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The “A” in the name comes from the use of Series A Preferred Stock, the securities issued in the round. A funding or financing round in which Series A preferred stock is issued and sold. Series A Preferred Stock is typically sold to outside investors. Usually Series A preferred Stock is sold to the first institutional investor(s) in a company. Sometimes this is a first venture capital financing round, but more usually this round would be comprised of angel investors or other sophisticated individual investors. This round can be effectuated through a private offering or a public offering, but most are private offerings relying on an exemption from registration requirements under the U.S. Securities Act. Subsequent preferred stock funding rounds are usually referred to as “B,” “C,” “D,” and so on, although in some cases it can be preferable to number subsequent preferred stock funding rounds “A-1,” “A-2,” and so on.
A funding or financing round, following the “A” round, in which Series B preferred stock is issued and sold to existing and/or new investors. This can be effectuated through a private offering or a public offering. Subsequent preferred stock funding rounds are referred to as “C,” “D,” and so on.
1933 Act
This refers to the Securities Act of 1933, which regulates the offering and sale of securities by securities issuers and their representatives.
1934 Act
In common usage, a reference to the Securities Exchange Act of 1934. This term is used synonymously with the term Exchange Act.
Accredited Investors
Accredited means at least meeting or possibly exceeding any of the financial standards that the Securities and Exchange Commission has established under its Regulation D in defining the term accredited as applied to investors in the context of this term and Regulation D under the Securities Act, which provides a safe-harbor exemption for private placements, including some offerings made in whole or in part to accredited investors. An entity may qualify as an accredited investor if it meets any of the alternatives definitions: a $5 million net worth qualification, alternatively all of the equity owners being accredited investors themselves would make the entity an accredited investor, or banks, insurance companies, other financial institutions and some other specified entities are treated expressly as accredited investors. The situation of individuals and couples is special. If one individual has an income of $200,000 for the prior two calendar years and expects an income of $200,000 for the current calendar year, or if one couple has an income of $300,000 for the prior two calendar years and expects an income of $300,000 for the current calendar year, or if an individual or couple has a minimum net worth ( excluding primary residence equity, if any) of $1 million. In the alternative an individual can be accredited if he or she has a net worth of $1 million or more (excluding net equity in the primary residence). A married couple is an accredited investor if they have a net worth of $1 million or more (excluding any net equity in the primary residence) or a $300,000 combined income per year in the current and two immediately prior years or either of them has an individual income of $200,000 per year in the current and two immediately prior years. Regulation D under the Securities Act provides a safe-harbor exemption granted by the SEC for private placements. A private offering of securities by a securities issuer can be accomplished without Securities Act registration. The company offering securities is allowed to sell to accredited investors with a minimum of legal difficulties, liabilities and restrictions. A private offering can be accomplished with far less formality and fewer legal strictures than in a public offering that must be registered with the Securities and Exchange Commission. An issuer of securities would seek accredited investors in order to sell them securities. Making matters more risky, an investor in a private offering may have sparse information. Worse still, usually no one provides any guarantees–the issuing company makes no guarantees and a personal guaranty or assurance by a third-party in rarely provided in a private offering. Moreover, an investor in a private offering also receives securities that may not be resold without registration under the Securities Act or the satisfaction of an exemption under Rule 144 that requires the holder to have held the securities for a minimum period of one year before selling (reduced to 6 months if specified information about the securities shall have been made publicly available). Qualified individuals or entities who meet the tests for being treated as “accredited” are relatively easy and attractive targets to whom to sell securities. Some feel that the issuing company has all of the advantages because an investor will be foregoing protections that are embodied in the Securities Act, protections that would apply in the context of an offering registered with the SEC under the Securities Act. Accredited investors in a private offering need to protect their own interests by asking for information from the securities issuer, or obtaining information independently, to have a solid basis to make informed investment decisions.
Accredited Shareholder
Companies with at least $10 million in total assets and more than 500 unaccredited holders of capital stock or other securities are required to register the securities with the Securities and Exchange Commission pursuant to Section 12(g) of the Exchange Act, as amended by the JOBS Act. So long as the unaccredited shareholders do not number more than 500, the companies can have up to 2,000 accredited shareholders. The burden is on the companies to reasonably determine that a shareholder is accredited. The definition of accredited shareholder mirrors that for accredited investors.
Accrued Dividends
Accrued dividends are to dividend-bearing preferred stock what accrued interest is to a promissory note. In both cases, the term accrued and unpaid is used to indicate the amount owing pending the payment date. However, dividend-bearing stocks vary among them in many ways including whether or when their dividends actually accrue. Accrual of a cumulative dividend is like interest of most promissory notes because it can be measured or calculated based on the amount of time elapsing after issuance. Cumulative dividends start to accrue at a set time and continue to accrue while the preferred stock is outstanding. However, a dividend that is non-cumulative will not accrue unless and until the Board declares the dividend. If a dividend declaration is conditional, the accrual will take place at a date following being declared when all of the pre-conditions shall have been met. Also see Cumulative Dividends and Dividends.
Advisory Board
A group of outside advisors to a company, typically with expertise, experience and/or contacts in the company’s industry and/or markets, formed by a business for the purpose of providing informal guidance, advice and assistance to the company’s management. An advisory board is intended to be distinct and separate from the board of directors. If formed properly and operated correctly, an advisory board does not have the formality, role, or fiduciary duties of the company’s board of directors. Advisory Board members typically do not interact with each other but more often each member of the Advisory Board would mentor or advise one or more officers concerning particular strategic, business, and operating matters in that person’s domain expertise.
An affiliate of a specified person is another person controlling, controlled by, or under common control with the specified person. This tracks a definition in SEC rules. Often documents used in capital-raising transactions and documents used in mergers and acquisition transactions will use the same definition for “affiliates.” The SEC deems a company’s directors and executive officers, as well as controlling stockholders, to be affiliates of the company because they each could exercise control of the company.
Affirmative Covenant
Affirmative covenants are a kind of covenant or promise. They are called affirmative because they require something to be done affirmatively. The opposite of an affirmative covenant is a negative covenant. See Covenant.
An agreement in principle is a tentative, preliminary agreement. An agreement in principle is usually, but not always, made non-binding. See Letter of Intent.
Airball Loan

A loan with minimal or inadequate tangible collateral, as opposed to an asset-based loan, which is a loan with collateral.

A loan made to a borrower with inadequate or no collateral is judged by the fact that the loan amount exceeds the collateral’s liquidation value. These kinds of loans, loans made to small and middle-market businesses that could be called pre-revenue loans, pre-profit loans, or bridge loans, are extremely rare. Banks seem to avoid such loans. A lender with incentive to make such a loan can use interesting ways to assess and manage the risks of doing so. Instead of looking to hard assets or years of profitability, some lenders might look to different sources for comfort. Specifically, they could look for:

* Professional managers deeply knowledgeable about their industry;

* An outside board of directors equally steeped in the industry;

* Investors prepared to participate in an upcoming round of equity financing;

* Other signs of the borrower’s ability to repay a loan.

Capital of this kind may be available, but at a high cost, to these companies from a few non-bank lenders. Because these loans are difficult to obtain, lenders can get highly competitive terms, high interest rates, and a substantial amount of warrants to purchase stock in the companies to which they lend.

Alternative Asset Class

A class of investments that includes venture capital, leveraged buyouts, hedge funds, real estate, and oil and gas, but excludes publicly traded securities. Pension plans, college endowments, and other relatively large institutional investors typically allocate a certain percentage of their investments to alternative assets with the objective of diversifying their portfolios.

Angel Groups

Organizations, associations, clubs, and networking groups of angel investors formed for the purpose of studying, facilitating and executing angel investments in start-up and early-stage businesses.

Angel Investors

Typically, an angel is a high net worth individual and often an angel investor is called a smart-money investor because frequently an angel will also be an accomplished entrepreneur and/or business executive with a wealth of valuable experience and contacts.  Angel investors provide to startup and early-stage businesses some of the early-stage funding (and, in appropriate cases, other “value” that comes with the angel investor’s business experience).

Angel investments usually would precede any investments by early-stage venture capital funds. Angel investment typically does not take place until after a company has already raised as much money as practicable from among themselves, their friends and family, the directors and officers (and, in appropriate cases) employees or other individuals known by the founders, directors or officers. Angel investment rounds are much more formal than the founders’ round and any friends and family rounds completed by the corporation before the angel round.  Angel investors do not require a business to be well-established before angels will invest in it.  Angel investors desire to invest before a company has reached its potential.  It is important for an angel investor to correctly judge the qualifications of the company’s management team and examine the fundamental aspects of the company’s business plan.  Angel groups provide companies early stage capital, usually in amounts of less than $1 million.

