Acquisition
The obtainment of control, possession or ownership of a private portfolio company by an operating company or conglomerate.
Acquisition for expansion financing
Funds provided to a firm to finance its acquisition of companies. A consolidator of companies in specific industries.
Average IRR
The arithmetic mean of the internal rates of return.
Balanced
Aventure fund investment strategy which includes investment in portfolio companies at a variety of stages of development (Seed, Early Stage,Later Stage).
Bridge financing
Mezzanine financing for a company expecting to go public within six months to a year.
Burn Rate or Burn
The rate at which a company uses up its shareholder capital (invested money) prior to it becoming cash flow positive. Burn rate combined with shareholder capital reserves gives an indication of a company’s runway. It is very important to precisely calculate burn and runway, usually on a month-by-month basis, to allow the company to survive between funding events.
Business angel
A high net-worth individual who invests directly into entrepreneurial companies for equity. It is usually ‘smart money’ where, in addition to capital, expertise adds value to the investee company.
Capital Gains
Short or long-term profits from the sale of assets.
Capital weighted average IRR
The average Internal Rate of Return weighted by fund size with funds contributing to the average in proportion to their size.
Carried interest
Also known as "carry" The percentage of profits (generally 20-25%) that general partners receive out of the profits of the investments made by the fund. For instance, a $100 million fund raised from Limited Partners is invested into a portfolio of investments now worth $500million. Assume that there have been profits from proceeds of $50million. Limited partners would receive $40 million and the other $10million would accrue to the general partners as their carried interest.The term originally came from the practice in the early days of Venture Capital where general partners put up nothing in return for 20% of the profits and thus the limited partners "carried the interest" of the general partners. Nowadays, general partners typically put up about 1%of the funds commitments and the limited partners put up the rest. Now"carried interest" is synonymous with profit split. Typically, carried interest is only paid after limited partners receive their original investment back.
Committed capital
A limited partner's obligation to provide a certain amount of capital to a fund.This money is not usually received all at once but rather drawn down over three to five years starting in the year the fund is formed.
Company buy-back
The redemption of private or restricted holdings by the portfolio company itself.
Consolidation
A private equity investment strategy that involves merging several firms together and exploiting economies of scale or scope.
Convertible notes
(equity or debt)
A security that can be converted under certain conditions into another security (often into ordinary shares). The convertible shares often have special rights that the ordinary shares do not have.
Corporate fund
An initiative of a corporation to invest in other firms outside the corporation. The funds are often structured as corporate subsidiaries not as limited partnerships.
D/PI (Distributions to Paid-in Capital)
The amount a partnership has distributed to its investors relative to the total capital contribution to the fund.
Deal flow
The rate at which business plans of sufficient quality to do deals are received by a Private Equity/Venture Capital fund over a certain timeframe. Consistent deal flow is the lifeblood for a PE/VC firm. When asked, a PE/VC firm will usually say “deal flow is great, but could always be better”.
Disbursement
Investments by funds into portfolio companies.
Distribution
Cash or the value of stock disbursed to the limited partners of a venture fund.
Down round
Around of financing where (typically new) investors purchase stock from a company at a lower valuation than the valuation placed upon the company by earlier investors. Down rounds cause dilution of ownership for existing investors. This often means the founders and earlier investor’s stock or options are worth much less, or even nothing at all. Unfortunately, sometimes the only other option is going out of business. In this case down rounds are necessary and welcomed. Down rounds can occur when a red hot economy turns bad, or when the previous round of funding was based on an extremely inflated valuation.
Drag along rights (Drags)
"Drag a long" refers to the power of larger shareholders to compel the minority shareholder to sell when a purchaser wants to acquire 100% (or in some cases a majority stake) of the company, ie. a purchaser wishes to buy the company at a high valuation but only if they can purchase the entire issued share capital, and 3 out of the 4 shareholders wish to sell, but the 4th does not. Well drafted drag-along rights in the shareholders agreement would enable the 3 shareholders to compel the 4th to sell their share at the same price.
Drags and Tags
Refer to individual Drag along rights and Tag along rights.
Draw down
These are payments to the partnership by investors in order to finance investments. Funds are usually drawn down from investors on a deal-by-deal basis.
Due diligence
The investigation and evaluation of an investment opportunity including the management team, investment philosophy, and terms and conditions prior to committing capital to the fund.
Early Stage
A fund investment strategy involving investment in companies for product development and initial marketing, manufacturing and sales activities.
Earn out
Part of the price of a transaction which is conditional on the performance of the company following the deal.
