other organisation that does not need to be repaid and does not purchase equity. For example from Callaghan Innovation, NZTE or universities.
Ground floor – A reference to the beginning of a venture, or the earliest point of a start-up. Generally considered an advantage to invest at this level.
Group Company – A group of companies consisting of a parent company and subsidiary companies whose affairs are generally managed as a unified whole.
Hackathon – A fun, intense and caffeine-filled collaborative gathering of software developers and other contributors to create an app or service. Hackathons often last 48 hours with little or no sleep.
Harvest – Reaping the benefits of investment in a privately held company by selling the company for cash or shares in a publicly held company, also to execute the exit strategy.
Heads of Terms (also referred to as Term Sheet or Offer Letter) – A document which sets out the terms of a commercial transaction agreed in principle between parties in the course of negotiations. Heads of Terms show intent but are not generally legally binding other than certain provisions included in the Heads (such as confidentiality, exclusivity and costs).
Hockey Stick – A chart that resembles a hockey stick and projects fast growth.
Holding Company – A company which holds a number of subsidiary companies.
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.
Home Run – When a company has an exit that returns 20 or more times the investors’ initial capital.
Honeypot – A highly attractive offering used to entice a specific, targeted audience.
Hot Issue – Newly issued shares that are 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.
Illiquid – An investment that cannot be readily sold or transferred into cash. Unlike public shares for which there is a ready market, angel investments are typically held for 5 to 10 years with little or no chance of sale until the liquidity event.
Impact Investing – Financial investments that also aim to have a benefit for society.
Incubator – An organisation established to support the development of start-up companies with intermediate term access (1 – 3 years) to facilities (office and lab space), resources and development programs, usually including mentoring. Incubators differ from accelerators in that the latter typically focus on acceleration of growth in a shorter defined period whereas the former is focused on the development of the company and its product over a longer time period.
Indemnity – In the context of an investment an undertaking by the existing shareholders and/ or directors to meet a specific potential legal liability identified in the diligence process in relation to the company. An indemnity entitles the person indemnified to a payment if the event giving rise to the indemnity takes place.
Indicative Investment – Angel networks ask members for an indication of the amount they may invest in an opportunity if due diligence is positive. These indications drive the decision as to whether the angel network will proceed to due diligence. Given the time and effort involved in the due diligence process for business angels and also entrepreneurs/investee companies, they want to be confident that there will be a return in terms of investment at the conclusion.
Information Rights – Often used in the shareholders agreement and mainly designed for minority investors to secure their access to crucial information regarding the company in which they have invested.
Initial Public Offering (“IPO”) (also see Float and Listing) – This is the first time that a company tries to raise funds on a public market such as a shares exchange.
In-Licensing Agreement – Agreements with external or third parties under which the start-up has been granted permission to utilise certain technologies owned by those third parties, under defined terms and conditions.
Institutional Investors – Institutional Investors refers mainly to insurance companies, pension funds and investment companies collecting savings and supplying funds to markets but also to other types of institutional wealth like endowment funds, foundations, etc.
Intangibles – Assets of a company that are of a ‘non-physical’ nature such as intellectual property (i.e. patents, trade marks or brands).
Intellectual Property – Intangible assets of a company that are presumed to represent an advantage to the firm’s position in the marketplace. Intellectual property is often the key asset in a company seeking funding from business angels.
Intellectual Property Rights – Legal rights of owners of intangible assets, for example, trademarks, copyright, patents, designs and trade secrets.
Intermediary (Financial Intermediary) – An individual or institution empowered to make investment decisions for other persons or entities.
Internal Rate of Return – The interest rate used to measure the profitability of investments, which makes the net present value of all cash flows from a particular project equal to zero.
Internal Rate of Return (IRR) – A compound rate of interest worked out over the life of a private equity investment reflecting both the investment return and the rate at which the return is produced. The return on investment that an investor needs to compensate for the risk involved in making that investment will depend on the type of investor and company. Equivalent to the compound rate of return of an investment.
Invention Assignment Agreement – An agreement under which founders, employees, contractors, developers and others assign intellectual property rights to a company. Typically, these stakeholders or related parties of the company acknowledge that any and all intellectual property developed by them while working for or with the company, whether individually or jointly with other stakeholders, is the property of the company, not the individual. It can also apply to intellectual property that founders and others may contribute to a start-up company at the time of its establishment.
Investment Agreement (also known as Shareholders Agreement or Subscription Agreement) – The Shareholders Agreement sets out the contractual position between the parties, the terms of the investment (such as the funding being provided and the number of shares subscribed for). The Agreement will also set out the conditions of the investment and the warranties being provided by the founders.
Investment Bank– A regulated financial institution that provides various financial consulting services such as capital-raising, M&A, trading, etc.
Investment Round – A set of one or more investments made in a particular company by one or more investors on essentially similar terms at essentially the same time.
Investor Director – A director appointed by the investor (or a group of investors) to sit on the Board of the investee company. The investor will usually act as a non-executive director. The right to appoint an investor director will usually be required by an investor.
Investor Majority – This term is used in the Shareholders Agreement and will usually be a certain percentage of the investors (if there is more than one investor). This could be 50% of the investors. The Shareholders Agreement will set out that certain matters need to be agreed by Investor Majority (for example the appointment of a new director). This is a useful provision to have where there is a group of investors as it means that not every single investor has to agree to such matters. The percentage level should be considered carefully by the investors.
Investor Roles – Different investors can provide different kinds of support to their portfolio companies, especially among business angels. They can act as advisors, board members etc. Economic scientist Roland Engel classifies early-stage investors into five types: Cowboy (provides all resources except materials), Big Boy (financial investor), Landlord (assists start-ups through infrastructure or tangible materials), Co-founder (actively participates also on the operational level), and Godfather (has a strong network, participates in management). Furthermore, if several investors invest at the same time in the same company, they can distribute their work amongst themselves and one can then distinguish between different roles during the investment process itself.
IP Sweeper Assignation – Investors will often ask founders and/or those involved in developing the IP in a company to sign an IP Sweeper Assignation at/prior to completion of the investment. This is a widely drafted document which means that all IP relating to IP assigned to the investee company is transferred over to the company.
Issued Share Capital – The total nominal value of the shares of a company that have been issued to shareholders.
Issued Shares – The amount of shares that a corporation has sold (issued).
Issuer – Refers to the organisation issuing or proposing to issue a security.