A funding or financing round, following the “A” round, in which Series B preferred stock is issued and sold to existing and/or new investors. This can be effectuated through a private offering or a public offering. Subsequent preferred stock funding rounds are referred to as “C,” “D,” and so on.
Balloon Payment
A relatively large principal payment due at a specific time as required by a lender.
Basis Points
One one-hundredth (1/100) of one percent. For example, if one percent (1%) were expressed in “basis points,” it would be called “100 basis points.” 50 basis points equals one-half of one percent. Interest rates on loans are often quoted in terms of an index plus a margin, and the margin is often described in basis points, such as LIBOR or Prime plus 400 basis points. In the world of corporate finance, basis points are also used in other contexts, such as with regard to a change in dividend rates or in other comparisons between two similar percentages.
In various contracts, including the typical contracts used in mergers and acquisitions, the provision for one party to indemnify the other from losses contains a limitation called the “basket.” The basket is a specific limitation on indemnity claims permitted to be made by one party against the other party as provided expressly under an agreement (typically an investment or purchase agreement). An agreement contains an indemnification provision if the agreement provides that one party may bring indemnity claims against the other. An indemnification provision contains a “basket” if one party can make a claim against the other only if the aggregate amount of all claims exceeds a specified dollar amount. The specified dollar amount is the “basket.” A “deductible” basket means that the specified dollar amount is entirely exempt from indemnity claims, and deductibility refer to the fact that only the excess over that amount is subject to being made as an indemnification claim. In a deductible basket, all claims up to the amount of the basket are ignored because they are never a basis to bring an indemnification claim. The opposite kind of basket is a “threshold” (or “dollar-one”) basket, which means that once the specified dollar amount of the basket is exceeded, the indemnified person can recover the full amount of all claims (from the first dollar, including the amount of the basket).https://yocca.com/wp-admin/post.php?post=124&action=edit#
Beneficial Ownership
Refers to equitable rather than record ownership of securities. For purposes of Sections 13(d) and 13(g) of the U.S. Securities Exchange Act of 1934, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, relationship, or otherwise, has or shares (1) voting power, which includes the power to vote or to direct the voting of, such security; or (2) investment power, which includes the power to dispose of, or direct the disposition of, such security. The term is commonly used in investment and other transaction documents to encompass most kinds of direct and indirect ownership of securities.
Best Efforts Offering
A commitment by a syndicate of investment banks to use best efforts to ensure the sale to investors of a company’s offering of securities. In a best efforts offering, the syndicate avoids any firm commitment for a specific number of shares or bonds. Underwritten public offerings are either firm-commitment offerings or best-efforts offerings. In a firm-commitment underwriting, the underwriter commits itself to purchase the entire offering and assume the risk that it cannot resell all of it. Private offerings that use a placement agent are conducted by the agent on a best efforts basis only, and placement agents act like an agent for the company. Unlike an underwriter, they do not acquire and resell the securities.
Beta Product
A product that is being tested by potential customers (also called Beta trial customers) prior to being formally marketed, sold and launched into the marketplace on a full-scale basis.
Blank Check Preferred Stock
Preferred stock that has been authorized in the charter of a corporation and is unissued, if the Board of Directors can designate its terms, rights, privileges, preferences, and limitations. Before the preferred stock can be issued or sold to investors, the terms, rights and privileges of the preferred stock must be designated. Thus, shares of an authorized blank check preferred stock (if and to the extent authorized by the corporation’s charter) may be designated, issued, and sold pursuant to board of directors’ action with no requirement or need for further stockholder vote or approval. See also Certificate of Designation.
Blocking Rights
These often take to form of special voting rights, where the holder of a security with blocking rights can, in relevant circumstances, refuse to approve a particular action proposed by the company that issued the securities and, by withholding approval, thereby prevent the company from taking that particular action. See Veto Rights.
Blue Sky Laws
Laws of individual states in the United States that address (and, to some extent, regulate) the offer, issuance and sale of securities, and persons (brokers, dealers, advisors and finders) who act to facilitate the offer, issuance and sale of securities. These laws are generally intended to protect the investing public against fraud in connection with the sale of securities.
Board Observer Rights
A contractually provided right for an investor (or its designee) to attend all regular and special meetings of the board of directors (and often meetings of board committees). This also typically includes the right to receive information and notices that are provided to board (and committee) members. Importantly, a board observer does not have the right to vote as a board member and generally does not owe the company (as a board member) fiduciary duties or (absent a confidentiality agreement) confidentiality obligations.
Boat Anchor
A colloquial term for the person, project or activity that hinders the growth of a company.
Book Runner
The lead investment bank that manages the transaction process for an equity or debt financing, including managing the preparation of documentation, the broker-dealer syndicate, the pricing, the allocations among dealers and the closing.
Book Value
The net value of an asset as shown on a company’s balance sheet. When all accounting records were recorded in books, the “book value” was the value at which an asset was recorded on the accounting books, after any appropriate reductions such as, in appropriate cases, depreciation or the like. When discussing an asset’s book value, this typically is based on the asset’s original cost less accumulated depreciation. When we discuss the book value per share of the common stock of a company, we are referring to the net book value of all the assets of the company divided by the number of shares. For example, the tangible book value of the common stock is defined as total assets minus liabilities minus preferred stock minus intangible assets; and therefore the tangible book value per share is the net total amount described in the previous sentence divided by the number of shares of common stock.
C Corporation
Under U.S. income tax law, this term refers to a corporation that would be taxed in accordance with Subchapter C of the Internal Revenue Code, which applies to any corporation that has not properly elected to be an S corporation (taxed pursuant to Subchapter S of the Internal Revenue Code) as of the relevant taxable year.
Call Date
When a bond issuer exercises the right to retire the bonds (redeeming them before maturity at a specific price), this term refers to the date upon which the bonds may be called by the bond issuer for retirement.

The bond issuer makes a payment for the bonds to the holder who tendered or surrendered bonds. The redemption price usually includes the total of the principal amount of the bonds, accrued but unpaid interest, plus a call premium expressed in terms of a percentage and basis points of the original principal amount of the bond.

Call Option
The right for a specified time period to buy a security usually at a specified price. See also Option.
Call Premium
The premium amount measured in terms of percentage in excess of the par value of the bond that a bond issuer must pay in order to call bond issue for redemption prior to maturity.
A bond issuer’s ability to exercise a right to retire the bonds (redeeming them at a specific price).

When an issuer calls a bond, the call price always includes the total of the principal amount of the bonds, the accrued but unpaid interest, plus a call premium. Usually a call price is expressed in terms of the original principal amount of the bond being retired, all accrued interest being repaid concurrently, such as callable at 105, which means $1,000 in original principal amount can be called for $1,050 plus accrued and unpaid interest.

Capital Commitment
The total or maximum amount of capital funding committed to a limited liability company, limited partnership or any venture capital or private equity fund, by its members or limited partners.

A fund provides for capital commitments in lieu of payment of all of the investor’s capital commitment in cash immediately. The capital calls are made at times chosen by the fund manager so that funds are available when needed for making investments in portfolio companies.

Capital Gains
Earnings that constitute taxable income for purposes of the United States Internal Revenue Code, as amended, incident to a sale or exchange of property where the property is classified as a capital asset (ie., either held for investment or used in a trade or business, and excluding assets sold by a dealer of that kind of asset from its inventory). Earnings or losses for income tax purposes are measured in terms of the difference between the seller’s net proceeds and the seller’s tax basis in the property.

Usually, an investor prefers to defer capital gains taxes as long as possible so that the untaxed value of the asset can grow and compound. Legitimate capital gains deferral is the primary purpose of every Tax-Free Corporate Reorganization and every Section 1031 Exchange. But ultimately, many transactions of that kind are taxable, and in that case if the capital asset was held for one year or more then the investment earnings would be further classifiable as long-term capital gains. A capital asset held for one year or longer, when sold, results in the earnings that are recognized being taxed at a lower rate than the tax rates on ordinary income.

Capital Stock
The units of ownership in a corporation as authorized in the corporation’s charter, called by names such as common stock and preferred stock and usually evidenced by stock certificates all called in a generalizing manner the capital stock.

See also Equity Securities.

Capitalization Rate
The “cap rate” is the ratio of a real estate property’s net operating income to its current market value. Capitalization rates can vary from year to year as the level of income generated by the property fluctuates.
Capitalization Table
A table showing the capitalization of a company, which typically includes all classes of securities issued by the company similar to the presentation in the capital section of the company’s balance sheet.

The Cap Table lists all the form of securities (whether equity or debt). It is necessary that all securities are included on this list, such as common stock, preferred stock, options, warrants, senior debt, mezzanine debt and subordinated debt.