Escrow provisions
Legal term used to describe the undertaking given by certain shareholders not to sell shares unless certain conditions are met, e.g. only after a set time has elapsed. Escrow is used to control the volume of shares released onto the market, and is also used as an instrument to force key shareholders (not the exiting investors), e.g. high profile and talented founders, to remain actively involved with the company so that the share value is maintained into the foreseeable future for the acquirer of the investor’s shares. Escrow periods can last between 1and 2 years, but it sometimes depends on what the shareholders who are subject to escrow are able to negotiate.
Estimated investment amount
In cases where individual fund contributions to an investment round are unknown, the unknown portion of the investment round is distributed evenly among those investors.
Exiting strategy
A fund's intended method for liquidating its holdings while achieving the maximum return possible.
Financial Sponsor
See Management Firm.
First closing
The initial closing of the fund.
First stage
The First round of financing following a company's start up phase that involves an institutional Venture Capital fund. The round is usually a step-up in valuation, total size (usually not less than $5 M) and per share price for companies' whose product(s) are either in develop mentor commercially available.
Follow-on fund
A fund that is subsequent to a venture capital organisation’s first raised fund.
Fund
The investment vehicle, often a limited partnership, to which the limited partners commit capital.
Fund age
The age of a fund (in years) from its first take down to the time an internal rate of return is calculated.
Fund Focus (investment stage)
The indicated area of specialisation of a venture capital fund usually expressed as B (Balanced), S/E (Seed and Early Stage), LS (Later Stage)or LBO (Leveraged Buyout)
Fund manager
See Management Firm
Fund of funds
A fund that invests primarily in other venture capital funds rather than portfolio firms.
Holding period
The amount of time an investment remains in a portfolio.
Horizon return
An IRR calculation between points in time where the beginning point is variable and the end point is fixed.
Hurt money
Cash invested by the founder of the business. The more hurt money, the more attractive the proposition will be to investors.
Inception
The starting point at which IRR calculations for a fund would be calculated; generally, the vintage year or date of first capital take down.
Investment philosophy
The stated investment approach or focus of a management team.
Investors
The investors in a fund.
IPO (initial public offering)
The sale or distribution of a stock of a portfolio company to the public for the first time.
IRR (internal rate of return)
IRR is the discount rate that equates the cost of an investment with the present value of the cash generated by that investment. It shows the discount rate below which an investment results in a positive Net Present Value (NPV) (and should be made) and above which an investment results in a negative NPV (and should be avoided). IRR is used to measure the return of investments in private securities. A major reason for this is that private investment managers typically exercise a greater degree of control over the amount and timing of their funds’ cash flows. How private managers exercise this control is crucial in assessing their investment skill. Thus, private fund managers need a return calculation method that takes into account their control over fund cash flows. IRR does this. Typically a fund manager will look for an IRR of 25% or greater (40%) for early stage investments across their portfolio companies, and this directly impacts on choosing which dealsto fund.
Later Stage
A fund investment strategy involving financing for the expansion of a company which is producing, shipping and increasing its sales volume.
LBO (leveraged buyout)
A fund investment strategy involving the acquisition of a product or business, from either a public or private company, utilising a significant amount of debt and little or no equity (usually a ratio of90% debt to 10% equity).
Limited partnerships (LP)
The legal structure used by most venture and private equity funds, in which the venture capital firm serves as the sole general partner. Venture capital and private equity funds are generally designed for a life limited to 10-15 years during which all investments are either sold or otherwise liquidated. The majority of the money in each fund comes from limited partner investors (“LPs”) who can be institutional investors like university endowments, public superannuation funds, corporate superannuation funds, insurance companies or high net worth individuals. The venture capital general partner (“GP”) also makes an investment of capital that is significantly smaller than the typical limited partner’s investment. This amount ranges from 1% to 2% of the total committed capital of the fund. Each typical limited partner commits at least 5% of the total fund capital.
Liquidation
The sale of the assets of a portfolio company to one or more acquirors when venture capital investors receive some of the proceeds of the sale.
Mainstream
With respect to fund type, excluding foreign-only investing, hybrid public market purchase funds, LBO and funds of funds.
Mainstreamers
With respect to fund size, $50 to $99 million; also known as Large funds.
Management fee
Compensation for the management of a venture fund's activities, generally paid quarterly from the fund to the general partner or management company
Management firm
The manager of a specific fund or funds. Where the fund is a limited partnership the management firm is the General Partner.
Management team
The general partners that oversee the activities of the venture capital fund.
Mature funds
Funds which have been investing for at least five years.
