Investment and Fundraising Terms

Business Development Terms:

Diversity & Inclusion Terms

Investment and Fundraising Terms

Antidilution:  

A term that 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.

Acceleration:

Some founders and key executive negotiate into their equity arrangements that they will be entitled to some form of acceleration of the vesting of their equity upon the occurrence of a triggering event. Typically, the triggering event is the sale of the Company, but can also be an involuntary termination of employment.

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.

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 table (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.

Carry/carried interest:

The profits that VCs are entitled to after returning capital committed to their investors. This typically ranges from 20 percent to 30 percent.

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

Commitment period: 

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

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.

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.

Dilution:

Dilution is a reduction in the ownership percentage of a share of stock caused by the issuance of new stock. Dilution can also occur when holders of stock options (such as company employees) or holders of other optionable securities exercise their options. When the number of shares outstanding increases, each existing stockholder will own a smaller, or diluted, percentage of the company, making each share less valuable. Dilution also reduces the value of existing shares by reducing the stock’s earnings per share.

Discount Shares:

When a convertible note or SAFE with a discount rate/conversion price discount (including a conversion price cap) is converted into equity, the resulting shares attributable to the discount are sometimes referred to as “discount shares.

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.

Employee pool: 

The shares set aside by a company to provide stock options to employees.

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 summary: 

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

Fair market value: 

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

Flat round: 

A financing round done at the same postmoney valuation as that of the previous round.

Fully diluted: 

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

General partner (GP):  

A senior partner in a VC firm.

General partnership (GP): 

The entity that manages the limited partnership.

GP commitment: 

The amount of money, usually between 1 percent and 5 percent 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 VC fund can remain active, typically 10 years with two one-year extensions.

Issued Shares:

Outstanding shares (also referred to as issued shares) refers to the number of shares that have been issued and are outstanding at a given time. This number cannot be greater than the number of authorized shares. Practices vary, but typically between 5 and 10 million shares to the founders of a company are issued at incorporation.

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.

Nondisclosure agreement (NDA):

An agreement whereby one party promises not to share information of another party.

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.

Pay-to-play:  

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

Postmoney: 

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.

Premoney: 

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

Price per share:

The dollar amount assigned to purchase one share of stock.

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 financing equal to the percentage the shareholder currently holds at the time of such financing.

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.

Reserves: 

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

Reverse dilution: 

The situation in which stock is returned to a company by departed employees whose stock has not vested, thus increasing the effective ownership of all shareholders in a company.

Secondary sale: 

The sale by a VC of stock in a portfolio company or its entire portfolio to an outside party in a private transaction.

Seed preferred:

Same as light preferred: A simple watered-down version of a preferred stock financing.

Stacked preference: 

When different classes of preferred stock have senior rights to payment over other classes of preferred stock.

Stock option: 

A right to purchase shares of stock in a company.

Strike price: 

The price at which a stock option may be exercised.

Super pro rata rights: 

The right of shareholders to purchase shares in a future financing equal to some multiple of the percentage they currently hold at the time of such financing.

Syndicate:

The group of investors who invest in a startup.

Term sheet: 

A summary document of key terms in contemplation of a financing.

Valuation: 

The value ascribed to a company by an investor.

Warrant: 

A right to purchase shares of stock in a company.

Weighted average antidilution: 

A style of antidilution that reprices an investor’s investment, usually through a conversion price adjustment, to a lower price per share, but takes into account the relative effect of the amount of shares sold in the current round.

Reference: Cooley LLP & Venture Deals By Brad Feld & Jason Mendelson


Business Development Terms:

Acquihire:

A transaction in which a company is being bought predominantly for the employees working there and not for the product/service it is bringing to market or its technology. The hope is that in purchasing teams of smart people who have a history of working together, purchasers can accelerate their own business growth. These transaction usually offer limited or negative returns for early investors in the company being sold, and usually the acquiring company does not continue to build and promote the acquired company’s products and service.

Aggregate Purchase Price:

Aggregate purchase price takes into account any assumed debt, certain assumed liabilities, transaction bonuses or transaction fees that may deduct value from a non-aggregate purchase price. If this is an offer to acquire a company, you will want to make sure you understand what exactly is going to be deducted.

Contract Manufacturer:

A contract manufacturer (CM) is a third-party manufacturer of components or products for a company. This is a form of outsourcing. A company generally approaches a CM with a design or product and ask for pricing to manufacture based upon variables like processes, labor, tooling, and material costs. There can be numerous benefits to using a CM, such as cost savings, quality, access to advanced skills, and economies of scale. However, there can be risks as well, including lack of control, loss of flexibility and responsiveness, and less ability to control quality.

Data Room:

A data room is a space used for storing information such as contracts or corporate documents typically with the intent to share that information in a secure and/or confidential fashion with others (such as with a potential acquiror). A data room can be physical or virtual. Data rooms are often used to facilitate the completion of due diligence during a legal or financial transaction, but might be used for other purposes.

Distribution In Kind: 

A distribution in kind (sometimes referred to as an “in-kind” distribution) is a distribution from a company in the form of property other than cash, such as securities or assets. While property may have the same value as cash, taxes may be triggered by an in kind distribution that would not be triggered by a cash distribution.

Exclusivity: 

In a term sheet for a private placement, M&A transaction or other transaction, there is commonly a requirement for temporary exclusivity that requires one or both parties to negotiate exclusively with the other for a limited time or under certain conditions so that the investment of resources and time into due diligence and negotiations intended to finalize the agreement does not get interrupted or wasted because of an interloping offer.

Incident Response Plan (IRP):

An “incident response plan”, or IRP, is an in-house plan consisting of a pre-made list of relevant contacts and tasks that need to be completed when there is a major incident, such as a data breach. An incident response plan needs to include the contact information for legal and other relevant departments, procedures for assessing the severity of the incident, drafts of notifications to relevant audiences including public relations and law enforcement if applicable, and steps to close the incident.