When a maximum limit is placed it is called capping an amount and the limit itself is often called a cap.

The effect of capping is to limit, but not below zero, an amount by mutual agreement. Negotiating, setting, performing under and exceeding a cap each has a different meaning in different contexts. One of the “capped” amounts in a definitive acquisition agreement can be a cap on indemnity, in which case then there is no obligation for indemnity beyond an amount that equals or is defined by the cap. If there is not a cap on a specified thing, then there is possibly too much for one party or the other or both. An unlimited amount of obligation or liability is never ideal. A indemnity liability cap is commonly called just a “cap”.

Capped-Participating Preferred Stock
A kind of participating preferred stock.

In a liquidation or a transaction treated as one, a series of preferred stock can participate in the value of the common equity on a parity with the outstanding common stock by receiving distributions pro rata alongside holders of common stock, which is called participating in a distribution on an as-if-converted basis. If an unlimited amount can be distributed in this way, there is no limit or cap set by the original terms of the participating preferred stock. A capped-participating preferred stock is the product of a conscious design and a mutual agreement on the amount that the participating preferred stock can receive because that amount of participation is limited. If an investor cannot on a liquidation or a sale of the company receive as a holder of the capped-participating preferred stock, a participation amount per share greater than a specified limit, it can consider whether it is beneficial to exercise a right, if any, to convert the preferred stock into common stock. The unlimited participation of common stock can be more or less valuable than the preferred stock’s liquidation preference and its limit of participation. If not limited or capped, a participating preferred stock could be entitled in a liquidation to a pro rata distribution along with common stockholders of the net value of the company that remains after all the company’s debts, obligations, and liabilities are satisfied and after all the preferred shares receive their preferences. See Participating Preferred Stock.

Carried Interest
Regarding a venture capital (or private equity) fund organized as a limited partnership, the carried interest would be the general partner’s share of the capital gains generated through the fund’s performance (via liquidity events with respect to portfolio investments). Carried interest does not refer to the management fee charged by the venture capital or private equity general partner.

Typically, a fund must return the capital invested in it by limited partners (plus any agreed hurdle rate or preferred rate of return) before the general partner can share in the gains of the fund. The general partner will then receive its agreed carried interest (also known as its “carry”), which is the agreed share or split (with the limited partners) of the remaining gains. The carried interest is the general partner’s principal financial incentive to perform well and generate strong fund returns.