Mezzanine Capital (or Debt)
A fund investment strategy involving subordinated debt (the level of financing senior to equity and below senior debt). Along with the typical interest payment associated with debt, mezzanine capital will often include an equity stake in the form of warrants attached to the debt obligation or a debt conversion feature identical to that of a convertible bond. Mezzanine capital is a more expensive financing source for a company than secured debt or senior debt. It is more expensive because of the increased credit risk, i.e. in the event of default, mezzanine debt is less likely to be repaid in full. It is only secured by the equity of the company, and not the company's tangible assets (e.g., property, cash or accounts receivable). In compensation for the increased risk, mezzanine debt holders will require a higher interest payment and/or an equity stake in the company. However, it is a cheaper source of financing than equity as the current equity holders achieve less dilution.
NPV (Net present value)
NPV is a standard method in the planning of long-term investments. Using the NPV method a potential investment project should be undertaken if the present value of all cash inflows minus the present value of all cashout flows (which equals the net present value) is greater than zero. A key input into this process is the interest rate or “discount rate”which is used to discount future cash flows to their present values. If the discount rate is equal to the shareholder’s required rate of return, any NPV > 0 means that the required return has been exceeded, and the shareholders will expect an additional profit that has a present value equal to the NPV. Thus if the goal of the corporation is to maximize shareholders’ wealth, managers should undertake all projects that have an NPV > 0, or if two projects are mutually exclusive, they should choose the one with the highest positive NPV.
Option
The right, but not the obligation to buy or sell a security a set price (or range of prices) in a given period.
Ordinary shares
The equity in a company constituting ownership; ordinary shareholders are entitled to dividends and to vote.
Pari Passu
A Latin phrase that means “of equal step (or pace)”, used sometimes in Term Sheets or other investment agreements. It simply means that one investor will have the same rights and privileges as another investor, e.g the second investor invests pari passu with the lead investor.
PI (paid-in capital)
The amount of committed capital a limited partner has actually transferred to a venture fund. Also known as the cumulative take down amount.
Placement agent
A financial intermediary hired by venture capital organisations to facilitate the raising of new venture capital funds.
Pooled IRR (internal rate of return)
A method of calculating an aggregate IRR by summing cash flows together to create a portfolio cashflow and calculating IRR on portfolio cashflow.
Portfolio company
The company or entity into which a fund invests directly.
Preference shares
Shares that rank ahead of ordinary shares for dividends or payment should the company become insolvent.
Private equity
Includes all non-public equity and hybrid instruments: business angel capital,venture capital, management buy-outs, management buy-ins, and mezzanine arrangements.
Range of IRRs
Presents the low and high internal rates of return for a given year.
Ratchets
A structure whereby the eventual equity allocations between the groups of shareholders depend on either the future performance of the company of the rate of return achieved by the venture capital firm. This allows management shareholders to increase their stake if the company performs particularly well.
Residual value
The remaining equity which a limited partner has in a fund.
Restricted securities
Public securities which are not freely tradable due to ASC regulations.
Round/stage
The provision of capital to entrepreneurs in multiple installments, with each financing conditional on meeting particular business targets. This helps ensure that the money is not squandered on unprofitable projects
Runway
How long a company has to survive before the shareholder capital is used up by the burn, usually calculated in months to go before invested cash is exhausted. The analogy being the length of runway remaining for a plane (company) to get airborne (cash flow positive). To extend the runway,companies either have to get additional funding or reduce burn.
Second stage
Working capital for the initial expansion of a company which is producing and shipping and has growing accounts receivable and inventories. Although the company has clearly made progress, it may not yet be showing a profit.
Secondary sale
The sale of private or restricted holdings in a portfolio company to other investors.
Security
A type of transferable interest representing financial value. They are often represented by a certificate. They include shares, bonds issued by corporations or governmental agencies, stock options or other options, other derivatives, limited partnership units, and various other formal "investment instruments."
Seed stage
An investment strategy involving portfolio companies which have not yet fully established commercial operations, and may also involve continued research and product development.
Sequence
This refers to classification by new versus follow-on funds. New funds are defined as the first fund a management group raises together, regardless of the experience level of individual professionals in that group. Follow-On funds refer to subsequent funds (II, III, IV, etc.) raised by the same management group.
Shareholders Agreement
A shareholders' agreement is an agreement between the shareholders of a company relating to the ownership and management of the company. It is necessary because company constitutions do not cover many issues that relate to inter-shareholder matters. In a characteristic business start-up, a shareholders' agreement would normally be expected to regulate lock-up provisions, restrictions on transferring shares, or granting security interests over shares, pre-emption rights and rights of first refusal in relation to any shares issued by the company,"tag-along" and "drag-along" rights, minority protection provisions ,power for certain shareholders to designate individual for election to the board of directors, deadlock provisions and dispute resolution provisions. It is not uncommon for a Venture Capital/Private Equity firm to invest under the condition that the investee company adopt the VC/PE firm’s own shareholders’ agreement.
