Venture Deals

angel investor

an individual who provides capital to a startup company. this person is usually independently wealthy and invests his own money in the company.

antidilution

a term the provides price protection for investors. this is accomplished by effectively repricing an investor's shares to a lower price per share in the event that the company completes a financing at a lower valuation than a previous financing round.

as-converted basis

looking at the equity base of the company assuming that all preferred stock has been converted to common

at-will employees

an employee who does not have an employment agreement and can be terminated by the company for any reason

barter element

the price at which a stock option may be exercised

basis of stock option

the price at which a stock option may be exercised

best alternative to negotiated agreement (BATNA)

a backup plan if no agreement is reached between two parties

blended preferences

when all classes of preferred stock have equivalent payment rights in a liquidation

bridge loan

a loan given to a company by investors with the intent that the money will fund the company to the next equity financing

broad-based antidilution

the denominator in weighted average anti-dilution calculations that takes into consideration a fully diluted view of the company. the opposite is called a narrow-based antidilution

burn rate

the amount of money that your company is consuming, usually measured over months, quarters, or a year. this is the net amount of cashing that is leaving your bank account over the given time period.

cap

the valuation ceiling that exists in a convertible debt deal

capital call

the method by which a VC fund asks its investors to contribute their pro rata portion of money being called by a VC fund to make investments, pay expenses, or pay management fees.

capitalization (cap) table

a spreadsheet that defines the economics of a deal. it contains a detailed description of all the owners of stock of a company

carried interest (carry)

the profits that VCs are entitled to after returning capital committed to their investors. this typically ranges from 20% to 30%

carve-out (equity)

the concept whereby shareholders agree to give a preferential payment (usually to executives and employees of a company) ahead of the shareholders agreeing to the carve-out. normally, one would see a carve-out used in the situation where liquidation preferences are such that employees of the company do not have enough financial interests in a liquidation event.

carve-out (merger)

within the merger context, these are certain representations and warranties that will be indemnified outside of the escrow

clawback

the provision in the limited partnership agreement that allows investors to take back money from the VC should they overpay themselves with carry

commitment period

the length of time a VC fund has to find and invest in new companies, usually five years

committed capital

the amount of contractually-obligated funds investors have pledged to a venture capital fund

common stock

the type of stock that has the least amount of rights, privileges and preferences. normally employees and founders of a company hold common stock, as the price they pay for the stock can be much less than that of preferred stock

control

terms that allow a VC to exert positive or veto control in a deal

conversion

a process in which preferred stock is converted to common stock

conversion price adjustment

the mechanism by which an antidilution adjustment takes place. this allows the preferred stock to be converted into more common stock than originally agreed upon and thus allows the preferred to own more stock and voting rights upon converting to common

convertible debt

a debt or loan instrument that an investor gives to a company with the intent that it will convert later to equity and not be paid back as a standard bank loan would be

corporate venture capital

a venture firm that is sponsored and backed by a corporation, often but not always part of a publicly traded company

cross-fund investment

when a venture capital firm operates more than one fund and more than one fund invests in the same company

crowdfunding

when a group of individuals fund a company either through equity purchase, debt purchase, pre-sale ordering of a product, or gifting of money

director

a junior deal partner at a venture capital firm

double-trigger acceleration

a term that describes the situation in which a person would receive accelerated vesting. in a double-trigger situation, two events would trigger accelerated vesting, such as a merger of the company followed by a termination of a person's employment

down round

a financing round that is at a lower valuation than the previous round

drag-along agreement

a term that sets up a proxy on one's stock ownership to vote the same way as others do on a particular issue

due diligence

the process by which investors explore a company that they are thinking of investing in

earn-out

an amount agreed upon by an acquirer and a target company that the former shareholders of the target company will get if certain performance milestones are met post merger

economics

terms that impact the returns of a VC's investment in a company

employee pool

the shares set aside by a company to provide stock options to employees

entrepreneur in residence (EIR)

a person at a venture firm that is usually a former entrepreneur who is helping out the venture firm by finding deals to invest in, or working on his next company that the venture firm will one day fund

equity crowdfunding

a financing process made legal by the JOBS Act in 2012 and popularized by AngelList

escrow

the amount of consideration that an acquiring company holds back following a merger to make sure that representations and warranties made by the purchased company are true

escrow cap

the amount of money in a merger that is set aside to remedy breaches of the merger agreement

executive managing director

a senior partner in a venture capital firm who is superior to a managing director or general partner

executive summary

a short summary document, normally one to three pages, that describes material facts and strategies of a company

exercise

the act of purchasing stock pursuant to a stock option or warrant

exercise period

the amount of time an employee can exercise her stock after she leaves a company

fair market value

the price that a third party would pay for something in the open market

fiduciary duties

a legal and ethical duty that an individual has to an entity

flat round

a financing round done at the same post-money valuation as that of the previous round

founding general partner

a senior partner in a VC firm who founded the firm

fully diluted

a term explicitly defining that all rights to purchase equity should be in the valuation calculation

full-stack venture capital firms

a venture capital firm that employs many people beyond deal professionals, such as marketing, operations, PR, engineering, and financial executives, to attempt to help companies more than traditional VC firms. be cautious -- your mileage will vary.