Iteration – The process of (usually planned) repetitions of particular actions with the goal of getting better results each time due to learning effects. Iteration is important in the Lean Start-up movement which focuses on iterating and reengineering products and services on the basis of feedback received from customers.
J-curve – The appearance of a graph showing the typical value progression of early stage investment portfolios. Values often drop soon after the initial investment during the start-up and early stage period, but rebound significantly in later years after companies reach profitability.
Joint and Several – Care should be taken with the terms ‘Joint Liability’, ‘Several Liability’ and ‘Joint and Several Liability’ as their meaning sometimes differs between jurisdictions. If parties are jointly and severally liable a pursuer can sue each party in respect of the whole amount of such liability.
Key-Person Insurance – A life assurance policy taken out in respect of a key executive which provides the company with a cash cushion in the event of the death or illness of that executive to compensate for the disruption and effect of such death or illness on the company. Key person insurance for key people is often a Condition Precedent of an investor’s investment although in some cases the costs can be prohibitive.
Law of Large Numbers – A theorem that suggests that the average of results obtained from a large number of trials should be close to the expected value, assuring stable long-term results for the averages of random events. When applied to angel investing, it suggests that large portfolios of investments, made consistently over time, will return significantly positive results.
Lead Investor – The primary investor of a round of financing. This investor is typically the largest investor of the round (often syndicated with other clubs and funds in NZ) and usually structures and leads the negotiation of terms related to the investment’s documentation.
Lead Investor – When several angel investors invest into the same company, one of them usually takes a more active role managing the process both before the investment (e.g. due diligence) and afterwards (e.g. monitoring progress). Sometimes, the lead investor is granted an additional financial incentive for the other investors.
Lean Start-up – An approach to the process of building a company emphasising learning by doing. Especially suited for start-ups with relatively little capital seeking to bring products or services to the market as soon as possible without complex pre-planning.
Leveraged Buyout – Takeover of a company, using borrowed funds. Most often, the target company assets serve as security for the loans taken out by the acquiring firm, which repays the loan out of the cash flow of the acquired company.
Limited Partnerships – A business organisation comprised of one or more general partners, who manages a fund and assume legal debts and obligations on behalf of the partnership, and one or more limited partners, who invest money but have limited liability and are not involved with the day-to-day management of the fund. Limited partnership is the legal structure used by most venture and private equity funds. Often the general partner receives a management fee and a percentage of the profits (or carried interest). The limited partners receive income, capital gains, and tax benefits.
LinkedIn – A business oriented social media platform.
Liquidation – The process of dissolving a company by selling off all of its assets (making them liquid) for distribution to creditors and shareholders in order of priority. A liquidation can be either voluntary or compulsory. It sometimes marks an exit – the sale or transfers a company to a third party. It Is not always a negative thing although often used in this context.
Liquidation Preference – A Liquidation Preference determines the order in which a company’s assets are realised for the benefit of creditors (including shareholders) upon liquidation. For example, a liquidation preference may provide that a certain class of shares will rank ahead of the other shares in the company in the event of a liquidation.
Liquidation Waterfall – The sequence in which all parties, including investors, employees, creditors, and others receive payments in the event of a company’s liquidation through acquisition or bankruptcy.
Liquidity Event – This occasion represents the exit strategy of most entrepreneurs and investors. When a corporation is purchased (through a merger or acquisition) or when an IPO is made, equity is converted to cash and paid out to the investors and other shareholders.
Listing (also see Floating and IPO) – A company is said to be “listed” when it trades its shares on a public stock or share market.
Loan capital – Form of debt repayable on certain dates or at certain intervals. This can be distinguished from a bank overdraft that is usually re-payable on demand.
Loan Notes/Convertible Loan Notes – Investment put in by way of a loan but which can be converted into shares on agreed terms. Convertible Loan Notes are often used to try and address the issue of valuation which can be difficult to agree between the founders and the investors. Tax advice should be taken where Convertible Loan Notes are being used.
Lock-up Agreement – Agreements entered into between the lead underwriter and significant sharesholders, whereby the sharesholders agree not to sell any company shares for a number of predetermined days (usually 180). This time period allows the market to absorb the company’s offerings.
Mafia – In the context of angel funding and start-ups, a colloquial term used to describe the loose association of people previously involved with a highly successful technology company, such as Google, Facebook, Paypal or LinkedIn, as founders, early employees or investors.
Main Street Business – A term utilised to reference small traditional family lifestyle businesses such as local retail and service providers. These businesses are typically operated by family for the benefit of the family without the objective of a liquidation event such as the strategic sale or IPO of the company. As a result, these businesses are not typically funded by angel investment groups or VCs.
Major Investor – As used in investment term sheets, any investor who puts in more than a defined amount into a given round and is therefore entitled to specific information and/or voting rights.
Majority – The percentage defining the level of shareholders that must approve significant company actions such as borrowing money, or acquiring or merging with another business; typically defined to be 50.1% or greater.
Management Buy-in – Management buy-in is the purchase of a business by an outside team of managers who have found financial backers and plan to manage the business actively themselves. Synonym: MBI
Management Fee – Compensation typically paid annually from an investment fund to the general partner or investment advisor of the fund to cover administration costs, expenses related to investor relations and to compensate them for their services and expertise.
Management Team – The persons who oversee the activities of a venture capital fund or the senior leadership team of a company.
Market Capitalisation – The total dollar value of all outstanding shares. Computed as shares multiplied by current price per share. Prior to an IPO, market capitalisation 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).
Market Risk – Any risk a business faces with regard to its (potential) customers, for example, whether they will buy a product now being developed, whether the market will experience a crisis or shrink permanently etc.
Market Standoff Agreement – Similar to Lock-Up Agreements and prevents anyone from selling company shares for number of predetermined days after a previous share offering by the company.
Meetup – A website which enables the facilitation of online in-person meetings of groups with similar interests. Local Meet-ups groups focus on a wide variety of interests, including technology, entrepreneurship, investments and start-ups from the entrepreneurial world.
Merger – A combination of business entities under which efficiency improvements are expected to be achieved from potential synergies by eliminating duplicate factors of production such as plant, equipment and labour and by the more efficient use of capital driving increases in revenues and profits in the resulting company.
Micro-VC – The correct term for organisations sometimes referred to as super angels. Structured similarly to a traditional venture fund, a micro-VC is typically much smaller in size, with fewer partners, and invests less money but at an earlier stage.
Milestones – Conditions used to measure whether certain achievements have been met by a company. Often used in conjunction with payments of investment capital in tranches.