Deal Flow
A term meaning the rate at which deals are initiated and successfully concluded. The term as used by venture capital funds usually expresses the volume during a period of time of the companies offering the fund potential investments. The fund may track the number of potential investments being actively investigated by the fund advisors or the number that are in due diligence concerning a potential investment by the fund.
An instrument that evidences the issuer’s borrowing from the lender to whom the company issues a debenture. A sort of promissory note issued under a trust indenture to multiple investors whose debentures are entitled to be treated equally and on parity with all of the other debentures sold pursuant to the trust indenture. There is also a provision in a trust indenture that provides for a trustee whose duty it is to act on behalf of the debenture holders in the event of a non-payment or other default under the debentures. The holder of a debenture is entitled to receive a series of future payments from the company that issued the debenture. The debentures would contain applicable provisions if a debenture is convertible into common stock, subordinated in relation to some or all other past or future indebtedness of the issuing company, or senior to any such other indebtedness, Debentures usually have a repayment term at least 10 years. Debentures are usually issued by companies whose growth prospects are good and whose good cash flow also lessens the risk of a default. The company provides a conversion right as a means of raising more money from debt investors and possibly marginally improving from the debtor’s perspective the other terms of the debt. The addition of a conversion right draws or is intended to draw interest from investors who foremost seek a fixed-income interest payment, called the “coupon”, and also wish to pair that income with a potential equity upside, possible because any amount of debenture principal (and sometimes interest) can be converted into common stock at the holder’s sole choice. See also Note.
Debt Coverage
A measurement of a borrowing company’s ability to pay debt. An excess of income, EBITDA or a similar measure as compared with the borrowing company’s debt service expense during the same period. Debt coverage indicates a positive excess of income, indicative of the borrowing company having the ability to repay the debt. Also called the Debt Service Ratio or the Debt Service Coverage Ratio.
Debt Coverage Ratio
A measurement of a company’s ability to pay debt. The ratio of a borrowing company’s income, EBITDA or a similar measure to the borrowing company’s expense for debt service during the same period (i.e., the amount of principal and interest paid to keep the loan current). A ratio that is high, like 10:1, indicates an excellent ability to repay the debt. Also called the Debt Service Ratio or the Debt Service Coverage Ratio.
Debt Security
A security evidencing a loan by the purchaser of the debt security and a debt obligation of the company issuing the debt security, and examples of debt securities would include notes and debentures. The principle features of a debt security are, as with a commercial loan transaction, the term of the instrument (loan), the maturity date, the payment schedule, the original principal amount, the interest rate, the covenants and default provisions, and a debt security also sometimes provides conversion rights. The issuer issues and sells debt securities to a purchaser pursuant to a securities purchase agreement, and debt securities are usually marketed privately to investors.
Debt Service
The category of costs and expenses that includes payments made on any indebtedness. The principal amount plus interest and other charges paid or payable by the borrower during a specified period of time under the terms of any indebtedness.
Debt Service Ratio
The ratio comparing the borrower’s income (or any other chosen measure of ability to pay) with loan payment obligations (“debt service”). Typically lenders insist that a company maintain a certain debt service coverage ratio, also called debt coverage ratio. The credit agreement may impose penalties for failure to meet the minimum ratio. The higher the debt service ratio, in general the ability of the business to pay the debt service costs and expenses is greater. A ratio that is high, like 10:1, indicates an excellent ability to repay the debt. Also called the Debt Coverage Ratio or the Debt Service Coverage Ratio.
Deemed Liquidation Event
Among the most important terms of any series of shares of preferred stock is the liquidation provision because it describes what the preferred stock will receive in the event of a liquidation or dissolution of the issuing company. A “deemed liquidation event” is a merger, consolidation, sale of control (or of substantially all the corporation’s assets), or other event that the preferred stock’s terms treats like a liquidation in terms of the payment of the liquidation preference to the holders of the shares of that series. If treated as a liquidation, the investor has the right to receive in cash everything that the holder would have received if the transaction were a liquidation. If the liquidation provisions were not triggered, the holder of those shares would merely continue to hold shares in the surviving corporation or the issuing corporation itself, and an opportunity to exit from the investment would not occur. Although these matters are subject to negotiation, treating a sale of the company as a liquidation is fairly standard; however, in some cases the holders of a majority can waive the “deemed liquidation events”. See Liquidation Preferences and Participating Preferred Stock.
Definitive Agreement
The final and legally binding and enforceable signed written agreement. The term sheet or letter of intent would contain most of the principal terms of the contemplated transaction, but the term sheet or letter of intent would be non-binding. The parties contemplate that they will negotiate the terms of a definitive agreement before the parties enter into the transaction. Although binding, the definitive agreement conditions the parties’ respective obligations to consummate the transaction on the satisfaction or waiver of certain specified conditions.
Demand Rights
The right of an investor to demand that the corporation file a registration statement under the U.S. Securities Act of 1933 for a registration for resale of his, her or its shares of the corporation’s common stock. The SEC amended Rule 144 by shortening the holding period for non-affiliates, and non-affiliates are eligible to freely sell shares as long as the non-affiliate investor held the shares one (1) year or more after paying for the shares. The escalating cost of being a public company has reduced the corporation’s incentive to become a public company; and naturally it reduces the corporation’s willingness to provide any meaningful Registration Rights.
A reduction in the percentage ownership, or in the value of equity ownership, of a given stockholder caused by the issuance of additional equity securities or rights to acquire, convert into or exchange for equity securities.
Dilution Protection
The protection that an investor seeks in order to be able to continually own the same percentage of the company that such investor owned at the time of making its investment. While all stockholders are generally subject to dilution when a company issues additional shares, a stockholder with dilution protection would be entitled to be immune from such dilution, resulting in the additional dilution affecting only the other stockholders, and therefore disproportionately affecting the other stockholders. See Anti-Dilution Protection.
The individuals who are members of a boards of directors of corporations.
Disclosure Schedule
A schedule that is attached to a definitive agreement that describes exceptions to the representation and warranties being made by one of the parties. In a typical investment or acquisition agreement, the investor or acquiror permits the issuing company or target company to disclose information, including exceptions to the representations and warranties, in the disclosure schedule. Sometimes this is instead called a schedule of exceptions. It is the issuer’s or the acquired company’s obligation to prepare appropriate, complete, and responsive disclosure schedules. This scheduling process is part of the investor’s due diligence investigation. The disclosure schedule will form part of the definitive agreement and usually exculpates the issuing company or acquired company from liability or obligation on account of the disclosed item.
Discount Rate
The annual percentage rate used to discount future cash flows and thereby determine the present value of a series of future cash flows. With a 10% discount rate, for example, $100 received today plus an additional $100 that will be received in one year has a discounted, present value of $190.
The stage of development of a company after the formation and the seed stage and before it has customers and is generating revenues. Once a company achieves some established customers, positive cash flows, or profits, the early-stage label no longer applies. An early-stage company is judged according to whether it has in place a core (but not complete) management team, a developed business plan and proven concept or product (perhaps with initial customers and beginning to make sales). Some companies remain early-stage companies for a number of years, and some companies are never early-stage companies.
An arrangement (usually included in a definitive acquisition agreement) under which the seller(s) of a business is(are) entitled to receive addition future payments (of the nature of purchase price consideration) if certain financial performance metrics are achieved at (or as of periods ending at) specified post-closing dates (typical metrics include revenues, net income or EBIT).
A cash-flow based measurement of the operating profitability of a company. This is an acronym for a company’s earnings before interest and taxes. This measure is often used by sophisticated investors as a basis for valuing the company and their investment. One often utilized valuation methodology is based on a comparison of (reasonably comparable) private and public companies’ values as a multiple of EBIT.
A cash-flow based measurement of the operating profitability of a company. This is an acronym for a company’s earnings before interest, taxes, depreciation, and amortization. This measure is often used by sophisticated investors as a basis for valuing the company and their investment. One often utilized valuation methodology is based on a comparison of (reasonably comparable) private and public companies’ values as a multiple of EBITDA.
Elevator Pitch
A very concise, rehearsed but natural-sounding oral presentation, lasting fifteen to thirty seconds (i.e., the duration of an elevator ride in a low-rise building, which is twice the normal attention span of most adults). An elevator pitch is made by an entrepreneur to a potential investor. The subject is the business venture and the compelling nature of the investment opportunity, and the elevator pitch is presented in a way that captures the interest of the listener and conveys an immediate understanding on a general level.
Enterprise Value
An amount equal to the sum of the market values of the common stock and long term debt of a company, minus that company’s excess cash. The enterprise value is sometimes used in investment banking contracts as the basis for success-based earnings.
An individual who starts and fosters a business, usually at inception a business of his or her own and often later becoming a corporation that is owned in part by outside investors.
A combination of common sense, creativity, innovation, know how, and hard work being utilized so as to start and foster a business that ultimately creates exceptional value. The entrepreneur through any means possible endeavors to make a business out of an Idea or a concept . Of necessity, entrepreneurship usually involves bootstrapping.
Equity Securities
Securities evidencing the equity ownership a company or business entity. In a corporation, equity securities include any kind of capital stock, including common stock and preferred stock, and also the options, warrants, and rights (including conversion and exchange rights), if any, to acquire any shares of capital stock. Together, the equity securities represent the equity capital of the company.
In the US, “esquire” is mostly used as a title for attorneys. This term originates from the United Kingdom as an informal title for acknowledging educated people, such as not only legal professionals (solicitors and barristers) but also doctors of science and philosophy and those that have successfully completed a doctorate-level course of study. In a typical legal letter, an Esq.” or two usually helps differentiate the attorneys from non-attorneys.
Event of Default