Licensing: 

Licensing occurs when a person or company authorizes another person or company to make, use, or sell a specific product or item in exchange for money or other consideration (e.g., an inventor licensing her creation to a manufacturer to make and sell the creation in exchange for paying the inventor royalties).

Purchase price adjustment: 

A purchase price adjustment is a calibration of purchase prices based on metrics (often financial metrics), such as working capital as of the closing. The adjustment is designed to allocate the risk of changes to the metric to one party or the other. Depending on the deal, a purchase price adjustment may automatically be triggered by the occurrence or nonoccurrence of certain events. Terms relating to this adjustment can be found in letters of intent and acquisition agreements.

Service agreement:

A service agreement governs the provision of services by an individual (other than an employee) or entity to another party. Organized maintenance of these documents is recommended. Copies of existing service agreements may be requested by potential investors and acquirers.

Reference: Cooley LLP



Diversity & Inclusion Terms

Advocate:

someone who speaks up for her/himself and members of his/her identity group; e.g., a woman who lobbies for equal pay for women. Advocates acknowledge responsibility as citizens to shape public policy to address intentional or unintentional harm to minorities and the oppressed, whether caused by action or inaction.

Ally:

someone who speaks on behalf of others in need or distress until they are empowered to speak for themselves.

Asexual: 

someone who does not experience sexual attraction.

Bias: 

prejudice in favor of or against one thing, person or group compared with another, usually in a way considered to be unfair.

Bigender/Dual Gender: 

a person who possesses and expresses a distinctly masculine persona and a distinctly feminine persona and is comfortable in and enjoys presenting in both gender roles.

Bisexual: 

a person who is attracted to people of their own gender as well as another gender.

Cisgender: 

a description for a person whose gender identity, gender expression and sex assigned at birth align (e.g., man, masculine and male).

Discrimination: 

actions based on conscious or unconscious prejudice that favor one group over others in the provision of goods, services or opportunities.

Diversity: 

the wide variety of shared and different personal and group characteristics among human beings.

Gender:

social, cultural and psychological traits linked to males and females that define them as masculine or feminine.

Gender Identity:

refers to a person’s internal, deeply felt sense of being a man or woman, or something other or in between, which may or may not correspond with the sex assigned at birth; because gender identity is internal and personally defined, it is not visible to others.

Heterosexual: 

a person attracted to members of another sex or gender.

Homosexual:

a person who is attracted to members of what they identify as their own sex or gender (the terms Gay and Lesbian are preferred).


Intersex:

a general term used for a variety of conditions in which a person is born with reproductive organs, sexual anatomy or chromosomes that are not considered “standard” for either male or female.

Implicit Bias: 

occurs when someone consciously rejects stereotypes and supports antidiscrimination efforts but also holds negative associations in his/her mind unconsciously.


In‐group Bias: 

the tendency for groups to “favor” themselves by rewarding group members economically, socially, psychologically and emotionally in order to uplift one group over another.

LGBTQIA:

an inclusive term for those who identify as lesbian, gay, bisexual, transgender, queer, intersex and asexual.

Pansexual (also referred to as omnisexual or polysexual):

referring to the potential for sexual attractions or romantic love toward people of all gender identities and biological sexes; the concept of pansexuality deliberately rejects the gender binary.

Privilege: 

a right, license or exemption from duty or liability granted as a special benefit, advantage or favor.

Safe Space: 

refers to an environment in which everyone feels comfortable expressing themselves and participating fully without fear of attack, ridicule or denial of experience.

Microaggression:

everyday insults, indignities and demeaning messages sent to historically marginalized groups by well-intentioned members of the majority group who are unaware of the hidden messages being sent.

Oppression: 

results from the use of institutional power and privilege where one person or group benefits at the expense of another; oppression is the use of power and the effects of domination.

Sexual Orientation:

refers to the gender(s) that a person is emotionally, physically, romantically and erotically attracted to. Examples of sexual orientation include homosexual, bisexual, heterosexual and asexual. Trans and gender-variant people may identify with any sexual orientation, and their sexual orientation may or may not change before, during or after gender transition.

Silencing:

the conscious or unconscious processes by which the voice or participation of particular social identities is excluded or inhibited.

Social Identity: 

involves the ways in which one characterizes oneself, the affinities one has with other people, the ways one has learned to behave in stereotyped social settings, the things one values in oneself and in the world, and the norms that one recognizes or accepts governing everyday behavior.

Social Justice:

is both a process and a goal. The goal of social justice is full and equal participation of all groups in a society that is mutually shaped to meet their needs. Social justice includes a vision of society in which the distribution of resources is equitable and all members are physically and psychologically safe and secure.

Stereotype:

blanket beliefs, unconscious associations and expectations about members of certain groups that present an oversimplified opinion, prejudiced attitude or uncritical judgment. Stereotypes go beyond necessary and useful categorizations and generalizations in that they are typically negative, are based on little information and are highly generalized.

Transgender: 

has many definitions. It is frequently used as an umbrella term to refer to all people who deviate from their assigned gender at birth or the binary gender system. This includes transsexuals, cross-dressers, genderqueers, drag kings, drag queens, two-spirit people and others. Some transgender people feel they exist not within one of the two standard gender categories but rather somewhere between, beyond or outside of those two genders.

Transsexual:

refers to a person who experiences a mismatch of the sex he/she was born as and the sex he/she identifies as. A transsexual sometimes undergoes medical treatment to change his/her physical sex to match his/her sex identity through hormone treatments and/or surgically. Not all transsexuals can have or desire surgery.

Reference: Washington University in St.Louis Center for Diversity & Inclusion