Minimum Viable Product (MVP) – A new product that most easily provides the way to validate and better understand the customer.
Modified Berkus Method – A variation of the Berkus method for placing a financial value on pre-revenue start-ups. A major motivation is to take changed market conditions into account by reducing each driver to a maximum of $US500k. The method has also been modified to include entry barriers and strategic alliances.
Monthly Active Users – Distinct website users who engage with a site’s offerings or services in a given month.
Monthly Recurring Revenue (MRR) – Measure of the predicable and recurring revenue components of a subscription business. Not to be confused with monthly revenue, which includes one-time and one-off sales.
Multiples – Valuation using multiples or relative valuation is a method of estimating the value of an asset by comparing it to the market value of similar or comparable assets on the basis of defined indicators (e.g. revenues or profits).
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.
NASDAQ – An automated information network which provides brokers and dealers with price quotations on securities traded over the counter. Stands for National Association of Securities Dealers and Automated Quotations.
NDA – see non-disclosure agreement.
Negative Control Provisions – Terms agreed to as part of an investment round that protect investors from major adverse actions (such as dissolving the company, or selling it to someone for $1), but do not provide the right to affirmatively control the company.
Net Asset Value – Calculated by adding the value of all of the investments in the fund and dividing by the number of shares of the fund that are outstanding. NAV calculations are required for all mutual funds (or open-end funds) and closed-end funds. The price per share of a closed-end fund will trade at either a premium or a discount to the NAV of that fund, based on market demand. Closed-end funds generally trade at a discount to NAV. Synonym: NAV
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 resulting earnings of a company after deducting all costs and expenses, including operations, general and administrative, 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. Synonym: NPV
Net Promoter Score (NPS) – A score between -100 and 100 used to calculate how loyal customers are and how likely they are to recommend a product or service
New Issue – A share or bond offered to the public for the first time. New issues may be initial public offerings by previously private companies or additional shares or bond issues by companies already public.
Newco – The typical label for any newly organised 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.
Nominee Deed – An agreement between an investor and the nominee company. The Nominee groups together all investments from wholesale investors to allow for smaller investment parcel sizes, simplifying the share register and minimising the administrative overhead for investors and investee companies by streamlining the communication between the investors and the company.
The Nominee is the legal owner of the shares as a bare trustee; however the investor remains the beneficial owner and retains full economic rights.
Key points about the Nominee if this is how the network operates. Most angel networks in NZ operate using a nominee company:
- Investor Deed – You will need to sign a Nominee Ltd Investor Deed to invest through the Nominee. From some to time it may make sense for offers to be finalised through other Nominees, in which case the lead network will be in touch to arrange.
- Confirmation of investment – The Nominee will appear on the Companies Office Share Register however you should still receive email confirmation from the Nominee of your investment for your records.
- Company Updates – The Nominee should circulate company updates
- Administration – The Nominee will administer your investment in the case of dividend payments or other liquidity events.
- Reporting – The Nominee should provide 6 monthly reporting of all your investments.
Non Disclosure Agreement or NDA – Essentially a confidentiality agreement between the parties which prevents any disclosure of confidential information to any third party. Often entered into before any discussions regarding the sale of a company or technical discussions regarding key technology of the company. Synonym: Confidentiality Agreement
Non Solicitation Agreement – An agreement under which an employee or principal agrees not to solicit their existing employer’s or company’s employees, clients or customers after departing the company either for their own benefit or that of a competitor.
Non-Compete Agreement – An agreement between two parties under which one party agrees not to become employed by, enter into or establish a similar business, trade or profession in competition with the other party. Such agreements typically restrict competition on a geographic basis for a certain period of time. Synonym: Restraint of Trade
Non-Dilutive Shares – Shares with protective rights, such that when the number of shares outstanding increase, the existing shareholders positions are protected and remain constant in terms of their percentage ownership of the company. Shares for which a financing round does not cause dilution of the existing shareholders.
Non-executive director – A director who is usually part-time but who is not an executive director or employee of the company and often appointed on behalf of an investor or group of investors. The general view is that they can operate as an independent director able to take a long-term view of a company and protect the interests of investors. A non-executive director is subject to all of the same legal obligations (such as Directors’ Duties) as a nonexecutive director (although this should be checked in the relevant jurisdiction). See also: Investor Director.
NYSE – The New York Shares Exchange. Founded in 1792, the largest organised securities market in the United States. The Exchange itself does not buy, sell, own, or set prices of shares traded there. The prices are determined by public supply and demand. Also known as the Big Board.
New Zealand Venture Investment Fund or NZVIF – a fund established by the New Zealand government to invest in New Zealand’s early stage investment market either through privately managed venture capital funds or alongside angel investors.
NZVIF Documents – The standard set of investment documentation used for equity investment rounds, developed by the New Zealand Venture Investment Fund.
NXT – The NXT has replaced the NZX’s Alternative Market (NZAX). NXT is the NZ marketplace for small to medium-sized, fast growing businesses seeking a safe and efficient capital raising facility. NXT companies must be worth between $10m and $100m.
Observer – A person often appointed by an investor or group of investors who is entitled to attend Board meetings but who is not entitled to vote and who is not appointed as a director of the company. This is one method by which an investor can monitor their investment without sitting on the Board.
Offer Letter – See Heads of Terms.
Offer Documents – Documents evidencing a private-placement transaction. Include some combination of a purchase agreement and/or subscription agreement, notes or share certificates, warrants, registration-rights agreement, shareholder or investment agreement, investor questionnaire, and other documents required by the particular deal.
Operating Agreement – An agreement between the members of a Limited Liability Company, which governs the company’s business including purchase powers, rights, duties and obligations, and outlining the decision making process related to operational, functional and financial issues in a structured manner.
Operating Budget – A budget consisting of estimates of income and expenses from a company’s operations typically prepared on an annual basis. Expenses typically include operating costs related to producing the company’s product or service, labour, administration and marketing but exclude long term and non-operational items such as capital debt. Operating income would typically exclude items such as investment income. Synonym: Annual Budget
Option – The right to purchase a specified number of a company’s securities at a designated price at some point in the future. The term is generally used in connection with employee share schemes or ESOPs.
Option Pool – The number of shares set aside for future issuance to employees of a private company.
Ordinary Shares – A class of ownership that has lower claims on earnings and assets than preferred shares. It is riskier to own common shares because in the event of liquidation, common shares shareholders are the last to claim rights to assets. Founders and employees almost always own shares or options for common shares.