An event, act, or occurrence that constitutes a default by one party to a definitive agreement and allows the other party to that definitive agreement to exercise specific default remedies under that agreement, such as accelerating the maturity date of an indebtedness or permitting a party to sue for specified damages and/or terminate an agreement.
Exchange Act
This refers to the Securities Exchange Act of 1934, as amended, which regulates the securities markets.
Exclusive Negotiations
See No-Shop.
Exercise Price
The price specified by an option or warrant as the price at which the option or warrant can be exercised. An option or warrant to purchase shares of common stock would state the price at which shares of common stock can be purchased if the option or warrant is exercised. The exercise price is synonymous with the purchase price of the underlying shares or other securities covered by the option or warrant.
Exit Plan
The goal of a founder or investor to terminate his, her or its relationship with the company and to monetize fully his, her, or its investment in the company. The exit may be a merger or a sale to another company. For a majority stockholder of a closely-held business entity, exits sometimes takes the form of a recapitalization (e.g., a transaction that leverages the balance sheet and pays dividends to and/or purchases securities from the majority stockholder). Reaching one’s first successful exit is a significant milestone in entrepreneur’s career.
Fair Value
An accounting and financial principle that refers to the value that assets and liabilities would have in a free market where both the buyer and the seller are free to participate in or decline the transaction. An assessment of the market price or market value of an asset or liability is made. The “fair value” measurement standard is provided by the Financial Accounting Standards Board (FASB) Standard 167 (FAS 167) and GAAP.
Fairness Opinion
A professional evaluation, assessment and opinion provided for an agreed fee by an investment bank, financial advisor or valuation firm as to the fairness from a financial point of view of a transaction, usually a merger, acquisition or sale of a company. An opinion rendered for the seller of a company would relates to whether the consideration to be received by the seller or its stockholders is fair to them from a financial point of view. A fairness opinion is frequently obtained in a merger, acquisition, disposition, stock buyback, spin-off or other transaction that is material to the company, is one in which any insiders would receive a financial benefit or is one as to which the board’s decision would be held to a heightened judicial standard of review rather than the mere business judgment rule standard.
Financial Covenant
A covenant of a party that relates to that party’s ongoing obligations to maintain or to reach specific financial metrics, which may include various balance-sheet metrics, cash-flow metrics, earnings metrics or other metrics that are measurable and quantifiable.
Financial Statement
Financial statements are the accounting statements that formally report the financial position, results, cashflows or equity of the company and, if they exist, are prepared by a company’s accountants and would be frequently referenced by its management for purposes of decision making.
The persons or firms who, by merely identifying and introducing one or more potential investors to a fund-seeking company, sometimes help to arrange an investment transaction for some compensation. However, the term finder is to be distinguished from the term unlicensed broker, which is any person doing any actual selling, promoting, negotiating, messaging or intervening at all. If one or more of these are done by a person who considered themselves a finder for compensation, the person is required to have a securities broker or dealer license in many circumstances.
FINRA is an acronym for the title Financial Industry Regulatory Authority, a self-regulatory organization (SRO) of the securities industry. All firms who conduct securities transactions must be registered “members” of FINRA. Both the SEC and FINRA (as well as a few other SROs) regulate the securities industry. FINRA writes rules for the securities industry, enforces securities regulations and laws within the securities industry, registers securities professionals, trains securities professionals, oversees member firm compliance, and oversees dispute resolution between members, representatives and customers, among other things.
Firm Commitment
A commitment by a syndicate of investment banks acting as underwriters to purchase all the shares available for sale in a public offering of a company. The shares will then be resold to investors by the syndicate.
First Offer Rights
See Right of First offer.
First Priority
The highest ranking secured indebtedness of a company, having priority in date of perfection of a valid security interest.
First Refusal Rights
See Right of First Refusal.
Fiscal Year
The annual accounting cycle. Many companies use the calendar year as their fiscal year. Other companies choose a different beginning and ending date as their fiscal year.
The act of purchasing something and then immediately or quickly selling it. Used frequently in reference to residential real estate speculators who buy, fix and resell single-family residences. Used frequently in reference to IPO’s if investors purchase shares in the IPO because they want to sell into a spike in price on the first day of trading. To capitalize on this opportunity, the investor would buy and then almost immediately turn around and sell shares into the public market. An IPO investor who sells shares within 30 days after the shares first trade is considered a “flipper” by securities broker-dealers. Often the managing underwriters in an IPO require management and other significant stockholders to sign lock-up agreements. Pursuant to a lock-up agreement, the company’s directors, officers and 1 to 2% or more stockholders agree not to sell shares concurrent with or immediately following an IPO. Under a lock-up agreement, the stockholders party thereto must refrain from selling their shares for a stated period of time following the IPO (usually, six to nine months).
Follow-On Round
A company’s additional securities financing round(s) following its initial round of investor financing. These follow-on rounds can be funded by existing investors.
Forced Buyback
See Mandatory Redemption.
Founder Vesting
A requirement sometimes imposed by investors upon the founders of a company. In early stage ventures with a favorable valuation, one of the keys to justifying the valuation is a promise that the founders will continue to work for the company full-time. If vesting is imposed by an angel or a venture capital investor, a portion of the ownership position of that founder is retroactively made “unvested” and will only “vest” (in effect, regain their status of being fully-earned and nonforfeitable) in stages during continued employment with the company. Investors insist on these restrictions so that the founder continues to be strongly motivated by his or her large economic interest in the company. Such unvesting of previously vested shares requires the agreement of the affected founder. Placing vesting on the shares means placing restrictions and penalties, including potential forfeiture of those shares, and each time a portion of the shares vest, the restrictions and penalties lapse as to that portion of the shares. Over a period of time, all of the shares will have vested, assuming that the founder continues to work for the company or satisfy other commitments made in his agreement to the founder vesting. Founder vesting is designed to discourage founders from leaving the company. If the founder is employed by the company, the founder vesting may also serve a purpose of retaining the employee. Investors may want the founder to agree to make his or her shares unvested because they want to delay the founder from disposing of the shares. Sophisticated investors also try to ensure that founders do not receive a windfall from their founders’ shares prematurely (before the investors have an opportunity to exit). If the investors so require, founders frequently will agree to some form of founder vesting. Founders do not usually agree to make all of their founder shares subject to founder vesting and often limit the founder vesting period to three or fewer years.
Intermediaries (such as attorneys, accountants, bankers, headhunters, and consultants) who venture capitalists look to as sounding boards and advisors in sourcing and gaining introductions to potential portfolio company investments.
General Partner
With respect to a venture capital fund organized as a limited partnership, the partner designated and responsible for all aspects of managing the fund, including communicating with limited partners, raising capital for the fund, screening and making portfolio investments, nurturing and overseeing portfolio companies, and assisting with effecting exits and liquidity. The general partner, which is typically organized as an LLC, earns a management fee a percentage of the fund’s profits (known as the carry or carried interest). See also Limited Partners.
Going Private
A transaction by a public company that chooses to refinance, repurchase the equity of all public investors, delist from all stock exchanges, and become owned by a combination of the company’s management, its employees, and private investors.
Golden Handcuffs
A financial incentive or award that, by its terms, encourages either founders, managers, officers, key employees or others to continue to serve the company until specified “vesting” dates or the achievement of agreed milestones. The name stems from the way golden handcuffs operate and their effect. They generally operate by imposing adverse economic consequences upon an individual’s voluntary termination of service. A person who is bound by golden handcuffs is free to quit, but he or she will lose a significant reward that could only be received if the person performs further services or achieves further goals.
Growth Stage
The middle stage or state of development of a company when it has already received one or more rounds of funding, has Initial customers and is beginning to generate revenue (at an increasing rate) from its proven product or service offerings. Follows the early stage, and precedes the expansion stage.
Hedge Fund
An investment fund that is offered and sold to investors by a private offering of a company that is not a registered investment company. The hedge fund has recently become subject to some reporting regulations but remains relatively free of reporting regulations. Contractually, the hedge fund usually has some ability to use or create leverage, take long or short positions in securities or other assets, or use a variety of derivative instruments in pursuit of a strategy or goal. Investors frequently invest in a hedge fund in order to achieve an absolute rate of return that is uncorrelated to the typical indices of the equity markets or debt markets. Hedge fund managers are typically compensated based on assets under management as well as fund performance.
Hell or High Water
A phrase used to describe a definitive agreement having few, if any, conditions to closing. Once the hell-or high-water definitive agreement is signed, there are very few “outs” and thus (as a general proposition) the parties must proceed to closing.
Hockey Stick Projections
The upward-slanting shape of a graph or chart, as if the blade of the hockey stick is on the ground in the left side of the picture, with the handle slanting upwardly toward the right side, as in a line graph showing successive, continuous increases period over period. Whether those increases are in revenues or any other financial or operational measure. However, most hockey stick projections, but not all, deal with revenues being projected by a company. The hockey stick increases dramatically and accordingly has good and bad connotations. A few entrepreneurs have been known to include hockey stick chart projections in their investor presentations. The hockey stick projections may seem or be suspicious and may or may not be credible. The investors in most of these offerings are accredited investors who are expected to think twice about hockey stick projections and look more deeply. If an investor does his due diligence, the investor will understand how the company makes money. In addition, the investor will see how much money the company is making and, more significantly, how much he thinks it would make at any given time and any given conditions. Hockey stick projections have a third connotation, which is that everything reverts to norm, and what increases like a hockey stick can decline like a hockey stick.
Holding Securities
These are three general ways for a holder to hold any given securities, including but not limited to any given shares of stock: physical certificate, street name registration, or direct registration.