Syndication
The joint purchase of shares by two or more venture capital organisations or the joint underwriting of an offering by two or more investment banks.
Tag along rights (Tags)
"Tag along" rights refer to the power of a minority shareholder to sell their shares to a purchaser at the same price as any other selling shareholder, ie. if one shareholder wants to sell, they can only do so if the buyer agrees to buy out the other shareholders who wish to sell at the same price.
Takedown schedule
The plan stated in the offering memorandum providing for the actual transfer of funds from the limited partners' to the general partners' control.
Term sheet
A term sheet is a funding offer from a capital provider. It lays out the amount of an investment and the conditions under which the investors expect you to work using their money. The key is to remember that it's just an offer, and the entrepreneur can counter that offer and negotiate all the terms before finally accepting the funds. The investor can sometimes form a negative opinion of the entrepreneur if they accept the terms without question or prove to be poor at negotiating changes to the terms. Another thing to remember is that term sheets will usually have an automatic expiry date/time, and be of no further force or effect, if say (1) the Investors have not received from the Company a copy of the term sheet letter acknowledged and agreed to by the Company on or before say 5:00p.m. Central Australian Time on Friday, 21st July 2006 or (2) prior to any such receipt, the Investors orally or in writing, give notice of withdrawing from the offer. In addition, the term sheet may expire if the Investors do not purchase their shares for cash by a certain date.Term sheets are a major factor in establishing the relationship between the investor and investee, and the contents of the documents should stated clearly and definitively at the front end so that future operations and subsequent transactions can work smoothly at the back end as you successfully ramp up your business. Finally, it is unwise to sign a term sheet without getting legal advice re the clauses.
Third stage
Funds provided for the major growth expansion of a company whose sales volume is increasing and which is breaking even or profitable. These funds are utilised for further expansion, marketing, and working capital or development of an improved product
Trade sale
The sale of a company’s shares to another company, often in the same industry sector.
Tranche
A French word that means “slice” or “portion”. Typically investors will not put all of their investment into an investee as a lump sum, but as a series of staged investments or tranches. Tranche payments are often dependent on meeting mutually agreed milestones. Some milestone examples are reaching product development stages, cumulative revenue targets met without exceeding expenditure thresholds, key executive hires, signing distributors, adopting internal operational reporting and procedure standards, or a combination of these.
Turnaround
Financing provided to a company at a time of operational or financial difficulty with the intention of improving the company's performance.
Underwriting
The purchase of a securities issue from a company by an investment bank and its (typically almost immediate) resale to investors.
Valuation method
The policy guidelines a management team uses to value the holdings in the fund's portfolio.
Venture capital
Independently managed pools of capital that focus on equity or equity-linked investments in privately held high-growth companies. In Australia the term is often used as a synonym for private equity. In the United States, and increasingly in Europe, the term excludes Management Buy-Out/Buy-Ins, turnarounds and mezzanine investments
Vesting
To give someone control over their stock or stock options over a period of time. This period is known as the vesting period and is usually 3 to 5years. During the vesting period the employee cannot sell or transfer the stock or options. Typically, a quarter of the options in a stock option grant, for example, will vest each year for a four-year period.If you leave the company earlier than the four year period, the vesting formula applies and you only get a percentage of your stock. As a result, many entrepreneurs view vesting as a way for Venture Capitalists to control them, their involvement, and their ownership in a company which, while it can be true, is only a part of the story. A key component of vesting is defining what happens (if anything) to vesting schedules upon a merger. "Single trigger" acceleration refers to automatic accelerated vesting upon a merger. "Double trigger" refers to two events needing to take place before accelerated vesting (e.g., a merger plus the act of being fired by the acquiring company.) Double trigger is much more common than single trigger. Acceleration on change of control is often a contentious point of negotiation between founders and VCs, as the founders will want to "get all their stock in a transaction - hey, we earned it!" and VCs will want to minimize the impact of the outstanding equity on their share of the purchase price.While it's easy to set vesting up as a contentious issue between founders and VCs, it is recommended the founding entrepreneurs view vesting as an overall "alignment tool" - for themselves, their co-founders, early employees, and future employees.
Vintage
The year of fund formation and first take down of capital.
Vintage group
The range of years in which a group of funds were found and executed the first take down of capital.
Write-down
A reduction in the value of an investment.
Write-off
The write-down of a portfolio company's holdings to a valuation of zero and the venture capital investors receive no proceeds from their investment.
Write-up
An increase in the value of an investment.
Yield
Income payable to an investor by an investee.