Outstanding Shares – 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 shares.
Oversubscription – 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.
Oversubscription Privilege – In a rights issue, arrangement by which shareholders are given the right to apply for any shares that are not purchased.
PageRank – An algorithm which provides a measure of the relative importance of internet web pages and returned search results.
Pari Passu – At an equal rate or pace, without preference.
Participating Liquidating or Liquidation Preference – Preferred shares, which share (participate) with the common shares upon liquidation or sale. Upon liquidation, those investors with a liquidating preference will receive their original investment, any dividends owed and perhaps other consideration, before holders of common shares receive a distribution.
Participating Preferred Shares – A preferred share 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 sharesholders. Preferred shares might also have the right to share on a pro-rata basis with any distributions to the common shares upon liquidation, after already receiving the preferred-liquidation preference.
Partnership – A non-taxable entity in which each partner shares in the profits, losses and liabilities of the partnership. Each partner is responsible for the taxes on its share of profits and losses.
Partnership Agreement – The contract that specifies the compensation and conditions governing the relationship between investors (LPs) and the venture capitalists (GPs) for the duration of a private equity fund’s life.
Passing – The act of investors not getting involved in a particular investment opportunity presented to them. This does not imply that they don’t like the idea. The decision may be due simply to the fact that they are focused on different deal sizes, industries etc.
Pay to Play – A provision in venture capital where existing investors are forced to invest pro rata in a subsequent round. Non-compliant investors will be penalised consequences (such as getting their preferred shares converted into common shares and a loss of anti-dilution rights). Normally, used in next-round investments which can be down rounds where the company is worth less but ‘pay to play’ investors must still pony up.
Peer to Peer Lending – A relatively new type of online financing solution through which individuals lend money to other individuals or small businesses.
Performance Based Vesting – Under performance-based vesting, options vest only if specified performance criteria are met. For example, options may vest if annual earnings per share exceed a certain target by a specified date.
Permitted Transfer – A transfer of shares which is permitted under the shareholders’ agreement or constitution and whereby the shares do not have to be offered to existing shareholders or subject to any other provisions prior to being transferred. The shareholders’ agreement or constitution will often allow shareholders to transfer shares to family members or, in the case of corporate shareholders, to members of the same group. This can be attractive from a tax planning perspective.
Pipeline – Pipeline is the flow of upcoming deals.
Pitch – A presentation in which a start-up founder attempts to persuade an investor of the viability of their company. The presentation spectrum varies based on the specific purpose of the pitch. Brief presentations in which an entrepreneur provides a 30-60 second overview of their idea, business model and marketing strategy, with the purpose of attaining a follow-up meeting with an investor are described as elevator pitches. Formal, detailed presentations utilising power point slide decks, with the specific objective of seeking investment from angel groups or VCs, are known as investment presentation pitches.
Pitch Deck – A presentation created by entrepreneurs that details the attributes of a start-up opportunity in order to help the entrepreneurs communicate it with investors, in their efforts to raise money to fund their venture. The presentation, which typically includes approximately a dozen slides, provides a summary of the start-up’s business plan, and helps investors determine if they have a continued interest in evaluating the company.
Pivot – The act of a start-up deliberately and substantially changing the direction of its business based on what it has learnt to date. Pivoting implies that start-ups make use of prior experience and apply the insight in new areas to create a successful business.
Placement Agent – The investment bank, broker, or other person that locates investors to purchase securities from the company in a private offering in exchange for a commission.
Platform as a Service – A cloud computing service category which provides a foundation upon which customers can develop, operate and manage multiple application functionalities without the need to develop the underlying infrastructure. -Synonym: PaaS
Portfolio – All current investments or companies in which an investor holds shares.
Portfolio Companies – The group of start-ups and other companies in which an angel group, venture capital fund or private equity firm have invested.
Post-Money Valuation – The value of a company calculated after a round of funding.
Post-money Cap Table – A table depicting the ownership of the founders and investors in terms of absolute quantities of shares or units, describing the entity type, and percentages of total ownership they represent. These ownership stakes and the related analyses, typically represent the stakeholders of a start-up venture and also provides analysis of equity dilution.
Post-Money Valuation – The company’s value immediately after funding. If pre-money valuation = $2M and the company raises $500K, then the post-money valuation = $2.5M.
Power of Attorney – This is a contractual document provided by an individual in favour of another that allows the attorney or person given that power to undertake actions on their behalf such as sign investment documentation. This can be useful where a group of investors are investing together (i.e. it means that not all of the investors would have to attend and sign at the completion meeting). The document will set out the remit of the attorney(s) which will be limited.
Pre-emption Rights – A right of first refusal for existing shareholders over the issue of new shares allowing them to preserve their percentage shareholding in the company and prevent dilution.
Preference Shares – Shares which hold preferential rights over ordinary shares, typically including a first right to dividends and any capital payment.
Preferred Dividend – A dividend ordinarily accruing on preferred shares payable where declared and superior right of payment exists as opposed to common dividends.
Preferred Shares – A class of ownership created through contract that clearly sets out the terms of the Preferred Shares. The terms can confer a variety of voting, dividend, management, conversion and other rights. Often this means that in the event of liquidation, preferred shares shareholders have priority over earnings and assets and generally earn dividends, but forego voting rights.
Pre-Money – The value of a company calculated before a round of funding.
Pre-money Cap Table – A cap table depicting the ownership of the founders and investors in terms of absolute quantities of shares or units, depending upon entity type, and percentages of total ownership they represent. These ownership stakes and the related analyses, typically represent the stakeholders of a start-up venture and also provides analysis of equity dilution.
Pre-Money Valuation – The company’s value immediately before funding. If post-money valuation = $2.5M and the company raised $500K, then the pre-money valuation = $2M.
Prepaid Warrant – A prepaid warrant is a warrant issued by an issuer entitling the holder to exercise the right to a specified number of different securities, for no additional financial consideration, during a specified time period.
Pre-Revenue – Pre-revenue refers to the early phase of start-ups when they do not yet generate income because they are still developing their first products.
Private Companies – Companies that are not publicly traded on the shares market.
Private Equity – Investment in a private company that is not listed on a stock exchange. The term is also often used to refer to later-stage transactions, as opposed to business angel or early venture capital rounds.
Private Offering/Private Placement – Sale of unregistered, restricted securities by the company.
Private Placement – The sale of shares, bonds or other investments directly to institutional or accredited investors.
Private Placement Memorandum – Also known as an Offer 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.