(1.) Physical Certificate – The security is registered in your name on the issuer’s books, and you receive an actual, hard copy stock or bond certificate representing your ownership of the security.

(2.) Street Name Registration – The security is registered in the name of your brokerage firm on the issuer’s books, and your brokerage firm holds the security for you in ‘book-entry’ form. ‘Book-entry’ simply means that you do not receive a certificate. Instead, your broker keeps a record in its books that you own that particular security.

(3.) Direct Registration – The security is registered in your name on the issuer’s books, and either the company or its transfer agent holds the security for you in book-entry form. The ‘Direct Registration System’ (also known as ‘DRS’) allows investors to transfer securities held this way.

Hurdle Rate
The minimum preferred rate of return to limited partners in a venture capital fund (organized as a limited partnership) to be achieved (after the return of limited partner invested capital) before the general partner’s (or fund manager’s) carried interest kicks in. A hurdle rate of 1096 means that the venture capital fund must achieve a return of at least 10% per annum on invested assets (for its limited partners) before the remaining profits or gains are shared (with the general partner) according to the carried interest arrangement. Also sometimes referred to as the preferred return.
Incentive Stock Options
Stock options that are entitled to favorable tax treatment for the holder under the Internal Revenue Code (e.g., the holder may avoid the obligation to pay taxes at the time of exercising the option and thereby deferring tax until the disposition of the stock, and along with this achieving long-term capital gains treatment instead of ordinary income treatment on the intrinsic value of the option). ISOs are also subject to certain limitations and restrictions. If the ISOs qualify for the favorable tax treatment for the option holding employee, they are also less favorable to the company. The stock option with better tax treatment for the company is called “nonqualified” and when the option holder exercises the nonqualified option, the company can take an income tax deduction as a compensation expense equal to the intrinsic value of the option. Almost all emerging companies choose to issue ISOs and nonqualified options in appropriate cases. See also Non-Qualified Stock Options.
The process which results in a business or venture becoming a corporation, via filing a charter with the state of incorporation’s secretary or department of state. Many businesses choose Delaware as the state in which to incorporate and be domiciled.
An organization or facility designed to host, nurture, and assist start-up companies (including business concepts and new technologies) to the point that they become attractive to professional management, angel investors, and even venture capital funds. An incubator typically provides both physical space and many (shared) back-office/administrative services, as well as access to basic legal, accounting, technical and other support services. Incubators typically charge both a fee and a percentage of the equity (or equity upside) for these services.
Provisions in a definitive agreement (and sometimes in a separate agreement) providing one party with post-closing remedial rights (i.e., cash compensation for damages) against the other party with respect to breaches by the other party of its representations and warranties or covenants (that survive the dosing), as well as the right to recover legal and other fees and expenses Incident to pursuing such remedial rights. Indemnities are typically negotiated, and often are subject to a basket, a cap, and other limitations and exclusions.
Independent Directors
A member of a board of directors who has no material financial ties or affiliations with either the company, company insiders (i.e., founders or management) or outside investors that effectively control the company. SEC rules and stock exchange rules (if applicable), investor rights agreements, voting agreements, and charter provisions may require the election of one or more independent directors (typically designated by the investor(s) and reasonably acceptable to the founders and other common stockholders). For public companies, SEC and stock exchange rules provide rather elaborate, detailed definitions and requirements regarding the number and qualifications of independent directors.
Initial Public Offering
A corporation’s first offer and sale of stock to the public effected pursuant to a registration statement (and prospectus) filed with and declared effective by the SEC under the Securities Act. Typically, the IPO is underwritten by an investment banking firm (underwrite), with the shares listed or quoted on a national securities exchange (such as the New York Stock Exchange) or stock quotation system (such as the NASDAQ Stock Market). An IPO can provide a very fortunate and deserving company a substantial amount of new investment capital, liquidity for existing stockholders and improved access to the public capital markets.
Inside Round
A round of funding in which the investors have all previously invested (usually in the immediately preceding round) in the company. Inside rounds can give rise to valuation and conflict issues (and attendant potential liabilities).
Institutional Investor
Large, asset-rich, professionally managed organizations that (as a core business model) invest capital-on behalf of others–in a variety of investments and asset classes and on a continuous basis. Examples include insurance companies, pension funds, and university and other major endowments. Institution Investors, together with very high net worth individuals, comprise the vast majority of the investors (and limited partners) in venture capital funds.
Intellectual Property - IP
Intangible (non-physical), but often very valuable, assets of the business, such as inventions, knowledge, know-how, “brand”, techniques, and unique writings and images, often protected by the law of patents, copyrights, and trademarks. The protection of intellectual property can be vital to a company’s fundraising and growth prospects. Startups with intellectual property that provides a distinct competitive advantage and a long-term protectible position in a large (potential) market are very attractive to institutional investors and venture capital investors.
Internal Controls
The processes and procedures that control the conduct of persons engaged in financial transactions on behalf of the company.
Internal Rate of Return
The interest rate (expressed as a return on capital invested) at which a specific amount of capital invested today would have to grow in order to reach a specific value at a specific time in the future. This is the standard, accepted benchmark venture capital funds (and their limited partners) utilize to measure and compare their performance.
Investor Rights Agreement
One of the principal definitive agreements (between the company and the investors/purchasers) in a venture capital investment transaction, typically providing for registration rights, covenants regarding rights to financial and other information, board observer rights (if any), other affirmative and negative covenants, and rights of first refusal an new issuances of securities by the company.
Acronym for the Initial Public Offerings, which often involve a company’s common stock being registered with the SEC under the 1933 Act. See Initial Public Offering.
Acronym for Incentive Stock Options. See Incentive Stock Options.
The name stems from the fact that a company that raises capital “issues” either debt instruments or securities, or a hybrid of the two. A business entity “issues” something in the context of selling debt instruments, like bonds, debentures, promissory notes, or equity securities and/or debt securities as a means of raising capital. In a typical investment transaction, the issuer is the company that receives the subject financing and issues the security or other instrument.
Jobs Act
This refers to the Jumpstart Our Business Startups (“JOBS”) Act. The act contains five distinct sections, reflecting that the act was a combination of multiple distinctly different bills from various sponsors in the houses of Congress. The apparent aim of the act is to help to encourage funding of United States small businesses. The connection between this law and small business funding and formation is that it accomplishes its goals by reducing teh burden on small business capital raising that is posed by the securities laws in existence before. Growth capital leads to greater job creation, whereas SEC rules and regulations stand between growth capital and the small businesses that need it. Having the acronym JOBS, this act obviously was named purposefully to draw attention to the connection between capital and small businesses and jobs growth. AngelList co-founder Naval Ravikant spent six months lobbying for particular of the JOBS Act reforms, recalled the naming of the bill this way, ‘It ended up being a giant dog’s breakfast of different bills combined together, and then some genius, probably some congressional staffer, said ‘How are we gonna get this thing to pass? Oh– let’s say it has something to do with jobs. Jumpstarting Our Business Startups! JOBS, JOBS!’ And then, what congressperson can vote against something called the JOBS Act? It was a miracle.” The easing particular securities regulations in a healthy way can reduce the cost and energy required for smaller companies to offering and selling securities to raise capital. Permission is given in one part of the act for businesses to use the widest modern means of communication to convey the offers of their securities. The offers will be disseminated publically and generally everywhere with the permitted purpose of reaching out to raise capital from any accredited investors who may also come across the offers. Excessive regulation has had an unfortunate effect of dampening investment activity, and the act is intended to eliminate or substantially modify some of the existing securities rules. The rules eliminated or substantially modified include some rules that were deemed of limited necessity, if any, for the protection of the investors concerned. The act takes effect in stages, and some of the act has taken effect. Portions of the act have a protracted implementation involving delays by the SEC in carrying out its rulemaking authority.
Junior Securities
Securities (e.g., common stock or certain preferred stock) that have a lower preference or priority-in terms of liquidation preference, dividends, conversion and perhaps other rights as compared with other, more senior securities. Usually, but not always, the common stock is the most junior equity security. One or more series of preferred stock may be junior to other series of preferred stock, just as they may be senior or on a parity with other series.
Later-Stage Company
The stage of development when a company has achieved significant and increasing revenues and positive cash flow. Typically, a later stage company has completed its expansion stage and is nearing a liquidity or exit event.
Lawyer or Attorney
As commonly used in the United States, the terms “lawyer” and “attorney are completely interchangeable, but there is a big difference. As formally used in the United States, all attorneys are lawyers, but not all lawyers are attorneys. The attorney holds a professional license to practice but a lawyer may hold no licenses at all. A lawyer is someone who is educated in the law. Attorneys become lawyers when they graduate from law school. If they choose to practice law as a profession, one of the essential steps involved in becoming an attorney is sitting for the bar exam. A lawyer must pass the bar exam to be eligible to practice law within a specific state. State bar associations consider it very important to differentiate their members as licensed attorneys.
Acronym for Leveraged Buyouts. See Leveraged Buyouts.
Lead Investor
The person, institutional investor or venture capital fund that organizes, leads (e.g., in such matters as due diligence, valuation, negotiations, documentation, and closing), and typically invests the most capital in a funding round. In seed, start-up and many early stage investments, securing a lead investor is often the critical distinguishing factor between success and failure.
Letter of Intent
A document, usually in the form of a letter agreement, confirming two (or more) parties’ intentions to pursue and effect an investment (or acquisition) transaction. It summarizes the material intended terms of the deal, and serves as the basis for (and triggers the start of) substantial due diligence and the preparation of draft definitive agreements. By its terms, a letter of intent is (generally) not legally binding, except that it may include certain binding and enforceable provisions, such as those addressing confidentiality, no-shop agreements, and provisions regarding fees and expenses). Sometimes also referred to as a term sheet (and, to a lesser extent, a memorandum of understanding or agreement in principle).
Leverage Ratios
Measurements (expressed as ratios) of a company’s indebtedness as compared to its cash flow or some other similar financial metric. Typical leverage ratios include Total Debt-to-EBITDA (which would measure the leverage as a ratio of debt to cash flow), Senior Debt-to-EDITDA (which would measure the leverage as a ratio of senior debt to cash flow), or Total Debt-to-(EBITDA minus Capital Expenditures) (a measurement of leverage as a ratio of the debt to the cash flow net after capital expenditures. The requirements imposed by key financial covenants in credit facilities and debt securities often include maximum leverage ratios, among many other things.
Capitalized with borrowed money or indebtedness. A company may be seeking capital in order to achieve results faster than if the only available cash were the cash generated by current operations. Credit facilities and debt securities can provide capital without diluting the equity owners percentage interests. Selling shares of the equity to raise capital results in percentage ownership dilution to the previous equity owners. Leverage is used in order to maximize potential equity returns, although this cannot be certain to occur because with leverage also comes the debt itself, which encompasses debt service requirements, covenants and default provisions. The debt is an unconditional right to receive payment from the indebted company and equity owners have least priority in terms of payments from the company. Debt once incurred always needs to be repaid or discharged. If the company cannot repay debt when due, and the assets of the company are insufficient to fully repay in full all the debts, the equity usually has become worthless.
Leveraged Buyout
Acquisition transactions that are highly leveraged with debt financing—hence a “leveraged buy-out”, which has the acronym LBO. The cash flow from the target company provides a source for the repayment of such debt.
An agreement under which a patent owner (the licensor) grants to a company (the licensee) the right to produce, use, market and or sell an invention (product or service) under certain circumstances and for a specified term at agreed compensation.
Limited Liability Company
A legal entity organized under state law through the filing of a charter (typically, called a Certificate of Formation and in California and certain other states called Articles of Organization, coupled with the signing of an LLC Agreement and in California and certain other states called an Operating Agreement). The LLC is owned by its members (or LLC interest holders), and typically is managed by its manager(s) or officers and overseen/directed by its managers. The term “managers” sometimes refers to a board of managers. Limited liability companies sometimes present, but not under all circumstances, certain unique advantages (as compared to choosing to form as corporations) regarding governance, flexibility and, if desired, (flow-through) taxation to owners. A limited liability company is acceptable to some investors some of the time, but is unacceptable to some investors all of the time. See Pass-Through Entity.
Limited Liability Entity
A corporation or a limited liability company are customary business ownership structures that provide limited liability. A business being incorporated or organized as a limited liability entity is a stand-alone legal entity so it offers some protection to its owners, directors, officers, employees and investors from liability resulting from the entity’s actions.
Limited Partner
A passive investor in a limited partnership. With respect to a venture capital fund organized as a limited partnership, high-net-worth individuals and institutional investors that contribute capital to the fund, are not involved in the management of the fund, and enjoy limited liability with respect to actions by the fund. See also General Partner and Limited Partnership.
Limited Partnership