game theory

the concept that one's actions depend on what actions other persons may or may not take and the inherent incentives behind these actions

general partner (GP)

a senior partner in a venture capital firm

general partnership (GP)

the entity that manages the limited partnership

general solicitation

fundraising to potential investors without a "substantial preexisting relationship." Some also consider this to be when a startup advertises for funding

GP commitment

the amount of money, usually between 1% and 5% of the fund, that the general partners invest in their own fund

holdback

the amount of consideration that an acquiring company holds back following a merger to make sure that representations and warranties made by the purchased company are true

indemnification

the promise by one party to protect another party should something go wrong

investment term

the length of time that a venture capital fund can remain active, typically 10 years with two one-year extensions

JOBS Act

formally known as the Jumpstart Our Business Startups Act, enacted in 2012. it formally created rules around crowdfunding, changed some dynamics around IPOs, and gave congress a way to say they were helping startups

key man clause

contractual provision within the limited partnership agreement that describes what will happen if certain partners leave the VC fund

KISS

an acronym for "keep it simple security," which can be an alternative for either a debt or equity financing

lead investor

the investor in a startup company who takes on the leadership position in a VC financing

letter of intent (LOI)

a term sheet for a merger

light preferred

a version of a preferred stock financing that has very simple and watered-down terms

limited partners (LPs)

the investors in a VC fund

limited partnership (LP)

the entity used by the limited partners to invest in a VC fund

limited partnership agreement (LPA)

the contract between a VC fund and its investors

liquidation event/liquidity event

when a company is sold and ceases to exist as a stand-alone company

liquidation preference

a right given to a class of preferred stock allowing that stock to receive proceeds in a liquidation in advance of other classes of stock

liquidation preference overhang

the cumulative amount of liquidation preferences that a company has agreed to during their existence. the amount of money owed to investors before common stock will receive proceeds

major investor

a concept used in VC financings that allows a company to distinguish between shareholders who purchase more stock than others

management company

the entity that services each fund that a VC raises

management fee

the fee that the VC funds have a right to receive from their LPs as money to manage their business operations regardless of the performance of the fund

managing director (MD)

a senior partner in a VC firm

materiality qualifiers

inserting the word "material" in front of things such as protective provisions

micro VC

a super angel who raises a small fund made up of professional investors

most favored nation (MFN)

the right to get the equivalent terms to anyone who gets better terms than you int he future

nonparticipating preferred

a simple preferred stock that does not have a participation feature

operating partner

a position at a VC firm that is normally under managing director, but above principal

option budget

the amount of options a company plans to allocate to employees over a finite time period

option pool

the shares set aside by a company to provide stock options to employees

pari passu

when all classes of preferred stock have equivalent payment rights in a liquidation

party round

a financing round with many participants, usually at small dollar amounts

pay-to-play

a term that forces VCs to continue to invest in future company financings or suffer adverse consequences to their ownership positions

performance warrant

a warrant that is exercisable if certain performance metrics are met by the holder of the warrant

post-money

the value of a company after an investor has put money into the company

preferred stock

a type of stock that has preferential terms, rights and privileges compared to common stock

pre-money

the value ascribed to a company by an investor before investing in the company

pre-seed round

the round before a seed round. this is now what the very first financing round in a company is referred to as.

price per share

the dollar amount assigned to purchase one share of stock

principal

a junior deal partner at a venture capital firm

private placement memorandum (PPM)

a long legal document that is prepared by the company, its bankers, and its lawyers that is a long-form business plan created to solicit investors

pro rata right

the right of a shareholder to purchase shares in a future

product crowdfunding

an approach to funding product development by using customers to preorder products, which was popularized by Kickstarter

protective provisions

contractual rights that allow the holders of preferred stock to vote on certain important matters pertaining to a company

ratchet-based antidilution

a style of antidilution that reprices an investor's shares in previous rounds, usually through a conversion price adjustment, to the price paid in the current round

representations and warranties

provisions in a financing purchase agreement or merger agreement whereby the company makes certain assurances about itself

reputation constraints

the impact reputation has on one's behavior

reserves

the amount of money that a VC firm allocates on its books for future investments to a particular portfolio company

restricted stock units (RSUs)

a substitution for traditional stock options that provides different tax accounting for the company that issues them