Pro Forma – A pro forma is a description of financial statements that have one or more assumptions or hypothetical conditions built into the data. A financial projection based on assumptions. Also, refers to a statement of income and balance sheets that exclude non-recurring items.
Pro Rata Rights – A right of investors to participate in future financing rounds, proportional to their already committed investment.
Professional Partner – Services and professional partners of the start-up entity typically including, but not limited to their commercial lawer, intellectual property lawyer, accountant, consultants and contract development partners.
Proof of Concept – A demonstration of the feasibility of a concept or idea that a start-up is based on. Many VCs require proof of concept if you wish to pitch to them.
Proprietary Deal Flow – When an investor has an opportunity to review a deal before other potential investors.
Public Company – A company that has securities that have been sold in a registered offering and that are traded on a public stock exchange.
Public Funding – Money provided to private companies by public institutions such as government agencies. Examples are government grants for research and loans through economic development banks.
Put option – A contractual term/condition which provides the investor the option to compel the company to purchase their shares. Opposite of a “call option”.
Quality Assurance – The process of checking recently developed goods to see whether specific requirements and standards are met. The aim is to identify defects before they get to customers.
Quora – A leading question-and-answer website where many industry experts in early stage investing answer questions.
Raising Capital – Raising capital refers to obtaining capital from investors or venture capital sources.
Ratchet – Ratchets reduce the price at which investors can convert their debt into preferred shares, which effectively increases their percentage of equity. Often referred to as an “anti-dilution adjustment.”
Rate of Return – Internal rate of return.
Recapitalisation – A corporate reorganisation of a company’s capital structure, changing the mix of equity and debt. A company will usually recapitalise to prepare for an exit, lower taxes, or defend against a takeover.
Receivership – See Administrative Receivership.
Redeemable Preferred Shares – Redeemable preferred shares, also known as exploding preferred, at the holder’s option after (typically) after five years in the US, which in turn gives the holders (potentially converting to higher status creditors) leverage to induce the company to arrange a liquidity event. The threat of creditor status can move the founders to actively pursue an exit if a liquidity event is not occurring with sufficient rapidity. A US-centric term.
Redeemable shares – Shares which can be repurchased by the company at a predetermined value as set out in the company’s constitution. This may be a useful alternative to a buy-back of shares by a company at the current fair or market value.
Redemption – Commencing on a predetermined date after the first close, at the request of the holders of a predetermined percentage of the then outstanding Series X Preferred, the company will redeem the then outstanding Series X Preferred at a redemption price equal to the purchase price plus any accrued and unpaid dividends (a forced buy-back).
Redemption Rights – The right of an investor to request the company to buy back (redeem) the investor’s shares.
Remuneration Committee – A committee put together to determine the remuneration or pay of each executive and employee. Often investors will want to ensure that their investor director is part of the Remuneration Committee.
Replacement Method – An asset-valuation method that assesses the cost of replacing the asset with another of equal value and character.
Representations and Warranties – A list of material statements or facts that are included in the investment documentation and to which the entrepreneur unequivocally commits and may be liable to recompense investors if they are not true or do not eventuate.
Repurchase – A repurchase of outstanding securities by a company that wants to reduce the number of shares issued. By cancelling the shares being bought back, the value of the remaining shares increases. Also called buyback.
Resale Registration – Registration by a company of the investor’s sale of the shares purchased by the investor in a private offering.
Research and Development – (R&D) refers to systematic investigation or experimentation involving innovation or technical risk, the outcome of which is either new knowledge (with or without a specific practical application) or new or improved materials, products, devices, processes, or services.
Reserved Matters (also known as Investor Protections or Investor Controls) – Certain matters that cannot be carried out in relation to the company without the consent of a certain percentage of the shareholders in the case of fundamental decisions (such as changes to share capital) or the consent of the directors (usually including any investor director) in relation to matters of management.
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.
Restrictive Covenant (also known as NonCompete Clauses) – A negative covenant that restricts the way in which a party can act after the occurrence of a certain event (such as when a shareholder or director leaves the company). Commonly found in contracts of employment or service agreements to protect the employer’s/company’s business by restricting the activities of an employee/director when the employment has ended.
Retained Earnings – Retained earnings are the corporate profits that are neither paid out in cash dividends to sharesholders nor used to increase the number of shares, but are reinvested in the company.
Return of Capital – The return to an investor of all or part of the money invested in a company such as in the case of a liquidation or a sale of the company.
Return on investment (ROI) – This term is also referred to as the rate of return (ROR). It is the amount of money that is gained in a past or existing investment. Angel investors expect a large ROI to compensate for investing in risky early stage ventures.
ROI Per Annum – The profit or loss resulting from an investment transaction, usually expressed as an annual percentage return. ROI is a return ratio that compares the net benefits of a project verses its total costs. A Return on Investment (ROI) is calculated to measure the performance of one investment relative to another.
Calculating your ROI is expressed as a percentage and is based on returns over an associated time period, usually one year. For example, a 25 percent annual ROI means that a $100K investment would return $25K in one year. Thus, after one year, the total investment returned would be $125K.
It’s the money an investor gets back as a percentage of the money he or she has invested in a venture. For example, if an angel invests $200k for a 20 percent share in a company and that company is bought out for $4m, the VC’s return is $800k.
Reverse Vesting – When founders of a company agree they will give back part of their share holding if they leave the company before a specified date (typically four years). This is usually required by investors, and a good thing for founders themselves in the case of multiple founders as it incentivises the team to stay in the company or lose their equity in the business.
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 sometimes 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 probability that part or all of an original investment will be lost or that investment returns will be lower than anticipated. Numerous factors may impact these potential investment and return losses, including but not limited to demand risk, economic risk, environmental risk, funding risk, legislative risk, maintenance risk, operational risk, procurement risk, technology risk and timing risk.
Round – Start-ups raise capital from investors in individual rounds, depending on the stage of the company. The first round is usually a seed round followed by Series A, B, and C rounds if necessary.
Royalty Based Financing – Royalty based financing presumes a fundamental trade-off between the investor and the business owner. In lieu of an equity ownership stake given to the investor, business owners agree to return to the investor the original principal plus either a predetermined multiple of the original investment (fixed dollar payback) or payment of a royalty until a fixed period of time has elapsed (fixed time payback). In some cases the royalty is based on a percentage of sales of a specific product or set of products.