A legal entity organized under state law that elects the tax treatment of a partnership, is composed of a general partner and various limited partners, is the most common organizational form adopted by venture capital funds, and is formed through the filing of a charter (typically called a Certificate of Limited Partnership). The partnership is also evidenced by the signing of a Limited Partnership Agreement. See also , Limited Partner and Pass-Through Entity.
The process of selling off the (remaining) assets of a company, typically followed by (1) the distribution of the sale proceeds, after satisfaction of all debts, priority claims and liabilities, to the company’s equity holders, In accordance with their preferences or priorities and on a pro rata basis, and (2) the dissolution of the company. In the context of preferred stock, certain events or transactions (such as a merger, sale or change of control) may constitute a “deemed liquidation” (thereby entitling the holders to receive the liquidation preference applicable to its shares of preferred stock before any payments are made to common or junior preferred stockholders).
Liquidation Preference
A feature and provision of preferred stock. A liquidation preference is the right of a holder of the securities with the preference to receive, in priority to amounts distributed to other (common and junior) securities holders, a specific amount (called a preference) if the company is liquidated (or deemed to be liquidated) or if its stock is redeemed. The liquidation preference is usually fixed at the original investment amount, plus accrued and unpaid dividends, or may be fixed at a multiple of that amount See Liquidation, Multiple Liquidation Preference, and Participating Preferred Stock.
Management Buyout
A control acquisition if and only if led by the existing senior management team of the target company. It is also referred to as an “MBO” or sometimes a “management-led buyout”. See Buyout.
Management Fee
A fee charged to the limited partners of a (limited partnership) fund by the general partner. The fee, which is typically fixed at a percentage of the limited partners’ capital commitments to or capital invested by the fund, is designed to cover the costs of managing, operating and administering the fund. See also Carried Interest.
Mandatory Conversion
A kind of conversion of convertible securities that takes place without any affirmative action of, and despite any objection or other negative action by, the holder of these convertible securities, which results in the holder receiving some other securities or assets, or both, upon conversion and the holder’s rights in the converted securities, naturally, fully and forever expiring. See Automatic Conversion.
Market Capitalization
The aggregate value of a business based on the dollar value of all issued and outstanding securities. The “market cap” is computed by multiplying the number of outstanding shares by the current (market) price per share.
Its 144-year-plus history began in 1868, when lawyer and businessman James B. Martindale first published The Martindale Directory. Its stated purpose was “to furnish to lawyers, bankers, wholesale merchants, manufacturers, real estate agents, and all others…the address of one reliable law firm, one reliable bank, and one reliable real estate office in every city in the United States…” By 1896, The Martindale Directory included the basic information that still appears in its lawyer and law firm Profiles, as well as ratings and a section on foreign lawyers and firms. In 1930, the Martindale Company purchased the publishing rights to Hubbell’s Legal Directory, which contained a digest of state laws, court calendars and a selective list of lawyers and firms. The following year marked the first edition of the Martindale-Hubbell Law Directory; a two volume set that combined the features of both predecessor publications. Today, Martindale-Hubbell offers solutions for both professional and consumer markets. Its online destinations contain profiles for over one million lawyers and firms in the United States, Canada and 160 other countries, serving as a fundamental legal resource.
Acronym for Management Buyout. See Management Buyout.
Memorandum of Understanding
See Letter of Intent.
Mezzanine Financing
A layer of debt financing that usually has intermediate priority (seniority). For example, mezzanine debt (also called “mez debt”) has lower priority than senior debt; and at the same time, mezzanine debt has higher priority than any subordinated debt. For venture-backed companies, a mezzanine round is generally the round of financing that occurs in later stages and is designed to assist a company in reaching an IPO, sale or other liquidity event. See also Bridge Financing. Mezzanine debt has a higher interest rate (and often includes warrants) than senior debt, compensating for its lower priority position and greater bad debt risk as compared with the senior debt. In the capital structure of a company, all debts, obligations and liabilities of a company are senior to its capital stock.
Milestone-Based Investing
See Staged Investing.
Minority Protections
Rights provided to minority or smaller stockholders affording protection against actions taken (or potentially taken) by majority or controlling stockholders. The rights, if any, may include veto rights, tag-along rights, preemptive rights, and board representation rights. Angel investors and venture capital investors typically acquire securities with these rights.
Acronym for a Memorandum of Understanding. See Letter of Intent.
Narrow-Based Weighted-Average Anti-Dilution Protection
A formula (and related adjustment mechanism) to calculate anti-dilution protection adjustments, which are adjustments to a conversion price that are made in order to compensate the holder for dilution. Anit-dilution adjustments are frequently incorporated in convertible preferred stock. See Anti-Dilution Protections and Weighted-Average.
Acronym for a non-disclosure agreement. See Confidentiality Agreement.
Negative Covenant
See Covenant.
No-Hire Provision
See Non-Solicit.
No-Raid Provision
See Non-Solicit.
A provision in an agreement (or letter of intent) whereby the company (and those controlling its ownership) agrees not to market itself to, or solicit or encourage other investment (or acquisition) proposals from, other potential investors (or buyers) during a specified period by agreeing to a no-shop clause, the company gives the investor (or acquirer) (party to the agreement) an exclusive right during the agreed period to negotiate and enter into a definitive agreement with the company.
A contractual provision in which one party (typically, in the context of VC transactions, a founder, manager, employee or consultant) agrees, for a specified period of time following any termination of employment, not to work for a competitor company, form a new competitor company, or engage in activities competitive with the other party.
Non-Cumulative Dividends
Dividends that are payable to owners of a security (typically,Dividends preferred stock) at a specific point in time only (i) if there is sufficient cash available to pay the dividends after all company expenses are paid and obligations provided for, and (ii) as, if, and when declared by the board of directors. If cash flow is insufficient for any reason, the security owners will not receive dividends with respect to that time period and will have to wait until the board of directors declares dividends in the future.
Non-Disclosure Agreement
See Confidentiality Agreement.
A provision in an agreement (often signed by managers and employees) whereby the parties agree not to interfere with the company’s relationships with employees, customers, suppliers and/or vendors during a specified period of time following any termination of employment.
Non-Qualified Stock Options
Compensatory stock options that are not eligible to be treated as Incentive Stock Options for federal income tax purposes. Non-Qualified Stock Options are the most common and prevalent form of stock options because the alternative, Incentive Stock Options, have a number of requisite features that most of the options that are granted over the life of a business do not or will not satisfy. See also ISOs.
A provision in an agreement prohibiting one party for a specified period from soliciting for employment (or engaging in similar conduct) the employees of the other party. Also referred to as a no-raid provision. The provision can also be expressed as a restriction on employing or hiring such employees (as opposed to soliciting them), in which case it is referred to as a no-hire provision.
Offering Memorandum
See Private Placement Memorandum (PPM).
Option Pool
The number of shares of common stock (or equity interests) that are set aside for issuance upon the exercise of options or other equity-based incentives, to be granted by the board of directors in the future over a period of time (usually up to 10 years) to management and key employees (and perhaps others). The size of the option pool varies (from 10% to 25%), but it averages around 15% of fully diluted shares.
Option Reserve
See Option Pool.
Expression for a start-up company that does not have a VC fund as an investor or stockholder.
Outstanding Shares
The number of shares of capital stock that have been issued and are in the hands of investors/stockholders. This does not include treasury shares (issued shares held by the company) or shares that may in the future be issued in the event (i) convertible securities (such as convertible preferred stock or convertible debt) are converted, (ii) exchangeable securities are exchanged, or (iii) options, warrants, or other rights to purchase stock are exercised.
Pari Passu
A term referring to equal treatment of two or more parties, or of the securities (equally, ratably, with no preference) held by two or more parties, in an agreement. Often used to describe securities that are to be treated as being of equal priority or to share equally and ratably in distributions.
Participating Preferred Stock
A type of convertible preferred stock that has liquidation preference and related features advantageous to the holder (amplifying potential ultimate returns) at the expense of common stockholders. In a participating preferred stock, the holder is entitled not only to receive the stated liquidation preference (usually the original investment amount plus accrued dividends), but also a pro rata share (assuming conversion of its shares into common stock) of the balance of remaining proceeds available for distribution to common stockholders. This may occur with respect to a merger, sale, change of control or other designated deemed liquidation event, and also may relate to dividends (where, after a holder receives its cumulative dividend, it also has the right to receive, on a pro rata as-if-converted basis, any dividend payable on the common stock). Given these features, participating preferred stock has been characterized as a “double dip” (or “having your cake and eating it to”), and business founders and owners have sought to eliminate or soften the impact (e.g., via a cap on return or sunset provision) on these provisions.
Pass-Through Entity
A business entity for which there is generally no entity-level income taxation; rather, the entity’s owners or partners recognize the income tax burdens and benefits directly (which “pass through” the entity to the owners or partners), whether or not they have received a distribution. The most common pass-through entities are “S” corporations, limited liability companies, limited partnerships, and limited liability partnerships.
A provision in the investment documents (usually in the charter or certificate of designation with respect to the preferred stock series issued in the transaction) imposing sanctions on investors who do not participate (by purchasing their full pro rata share) in future, usually down round, equity financings. If the investor does not “play”, it suffers specific adverse consequences, including, for example, automatic conversion to common stock or a “shadow” (less favorable) preferred stock, loss of the right to participate in future funding rounds, loss of anti-dilution protections, loss of veto rights and related protective provisions, and/or loss of board representation rights. Some pay to play provisions are structured to provide rewards and incentives (including superior economic securities, rights and features) to those investors who do participate (by purchasing their full pro rota share) in future (down round) financings.
A feature of a security pursuant to which dividends (in the case of an equity security) or interest (in the case of a debt security) are paid in the form of additional securities of the same type, instead of cash.
Peer-Review Ratings
The Martindale-Hubbell® PEER REVIEW RATINGS™ are an objective indicator of a lawyer’s high ethical standards and professional ability, generated from evaluations of lawyers by other members of the bar and the judiciary in the United States and Canada. The first review to establish a lawyer’s rating usually occurs three years after his/her first admission to the bar. LexisNexis facilitates secure online Martindale-Hubbell® PEER REVIEW RATINGS™ surveys of lawyers across multiple jurisdictions and geographic locations, in similar areas of practice as the lawyer being rated. Reviewers are asked to assess their colleagues’ general ethical standards and legal ability in a specific area of practice.
Personal Guarantee
A contractual commitment by an individual (usually unlimited in nature and reaching to all funds, accounts and assets owned by the individual guarantor) to stand behind a company’s obligations and to repay any such obligations with respect to which the company fails to repay or otherwise defaults.
Piggyback Rights
See Registration Rights.
Placement Agent
A professional, registered (typically, with the SEC as a “broker dealer”) investment banker or financial advisor that specializes in finding (usually institutional) investors and structuring and closing private placement investment transactions. Placement agents require engagement and indemnification agreements, and work for a fee (often structured as a retainer with incentive compensation based on the proceeds ultimately raised in the investment transaction). See Private PLacement.
Portfolio Company
A business or company in which a venture capital fund has invested and holds an ownership interest.
Post-Money Value
The value of a portfolio company immediately after (and including the capital provided in) a current funding round. The post-money value is the pre-money value plus the amount of funds invested in the current round. For example, if investors in the current round invest $5 million in a company that is valued at $7 million “pre-money”, the resulting post-money value is $12 million.
Pre-Money Value
The (agreed-upon, conceptual) value of a company immediately prior to the current funding round. This value is determined by negotiation, with the VC fund extrapolating same via its financial model, constructed after some measure of financial and projections due diligence, and the application of various valuation methodologies. Pre-money value is calculated (as a mathematical matter, ex post facto) by multiplying the number of outstanding (or fully diluted) shares before the current round, times the agreed (or derived) purchase price per share in the round. See also Post-Money Value.
Preemptive Rights
The right of a stockholder to maintain its percentage ownership of a company by participating in future equity funding rounds, through the purchase of additional equity securities (pro rata, on the same price and terms) in such rounds. Sometimes also referred to as a “maintenance right.”
Preferred Return
See Hurdle Rate.
Redemption Right
The right of a security holder (e.g., the owner of preferred stock) to require the issuer to redeem (or purchase) some or all of his or her securities at a specified (or determinable) price and after a specified period of time has elapsed. The purchase price is usually the original investment price plus any accrued and unpaid dividends, and is often payable in installments over an agreed time period. Also referred to as a back-end put or forced buyback.
Rule 506
Rule 506 of Regulation D is the most widely-used exemption to raise capital. It exempts the issuer from registering securities with the SEC and allows the issuer to raise unlimited amount of capital from unlimited number of accredited investors.
S Corporations
Corporations that make a proper and timely subchapter S election with the Internal Revenue Service. The purpose of making an S election is to be be taxed as a pass-through entity as specifically provided in Subchapter S of the Internal Revenue Code rather than a corporation under Subchapter C or a partnership under Subchapter K. See Pass-Through Entity.
Section 1031 Exchange
Under Section 1031 of the United States Internal Revenue Code (26 U.S.C. § 1031), the taxpayer who exchanges certain types of property may defer the recognition of taxable capital gains due upon a sale, and hence reinvest the amount of capital gains taxes that otherwise would be due and payable. Cash to equalize a transaction cannot be deferred under Code Section 1031 because it is not of like kind. This cash is called “boot” and is generally taxed at a normal capital gains rates.