Rule Of Thirds – A rule of thumb for angel rounds, often employed as a sanity check for valuation ideas. It stipulates that typically around a third of the company equity will go to investors, another third will be held by the founders, and the final third will be reserved for employees (in an option pool).
Runway (also burn rate) – The amount of time a start-up has until it goes out of business, given the funding situation and assuming that income and expenses stay constant because it has run out of money. The runway is calculated by dividing the current cash position by the current monthly burn rate.
SaaS – SaaS refers to Software as a Service, a cloud based software application where users are charged on a subscription basis.
SAFE – Simple Agreement for Future Equity, a new form of funding for early stage companies developed by YCombinator to solve a number of issues with traditional convertible note financing. These have been “NZ-ised” for use in New Zealand in some instances.
Safe Harbour Certificate – A Safe Harbour Certificate is a written assurance provided by the investor to the investee company that they qualify as a Wholesale Investor. If circumstances do not change, the Safe Harbour Certificate will be valid for a period of two years, after which the investor will need to provide another.
If the investos is able to tick at least one of the criteria below, they will generally be able to self-certify as a Wholesale Investor for a Safe Harbour Certificate.
- own net assets which combined with the assets of entities in control, exceeded NZ$5 million for the 2 most recent financial years.
- total turnover of the investor’s and the entities they control exceeded NZ$5 million for the 2 most recent financial years.
- they have owned at some time during the last 2 years, a portfolio of financial products of a value of at least NZ$1 million.
- they have carried out 1 or more transactions to acquire financial products during the last 2 years, where the amount payable under those transactions (in aggregate) is at least NZ$1 million and the other parties to the transactions were not associated with them.
- principal business is investing in financial products.
- principal business is providing a financial advice in relation to financial products.
- principal business is broking financial products.
- principal business is trading in financial products on behalf of other people.
- the investor has been employed in an investment business within the last 10 years and, for at least 2 years during that 10 year period, participated in the investment decisions made by that business.
- is a Qualifying Financial Entity (QFE).
- is an authorised financial adviser in New Zealand.
There is no requirement for a Safe Harbour Certificate to be certified by an independent party, however the penalty for providing a Safe Harbour Certificate if you do not quality as a Wholesale Investor is currently $50,000. There are a few tricks with some of the criteria above, so it pays to check with your lawyer or a financial advisor before completion of the Safe Harbour Certificate.
Scalability – The ability of a business to grow very large very fast and/or become very valuable very fast. For example selling e-books (where delivery is cheap and delivering many more can be done almost instantly) scales better than consulting (where new employees have to be hired and trained in order to deliver more).
SCIF – NZ Seed Co-Investment Fund – a fund that co-invests in young tech companies alongside selected New Zealand angel groups. See NZVIF.
Screening – A process utilised by individual investors, angel groups and VC funds to determine their interest in investment opportunities. The screening may be informal or formal in nature and typically includes an assessment of the opportunity against the investors previously determined criteria for investment.
Screening Deals – The process used to rate or grade the opportunity presented by new ventures, which is followed by a “go… no-go” decision. Deals that pass the screen receive additional attention by the investors. Those that do not pass the screen are rejected.
Scrubbing Deals – The process of doing “due diligence” on new venture opportunities, prior to making an investment decision.
Second Round Financings – Finance made available to a company which has already had initial investment but needs more cash to grow or to continue.
Secondary public offering – When a company offers up new shares for sale to the public after an IPO. Often occurs when founders step down or desire to move into a lesser role within the company.
Secondary Purchase – Buying shares from an existing shareholder.
Secondary Sale – The sale of private or restricted holdings in a portfolio company to other investors.
Second-stage Financing – Provides capital for expansion. Companies are typically generating revenue and have a sound management team in place, but may not show bottom-line profits.
Sector – The market that a start-up companies product or service fits into. Examples include: consumer technology, cleantech, biotech, and enterprise technology. Venture Capitalists tend to have experience investing in specific related sectors and thus tend not to invest outside of their area of expertise.
Securities – Includes all types of equity and debt instruments and rights in and to them.
Seed Capital – Capital provided at the very early stage of a company perhaps for the development of a business plan, to meet other start-up costs, or for the entrepreneur to prove a concept.
Seed Fund – A venture capital fund specialising in very-early-stage start-ups.
Seed Round – The seed round is the first official round of financing for a start-up. At this point a company is usually raising funds for proof of concept and/or to build out a prototype and is referred to as a “seed stage” company.
Seed Stage – The key characteristic is product development. A venture in this stage is sometimes (but not always) generating revenue, and customers are interacting with the product. The business model is not yet fully developed, and seed capital is needed for research and development. This stage generates the first round of capital for the venture. Synonym: start-up stage.
Senior Debt – Borrowed money that a company must repay first if it becomes insolvent. If the company goes bankrupt, the holders of each type of financing have different levels of rights to the company’s assets.
Senior Securities – Securities that have a preferential claim over common shares on a company’s earnings and in the case of liquidation. Generally, preferred shares and bonds are considered senior securities.
Serial Entrepreneur – An entrepreneur who has previously founded and run one or more ventures.
Series – Refers to the specific round of financing a company is raising. For example, company X is raising their:
Series A – first round of investment
Series B – second round of investment
Series C – third round of investment
Service Agreement/Contract – Agreement entered into between a company and a director in relation to the provision of their services to the company. Similar to an employment contract and will formalise the terms of their appointment.
Shareholders Agreement – Sets out the contractual relationship between shareholders in a company (along with the constitution). The Shareholders Agreement is not a public document however, and will contain provisions on a wide range of matters including the structure of the board and provisions of a more commercial nature. Similar to an Investment Agreement.
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).
Sidecar Funds – Co-investment funds which invest alongside (top up) defined types of transactions (for example angel rounds with a certain minimum size).
Silent Partner – A silent partner is an investor who does not have any management responsibilities but provides capital and shares the liability for any losses experienced by the entity. Silent partners are liable for any losses up to the amount of their invested capital and participate in any tax and cash flow benefits.
Sniff Test – A colloquial expression referring to a quick assessment of a situation to see whether it appears legitimate.
Social Proof – An investment approach leaning heavily on the identity of other, well-known people who are supporting the company.
Social Venture – A company established to create societal benefit through entrepreneurial methods.
Soft Landing – A face-saving acquisition of an unsuccessful start-up, usually for little or no compensation.
Sophisticated Investor – An investor with the education, business background and investment experience to be able to obtain the information needed to make reasonable investment decisions about the company in question.
Spin-Out – Often used with reference to a university or other academic institution. A ‘spin-out’ is a company that has been formed using IP from that institution.
Spray and Pray – Investing in lots of companies in the hopes that one of them will hit it big.
Stage – The stage of development a start-up company is in. There is no explicit rule for what defines each stage of a company, but start-ups tend to be categorised as seed stage, early stage, mid-stage, and late stage. Most VC firms only invest in companies in one or two stages. Some firms, however, manage multiple funds geared toward different stage companies.
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. More applicable to listed entities than unlisted startups.
Start-up – A company in the early stages of development, which seeks to create a new product or service under significant uncertainty. Financially interesting start-ups have a large growth opportunity in the first few years.
Start-up Financing – Provided to companies completing product development and for early marketing. Companies may be in the process of organising or may already be in business, but usually have not sold their product commercially.
Shares Option – Grants the right to purchase securities (usually common shares) at a stated exercise price over some future period of time.
Share Option Agreement – An agreement that gives investors, shareholders or employees the right to buy or sell shares at predetermined conditions (price, quantity, time).
Share Option Plan – A benefit plan set by the company that gives investors, shareholders or employees an opportunity to buy (more) shares in the company.
Share Option Pool – Shares of equity reserved for employees of a company. The option pool is a way of attracting talented employees to a start-up company. If the employees help the company do well enough to go public, they will be compensated with shares. Employees who get into the start-up early will usually receive a greater percentage of the option pool than employees who arrive later.
Strategic Exits – An exit where the company is acquired by a strategic buyer, who usually operates in the same industry. Strategic buyers integrate the acquired company into their main operations. Strategic exits typically are relatively quick exits and often command a price premium compared to financial exits at the same stage.
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.
Strategic Partnership – Strategic partnership usually involves one company providing engineering, manufacturing or product development services, partnering with a smaller, entrepreneurial firm or inventor to create a specialised new product. Typically, the larger firm supplies capital, and the necessary product development, marketing, manufacturing, and distribution capabilities, while the smaller firm supplies specialised technical or creative expertise. Another common strategic partnership involves a supplier/manufacturer partnering with a distributor or wholesale consumer. Rather than approach the transactions between the companies as a simple link in the product or service supply chain, the two companies form a closer relationship where they mutually participate in advertising, marketing, branding, product development, and other business functions. As examples, an automotive manufacturer may form strategic partnerships with its parts suppliers, or a music distributor with record labels.
Subordinated Debt – A loan that ranks below other loans with regard to claims on assets or earnings.
Subscription Agreement – A contract that governs an investor’s investment in the company or partnership.
Subscription Price – The price at which shares in a company are bought or the price at which shares may be purchased in the future.
Subsidiary – A company that is controlled by another (parent or holding) company.
Success Fee – A percentage commission paid to an intermediary or other individual as an incentive on the closing of a large financing transaction.
Super Angel – True super angels are active angels who make many significant investments, find and negotiate investments, and can bring other investors along with them.
Supermajority – The percentage defining the level of shareholders that must approve significant company actions such as borrowing money, or acquiring or merging with another business. Typically in the 75%+ range.
Sustainability – Meeting the needs and demands of the present without restricting the ability of future stakeholders to meet their own needs. Sustainability is commonly classified into three pillars: economic, social, and environmental.
Sweat Equity – Term given to shares issued to founders or shareholders in consideration of the time and effort invested in the company (as compared to money invested).
Syndicate – Underwriters, broker/dealers or investors who invest as a group.
Syndication – An investment whereby different investors or groups of investors invest in a company. This can be used when one investor or group cannot raise the funds required or to lower the risk of the investment. Usually a lead investor will oversee and marshall the deal.
Tag Along Rights – Tag along rights or ‘piggyback’ rights are contained in a company’s constitution and allow (usually minority) shareholders to force other shareholders (who wish to sell their shares) to ensure that their shares are also bought on the same terms. See also: Drag Along Rights.
Take Away Provisions – Agreement made between an investor and the management of a company that entitles the investor to penalise the management if the company does not achieve pre-determined results.
Takedown Schedule – A takedown or draw down schedule means the timing and size of the capital contributions from the limited partners of a venture fund.
Takedowns – When investors are called to make a capital contribution, the amount and timing of the contribution is the takedown schedule. Also known as draw downs.
Target Multiples – The desired return on investment of private investors in early stage companies, defined in a multiple of the original investment.
Team Risk – Any risk associated with the founding team. The team is a crucial element of a start-up and therefore the founders need to share the same vision and their know-how, experience and personalities must fit together in order to build a successful company.
Technology Risk – Any risk associated with technologies used by a business. For example, using a technology which depends on a single supplier (lock-in) can constitute a technology risk.
Tender offer – An offer to purchase shares made directly to the shareholders. One of the more common ways hostile takeovers are implemented.
Term sheet – A non-binding agreement that outlines the major aspects of an investment to be made in a company. A term sheet sets the groundwork that guides lawyers in preparing the investment agreements. Often includes at least: agreed-upon valuation of the business including the proposed capitalisation table; key financial and legal terms; rights of both parties; and legal obligations of all involved. See Heads of Terms.
Ticket Size – The amount of money that goes into an investment transaction.
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.
Total Investment Required – This is the total investment that is being sought by an entrepreneur seeking to realise their business.
Trade Sale – A possible exit method for investors where the business is sold to another company (for example to a competitor).
Tranche – From the French word meaning a “slice” the term tranche is used to identify different stages of an investment. For example an investment of $500,000 may be split over two tranches of $250,000 whereby $250,000 is paid on completion and $250,000 is paid as a second tranche at a later date on the completion of certain pre-agreed milestones.
Transaction Costs – Expenses that occur when investors buy or sell securities. In the context of early stage investments, the amount of time investors put into the deal screening, due diligence and negotiations should be regarded as part of the transactions costs, in addition to cash costs e.g. for lawyers.
Treasury Shares – Shares issued by a company but later reacquired. They may be held in the company’s treasury indefinitely, reissued to the public, or retired. Treasury shares receive no dividends and do not carry voting power while held by the company.
Turnaround – Turnaround is the term used when the poor performance of a company or the business experiences a positive reversal.
Turnaround Financing (or Down Round) – Provided to companies, which still show promise, although they have gone through or are currently in a problem period. Often referred to as “down round,” since investors supplying the turnaround funds will negotiate a shares price lower than that paid by earlier investors.
Underwriter – An investor with the commitment and willingness to take the securities being offered into its own book should the distribution fail.