Originally, 1031 cases needed to be simultaneous transfers of ownership. But since Starker vs. U.S. (602 F.2d 1341), a contract to exchange properties in the future is practically the same as a simultaneous transfer. It is under this case, decided in 1979, that the rules for election of a delayed 1031 originated. To elect the 1031 recognition, a taxpayer must identify the property for exchange before closing, identify the replacement property within 45 days of closing, and acquire the replacement property within 180 days of closing. A Qualified Intermediary must also be used to facilitate the transaction, by holding all the profits from the sale, and then disbursing those monies at the closing, or sometimes for fees associated with acquiring the new property.

To qualify for Section 1031 of the Internal Revenue Code, the properties exchanged must be held for productive use in a trade or business or for investment. Stocks, bonds, and other properties are listed as expressly excluded by Section 1031 of the Internal Revenue Code, though securitized properties are not excluded.

The properties exchanged must be of “like kind”, i.e., of the same nature or character, even if they differ in grade or quality. Personal properties of a like class are like-kind properties. Real properties generally are of like kind, regardless of whether the properties are improved or unimproved. Generally, “like kind” in terms of real estate, means any property that is classified as real estate in any of the 50 US states, and in some cases, the US Virgin Islands.

Taxpayers who hold real estate as inventory, or purchase for re-sell are considered “dealers”. These properties are not eligible for Section 1031 treatment. However, if a taxpayer is a dealer and also an investor, she/he can utilize Section 1031 on qualifying properties. Personal use property will not qualify for Section 1031.

If liabilities assumed by the buyer exceed those of the seller (taxpayer), the realized gain of the seller will not only be realized, but recognized as well. If however, the seller assumes a greater liability than the buyer, the realized loss cannot offset any realized and recognized gain of receiving boot such as cash or other personal property considered boot.

Items such as equipment used on a property included in the lump-sum sale of the property may be able to be deferred. Under Treasury regulation §1.1031(k)-1(c)(5)(i), property that is transferred together with the larger item of value that does not exceed 15% of the fair market value of the larger property does not need to be identified within the 45 day identification period but still needs to be exchanged for like kind property to defer gain.

Section 179 Property
  • Equipment (machines, etc.) purchased for business use
  • Tangible personal property used in business
  • Business vehicles with a gross vehicle weight in excess of 6,000 lbs
  • Computers
  • Computer software (available “Off-the-Shelf” not custom-written)
  • Office furniture
  • Office equipment
  • Property attached to your building that is not a structural component of the building (i.e.: a printing press, large manufacturing tools and equipment)
Securities Act

This commonly refers to the U.S. Federal Securities Act of 1933, as amended, which law affects and regulates the offering and sale of securities both within the United States and offers directed to United States persons whereever those persons may be. The law applies to offers made from anywhere in the world.  This term is used synonymously with the term 1933 Act.

Unaccredited Shareholder

The JOBS Act amends Section 12(g) of the Exchange Act and establishes a concept called unaccredited shareholder, which is synonymous with accredited investor already holding securities.  Another difference, the determination of accredited status is made on a current basis, rather than at the time of acquisition.

Having more than 500 unaccredited shareholders results in a company being required to register securities and file reports under the Exchange Act, an onerous task.  Often companies unexpectedly exceed this limit as a result of secondary distribution of their shares.

Virtual Data Room
A virtual place that is accessed electronically (via a secured website) that serves as a place to share (if disclosing information) and receive (if information is being provided) any information about a common subject.

Delivery of bulky and heavy documents is replaced with an electronic counterpart that is more functional and efficient, where material documents, instruments, contracts, plans, books, and records can be shared with a select person or persons for examination, such as a company providing a copy of its corporate books to its potential investors in connection with the due diligence investigations those investors like to make. Attorneys, accountants, investment bankers or other professionals use virtual data rooms often as administrators and users. Users of these rooms are often expressly held responsible for protecting their access credentials and passwrods. The virtual data room platforms are generally designed to assure that a data room is secured.

Weighted-Average Cost of Capital
The average of the cost of equity and the after-tax cost of debt. This average is determined using weight factors based on the ratio of equity to debt plus equity and the ratio of debt to debt plus equity.