Unique Selling Proposition – A unique customer benefit of a product or service that clearly differentiates it from the competition.
Unit Offering – Private or public offering of securities in groups of more than one security. Most often a proportion of equity and warrant to purchase some number of shares, but could be two types of shares, a note and a share of equity, etc. Also used in some cases to refer to the sale of LP and LLC interests, since those interests are composed of more than one right.
Up-round – When the valuation of a company at the time of an investment round is higher than its valuation at the conclusion of the previous round.
Validation – The idea of validation is to prove that a business concept really makes sense. Depending on the desired level of validation, this may for instance, be product/market fit (proof that there are some willing buyers) or traction (proof that there are many/enough willing buyers).
Valley of Death – Sometimes a reference to period between the initial funding and the end of the runway but more often a reference to the gap between an early funding round and the second larger requirement for funding which is often much harder to source.
Valuation – The determination of the estimated financial worth of a company. There are a range of different methods for determining the value depending for instance on the development stage of the company and the industry.
Vanity Metrics – Information and data collected by and about a company, its management or its users that serve little purpose beyond internal emotional validation of the company. Such information and data lack the quality and depth to support business decisions.
Venture – Venture is often used to refer to a risky start-up or enterprise company.
Venture Capital – A source of financing for start-up companies made by entities and individuals seeking higher returns for taking greater risks. Also called risk capital. Start-ups talk to venture capitalists, who in turn manage funds contributed by limited partners.
Venture Capital Financing – A type of private equity investment provided to early stage high growth start-up companies in the latter stages of development, which have the potential for exceptional financial returns. Such venture capital investments typically range from $250,000 to tens of millions.
Venture Capital Firm – Venture Capital Firm is an investment company that invests its shareholders’ money in start-ups and other risky but potentially very profitable ventures.
Venture Capital Funds – Venture capital funds pool and manage money from investors seeking private equity stakes in small and medium-size enterprises with strong growth potential.
Venture Capital Limited Partnership – Venture Capital Limited Partnership is a limited partnership which is formed to invest in small start-up businesses with exceptional growth potential.
Venture Debt – A type of debt financing provided to venture-backed companies from specialised banks or non-bank lenders.
Vertical Market – A market definition, specialty or niche, such as “enterprise software,” “cancer diagnostics” or “fabless silicon design.”
Vesting – In order to keep the interests of all parties aligned, it is common that some shares are reserved for founders (sometimes also for early employees or partners), but they have to earn it over a predetermined period time. A typical vesting period for an employee or founder might be 3 – 4 years, which would mean they would earn 25% of their shares each year over a 4 year period. If they leave early, the unvested portion returns back to the company.
Vesting Schedule – A timetable and methodology under which a start-up releases shares to employees, management, founders, advisors, board members and other company stakeholders.
Veto Rights – The power (in the context of investments usually of minority shareholders) to stop predefined business actions (usually those with far-reaching consequences, such as selling significant parts of the company).
Voicemail Script – A short, clear, crisp engaging message which provides a succinct overview of your start-up concept and business model and can be shared via either email or telephone as a reply to potential investors who have expressed an interest in your opportunity.
Voluntary Conversion – The optional rights of Series A Preferred shareholders to convert shares of Series X Preferred into shares of common shares of the company at the then applicable conversion ratio, which initially may be one-to-one (Initial Conversion Ratio) and subsequently subject to adjustment.
Voting Rights – Rights that regulate how shareholders can vote on matters of strategic importance, such as electing members of the board of directors, events such as sales and mergers. Sometimes voting rights are divided based on the classes of shares in a company.
Voting Trust – An entity to which one or more shareholders have transferred their voting rights. Transferring the voting rights may accompany the transfer of shares. This is usually done for a defined period of time.
Vulture Capitalist – A VC whose operating method is to deliberately take advantage of an entrepreneur’s troubles.
Walking Dead – A company that isn’t bankrupt, but will never succeed, and thus can’t be sold or otherwise exited.
Wantrepreneur – An individual who continuously ponders, desires or wants to start a business, acts as if they are an entrepreneur but fails to take the steps necessary to establish and operate a business.
Warrant – A type of security that entitles the holder to the right, but not the obligation, to buy a proportionate amount of common shares or preferred shares at a specified price for a period of years. Warrants are usually issued together with a loan, a bond, or preferred shares and act as sweeteners, to enhance the marketability of the accompanying securities. They are also known as shares-purchase warrants and subscription warrants.
Warranties – A contractual representation or assurance (in the context of an investment) as to the condition of the company. It is usual practice for warranties to be provided by both the company and the members of the management team. If the warranty turns out to be wrong, the investors have a claim for damages against the warrantors. The amount of damages is also usually set out in the term sheet.
Warranty Limitations – Limitations on the liability of a warrantor (usually the founders and the company) under the warranties through certain financial or time constraints or through the use of disclosures via a Disclosure Letter.
Warranty Protection – This is the protection given to the investors as the company and the warrantors are providing warranties in relation to the company, which lowers the investors’ risk.
Waterfall – The order in which investors (and everyone else) get their money out on an exit. Almost always this is “last in, first out.”
Weighted Average – (used in relation to AntiDilution Provisions) This term is used when referring to anti-dilution provisions and how the anti-dilution is to be structured. Under this method of calculating anti-dilution provisions the number of shares issued at the lower price are taken into account in the re-pricing of the shares issued to the investors. This results in a conversion price adjustment.
Winding Up – The process of selling all of the assets of a company, paying off creditors, distributing any remaining assets to those who are entitled and dissolving the business.
Wireframe – A visual depiction in the form of a schematic or blueprint that represents the framework of a website and related web pages. Typically low tech, it lacks in “look and feel” characteristics, focusing more on the layout of the pages and arrangement of the content including potential navigational processes.
Working Capital – Capital available to finance the ordinary trading activities of a company. Working capital requirements should be monitored carefully and a good working capital provision is essential for growth.
Workout – A negotiated agreement between the debtor and its creditors outside the bankruptcy process.
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 of an asset and reduce profits.
Write-up/Write-down – An upward or downward adjustment of the 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 investee company or its securities beneficially or detrimentally.
Yield – The annual rate of return on an investment (including any interest and dividends) calculated as a percentage.
Zombie Fund – A VC firm that can’t raise a new fund, and thus can’t make new investments.
Zombie Start-up – A company which claims to have continuing operations but which demonstrates little or no growth in website visitations or use in recent quarters.